[Federal Register Volume 76, Number 147 (Monday, August 1, 2011)]
[Rules and Regulations]
[Pages 45673-45689]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-19256]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 9534]
RIN 1545-BD81


Methods of Accounting Used by Corporations That Acquire the 
Assets of Other Corporations

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

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SUMMARY: This document contains final regulations relating to the 
methods of accounting, including the inventory methods, to be used by 
corporations that acquire the assets of other corporations in certain 
corporate reorganizations and tax-free liquidations. These regulations 
clarify and simplify the rules regarding the accounting methods to be 
used following these reorganizations and liquidations.

DATES: Effective date: These regulations are effective on August 31, 
2011.
    Applicability date: For dates of applicability, see Sec. Sec.  
1.381(a)-1(e), 1.381(c)(4)-1(f), 1.381(c)(5)-1(f), and 1.446-
1(e)(4)(iii).

FOR FURTHER INFORMATION CONTACT: Cheryl Oseekey at (202) 622-4970 (not 
a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

    This document contains amendments to 26 CFR part 1. On November 16, 
2007, the IRS and the Treasury Department published a notice of 
proposed rulemaking (REG-151884-03) in the Federal Register (72 FR 
64545). This notice of proposed rulemaking, while continuing most of 
the provisions of the regulations originally issued under sections 
381(c)(4) and 381(c)(5) of the Internal Revenue Code (Code) regarding 
the methods of accounting to be used by a corporation that acquires the 
assets of another corporation in a section 381(a) transaction, proposed 
to clarify and simplify those existing regulations. The IRS received no 
comments in response to the notice of proposed rulemaking. No public 
hearing was requested or held. The proposed regulations, as revised by 
this Treasury decision, are adopted as final regulations.

Explanation of Provisions

    The final regulations differ somewhat in organization and format 
from the notice of proposed rulemaking. These changes are intended to 
be editorial in

[[Page 45674]]

nature and are not intended to alter the substance and principles of 
the rules set forth in the notice of proposed rulemaking. The IRS and 
the Treasury Department made these changes to further advance the 
objective, as expressed in the preamble to the notice of proposed 
rulemaking, of reducing uncertainty and controversy by providing 
regulations under sections 381(c)(4) and 381(c)(5) that are clear, 
consistent, and administrable. For example, the final regulations under 
sections 381(c)(4) and 381(c)(5) have been drafted so that the 
regulations mirror each other to the greatest extent possible, thus 
highlighting the consistencies of the regulations' provisions. 
Similarly, many of the examples in the notice of proposed rulemaking 
have been revised in the final regulations to specify the substantive 
tax rule in the regulations that the examples illustrate. Additionally, 
new examples were added to the final regulations to provide further 
illustrations of the substantive tax rules in these regulations.
    The keystone of the final regulations for sections 381(c)(4) and 
381(c)(5) continues to be whether the acquiring corporation operates 
the trades or businesses of the parties to a section 381(a) transaction 
as separate and distinct trades or businesses following the date of 
distribution or transfer. The final regulations continue to provide 
that when the acquiring corporation operates the trades or businesses 
of the parties as separate and distinct trades or businesses after the 
date of distribution or transfer, the acquiring corporation will use a 
carryover method. In contrast, when the acquiring corporation does not 
operate the trades or businesses of the parties as separate and 
distinct trades or businesses after the date of distribution or 
transfer, the acquiring corporation will use a principal method. These 
rules do not apply when a carryover method or principal method, as 
applicable, is not a permissible method, or when the acquiring 
corporation chooses not to use a carryover method or principal method. 
In those cases, the general rules under section 446(e) that govern 
methods of accounting apply.
    The final regulations modify the test for determining a principal 
method when the acquiring corporation does not operate the trades or 
businesses of the parties to the section 381(a) transaction as separate 
and distinct trades or businesses after the date of distribution or 
transfer. Under the final regulations, the determination of whether the 
distributor or transferor corporation is larger than the acquiring 
corporation is made by comparing certain attributes (that is, under 
section 381(c)(4) the adjusted bases of the assets and gross receipts, 
and under section 381(c)(5) the fair market value of the inventory) of 
only the trades or businesses that will be integrated after the date of 
distribution or transfer rather than comparing the attributes for the 
entire entity. The IRS and the Treasury Department believe that the 
attributes of a trade or business that will continue to operate as a 
separate and distinct trade or business after the date of distribution 
or transfer should not influence the determination of a principal 
method that will be used by trades or businesses that will be 
integrated after the date of distribution or transfer. The IRS and the 
Treasury Department also believe that applying the test at the trade or 
business level is consistent with Sec.  1.446-1(d) because methods of 
accounting are generally determined at the trade or business level.
    The final regulations also provide rules on how an acquiring 
corporation identifies a principal method when an acquiring corporation 
or a distributor or transferor corporation operates more than one 
separate and distinct trade or business on the date of distribution or 
transfer, has more than one method of accounting used in the trades or 
businesses, and the acquiring corporation combines the trades or 
businesses after the date of distribution or transfer. While the IRS 
and the Treasury Department do not think these situations occur 
frequently, the final regulations are revised to provide certainty for 
an acquiring corporation and to obviate the need to obtain a ruling in 
these situations.
    The final regulations under sections 381(c)(4) and 381(c)(5) 
clarify the definition of ``cut-off basis.'' The final regulations 
provide that cut-off basis generally means a manner in which a change 
in method of accounting is made without a section 481(a) adjustment and 
under which only the items arising after the beginning of the year of 
change (or, in the case of a change made to a principal method, only 
the items arising after the date of distribution or transfer) are 
accounted for under the new method of accounting. The definition of 
cut-off basis is expanded in the final regulations under section 
381(c)(5) to clarify that a taxpayer that makes a change within the 
last-in, first-out (LIFO) inventory method from one LIFO method or sub-
method to another LIFO method or sub-method does not recompute the cost 
of its beginning inventories for the year of change under the new LIFO 
inventory method when it implements the change on a cut-off basis.
    The final regulations under section 381(c)(5) also make certain 
organizational changes to Sec.  1.381(c)(5)-1(e)(6) of the notice of 
proposed rulemaking with respect to the integration of inventories 
after a section 381(a) transaction. These changes do not change the 
substantive rules in the notice of proposed rulemaking but are intended 
to clarify that the rules apply whether the inventory method of either 
the acquiring corporation or the transferor or distributor corporation 
must be changed to a principal method. The IRS and the Treasury 
Department are considering issuing additional guidance that would 
clarify or modify the manner in which inventories must be combined and 
integrated in a section 381(a) transaction.
    Finally, the final regulations correct the discussion of section 
472(d) that was in Sec.  1.381(c)(5)-1(e)(6)(ii)(B) of the notice of 
proposed rulemaking. Section 1.381(c)(5)-1(e)(6)(ii)(B) of the notice 
of proposed rulemaking provided that the restoration to cost of any 
previous write-downs to market value shall be taken into account fully 
in the year that included the date of distribution or transfer. 
Consistent with the amendments to section 472(d), the final regulations 
provide that these restorations shall be taken into account by the 
acquiring corporation ratably in each of the three taxable years 
beginning with the taxable year that includes the date of the 
distribution or transfer.
    The IRS and the Treasury Department are aware that some 
practitioners were concerned that the notice of proposed rulemaking did 
not provide audit protection when an acquiring corporation uses a 
principal method after the date of distribution or transfer. For the 
reasons expressed in the preamble to the notice of proposed rulemaking, 
the final regulations continue to deny audit protection in these 
circumstances. Unlike changes in method of accounting under section 
446(e) for which a taxpayer must disclose its use of a method of 
accounting, proper or improper, as part of the process for obtaining 
consent to make the change, changes to a principal method pursuant to 
these final regulations are made on the acquiring corporation's tax 
return with no disclosure on a Form 3115, ``Application for Change in 
Accounting Method,'' that a change in method of accounting occurred.
    The IRS and the Treasury Department are aware that some taxpayers 
desire to obtain audit protection for a required change to a principal 
method by filing a Form 3115. However, the IRS and the Treasury 
Department believe that, given

[[Page 45675]]

the need for efficient tax administration, filing a Form 3115 merely to 
obtain audit protection should not be allowed. Although audit 
protection is not provided for a change to a principal method required 
under these regulations, audit protection ordinarily is provided for 
any voluntary change in method of accounting for which a party to a 
section 381(a) transaction obtains consent under section 446(e) and the 
generally applicable administrative procedures.

Special Analyses

    It has been determined that this Treasury decision is not a 
significant regulatory action as defined in Executive Order 12866. 
Therefore, a regulatory assessment is not required. It is hereby 
certified that these regulations will not have a significant economic 
impact on a substantial number of small entities. Therefore, a 
regulatory flexibility analysis under the Regulatory Flexibility Act (5 
U.S.C. chapter 6) is not required. This certification is based on the 
belief of the IRS and the Treasury Department that the corporate 
reorganizations and tax-free liquidations described in section 381(a) 
generally involve large entities. In addition, these final regulations 
reduce the burden on taxpayers by clarifying and simplifying the 
existing rules and make the procedures for requesting changes in 
methods of accounting relating to corporate reorganizations and tax-
free liquidations described in section 381(a) consistent with the 
general rules for requesting changes in methods of accounting. Pursuant 
to section 7805(f), the notice of proposed rulemaking that preceded 
these final regulations was submitted to the Chief Counsel for Advocacy 
of the Small Business Administration for comment on its impact on small 
business. Consistent with 5 U.S.C. section 553(d), the regulations are 
effective 30 days after publication of this document in the Federal 
Register.

Drafting Information

    The principal author of these final regulations is Cheryl Oseekey, 
Office of Associate Chief Counsel (Income Tax and Accounting). However, 
other personnel from the IRS and the Treasury Department participated 
in their development.

List of Subjects in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

Adoption of Amendments to the Regulations

    Accordingly, 26 CFR part 1 is amended as follows:

PART 1--INCOME TAXES

0
Paragraph 1. The authority citation for part 1 continues to read in 
part as follows:

    Authority: 26 U.S.C. 7805 * * *
    Section 1.381(c)(4)-1 also issued under 26 U.S.C. 381(c)(4). * * 
*
    Section 1.381(c)(5)-1 also issued under 26 U.S.C. 381(c)(5). * * 
*


0
Par. 2. In Sec.  1.381(a)-1, paragraph (b)(1)(i) is revised and 
paragraph (e) is added to read as follows:


Sec.  1.381(a)-1  General rule relating to carryovers in certain 
corporate acquisitions.

* * * * *
    (b) * * *
    (1) * * * (i) The complete liquidation of a subsidiary corporation 
upon which no gain or loss is recognized in accordance with the 
provisions of section 332;
* * * * *
    (e) Effective/applicability date. The rules of paragraph (b)(1)(i) 
of this section apply to corporate reorganizations and tax-free 
liquidations described in section 381(a) that occur on or after August 
31, 2011.

0
Par. 3. Section 1.381(c)(4)-1 is revised to read as follows:


Sec.  1.381(c)(4)-1  Method of accounting.

    (a) Introduction--(1) Purpose. This section provides guidance 
regarding the method of accounting or combination of methods (other 
than inventory and depreciation methods) an acquiring corporation must 
use following a distribution or transfer to which sections 381(a) and 
381(c)(4) apply and how to implement any associated change in method of 
accounting. See Sec.  1.381(c)(5)-1 for guidance regarding the 
inventory method an acquiring corporation must use following a 
distribution or transfer to which sections 381(a) and 381(c)(5) apply. 
See Sec.  1.381(c)(6)-1 for guidance regarding the depreciation method 
an acquiring corporation must use following a distribution or transfer 
to which sections 381(a) and 381(c)(6) apply.
    (2) Carryover method requirement for separate and distinct trades 
or businesses. In a transaction to which section 381(a) applies, if an 
acquiring corporation continues to operate a trade or business of the 
parties to the section 381(a) transaction as a separate and distinct 
trade or business after the date of distribution or transfer, the 
acquiring corporation must use a carryover method as defined in 
paragraph (b)(5) of this section for each continuing trade or business, 
unless either the carryover method is impermissible and must be changed 
under paragraph (a)(4) of this section or the acquiring corporation 
changes the carryover method in accordance with paragraph (a)(5) of 
this section. The carryover method requirement applies to the overall 
method of accounting (for example, an accrual method of accounting) and 
any special method of accounting (for example, the percentage of 
completion method of accounting described in section 460) as defined in 
paragraph (b)(2) of this section used by each trade or business after 
the date of distribution or transfer. The acquiring corporation need 
not secure the Commissioner's consent to continue a carryover method.
    (3) Principal method requirement for trades or businesses not 
operated as separate and distinct trades or businesses. In a 
transaction to which section 381(a) applies, if an acquiring 
corporation does not operate the trades or businesses of the parties to 
the section 381(a) transaction as separate and distinct trades or 
businesses after the date of distribution or transfer, the acquiring 
corporation must use a principal method determined under paragraph (c) 
of this section, unless either the principal method is impermissible 
and must be changed under paragraph (a)(4) of this section or the 
acquiring corporation changes the principal method in accordance with 
paragraph (a)(5) of this section. The principal method requirement 
applies to the overall method of accounting (for example, the cash 
receipts and disbursements method of accounting) and any special method 
of accounting (for example, the installment method under section 453) 
as defined in paragraph (b)(2) of this section used by each integrated 
trade or business after the date of distribution or transfer. The 
acquiring corporation must change to a principal method in accordance 
with paragraph (d)(1) of this section for each integrated trade or 
business and need not secure the Commissioner's consent to use a 
principal method.
    (4) Carryover method or principal method not a permissible method. 
If a carryover method or principal method is not a permissible method 
of accounting, the acquiring corporation must secure the Commissioner's 
consent to change to a permissible method of accounting as provided in 
paragraph (d)(2) of this section. If the acquiring corporation must use 
a single method of accounting for a particular item after the date of 
distribution or transfer regardless of the

[[Page 45676]]

number of separate and distinct trades or businesses operated on that 
date, the acquiring corporation must use the principal method for that 
item as determined under paragraph (c) of this section, unless either 
the principal method is impermissible and must be changed under this 
paragraph (a)(4) or the acquiring corporation changes the principal 
method in accordance with paragraph (a)(5) of this section.
    (5) Voluntary change. Any party to a section 381(a) transaction may 
request permission under section 446(e) to change a method of 
accounting for the taxable year in which the transaction occurs or is 
expected to occur. For trades or businesses that will not operate as 
separate and distinct trades or businesses after the date of 
distribution or transfer, a change in method of accounting for the 
taxable year that includes that date will be granted only if the 
requested method is the method that the acquiring corporation must use 
after the date of distribution or transfer. The time and manner of 
obtaining the Commissioner's consent to change to a different method of 
accounting is described in paragraph (d)(2) of this section.
    (6) Examples. The following examples illustrate the rules of this 
paragraph (a). Unless otherwise noted, the carryover method is a 
permissible method of accounting.

    Example (1). Carryover method for separate and distinct trades 
or businesses after the date of distribution or transfer--(i) Facts. 
X Corporation operates an employment agency that uses the overall 
cash receipts and disbursements method of accounting. T Corporation 
operates an educational institution that uses an overall accrual 
method of accounting. X Corporation acquires the assets of T 
Corporation in a transaction to which section 381(a) applies. After 
the date of distribution or transfer, X Corporation operates the 
employment agency as a trade or business that is separate and 
distinct from the educational institution.
    (ii) Conclusion. Because after the date of distribution or 
transfer X Corporation operates the employment agency as a separate 
and distinct trade or business, under paragraph (a)(2) of this 
section X Corporation must use the carryover method for each 
continuing trade or business, unless either the carryover method is 
impermissible and must be changed under paragraph (a)(4) of this 
section or X Corporation changes the carryover method in accordance 
with paragraph (a)(5) of this section. As defined in paragraph 
(b)(5) of this section, the carryover method for the employment 
agency is the cash receipts and disbursements method of accounting 
and the carryover method for the educational institution is the 
accrual method of accounting used by T Corporation immediately prior 
to the date of distribution or transfer. There is no change in 
method of accounting, and X Corporation need not secure the 
Commissioner's consent to use either carryover method.
    Example (2). Carryover method for a special method of 
accounting--(i) Facts. X Corporation provides personal grooming 
consulting and T Corporation provides weight management consulting. 
Both X Corporation and T Corporation use the same overall accrual 
method of accounting. X Corporation has elected to use the recurring 
item exception under Sec.  1.461-5. T Corporation does not use the 
recurring item exception. X Corporation acquires the assets of T 
Corporation in a transaction to which section 381(a) applies. After 
the date of distribution or transfer, X Corporation operates the 
personal grooming consulting business as a trade or business that is 
separate and distinct from the weight management consulting 
business.
    (ii) Conclusion. Because after the date of distribution or 
transfer, X Corporation operates the personal grooming consulting 
business as a separate and distinct trade or business, under 
paragraph (a)(2) of this section X Corporation must use a carryover 
method for each continuing trade or business, unless either the 
carryover method is impermissible and must be changed under 
paragraph (a)(4) of this section or X Corporation changes the 
carryover method in accordance with paragraph (a)(5) of this 
section. As defined in paragraph (b)(5) of this section, the 
carryover method for the overall method of accounting for each trade 
or business is the accrual method used immediately prior to the date 
of distribution or transfer. The carryover method for the special 
method of accounting for the personal grooming consulting business 
is the recurring item exception under Sec.  1.461-5 while the 
carryover method for the weight management consulting business is 
not to use the recurring item exception under Sec.  1.461-5. There 
is no change in method of accounting, and X Corporation need not 
secure the Commissioner's consent to use the carryover methods of 
accounting.
    Example (3). Carryover method for a special method of accounting 
not permissible--(i) Facts. X Corporation is an engineering firm 
that uses the overall cash receipts and disbursements method of 
accounting and has elected under section 171 to amortize bond 
premium with respect to its taxable bonds acquired at a premium. T 
Corporation is a manufacturer that uses an overall accrual method of 
accounting and has not made a section 171 election to amortize bond 
premium with respect to its taxable bonds acquired at a premium. X 
Corporation acquires the assets of T Corporation in a transaction to 
which section 381(a) applies. After the date of distribution or 
transfer, X Corporation operates the engineering firm as a trade or 
business that is separate and distinct from the manufacturing 
business.
    (ii) Conclusion. Because after the date of distribution or 
transfer X Corporation operates the engineering firm as a separate 
and distinct trade or business, under paragraph (a)(2) of this 
section X Corporation must use a carryover method for each 
continuing trade or business, unless either the carryover method is 
impermissible and must be changed under paragraph (a)(4) of this 
section or X Corporation changes the carryover method in accordance 
with paragraph (a)(5) of this section. As defined in paragraph 
(b)(5) of this section, the carryover method for the overall method 
of accounting for the engineering firm is the cash receipts and 
disbursements method used by X Corporation immediately prior to the 
date of distribution or transfer, and the carryover method for the 
overall method of accounting for the manufacturing business is the 
accrual method used by T Corporation immediately prior to the date 
of distribution or transfer. There is no change in method of 
accounting, and X Corporation need not secure the Commissioner's 
consent to use either carryover method. Notwithstanding that after 
the date of distribution or transfer X Corporation has two separate 
and distinct trades or businesses, X Corporation is permitted only 
one method of accounting for amortizable bond premium under section 
171. Because after the date of distribution or transfer X 
Corporation must use a single method of accounting for bond premium 
for all trades or businesses, X Corporation must use the principal 
method for that item as determined under paragraph (c) of this 
section, unless either the principal method is impermissible and 
must be changed under paragraph (a)(4) of this section or X 
Corporation changes that method in accordance with paragraph (a)(5) 
of this section. X Corporation must change to the principal method 
in accordance with paragraph (d)(1) of this section. If amortizing 
bond premium is not the principal method, X Corporation may make an 
election to amortize bond premium to the extent permitted by section 
171. See paragraph (e)(2) of this section for rules on making 
elections.

    (b) Definitions. For purposes of this section--
    (1) Method of accounting. A method of accounting has the same 
meaning as provided in section 446 and any applicable Income Tax 
Regulations.
    (2) Special method of accounting. A special method of accounting is 
a method expressly permitted or required by the Internal Revenue Code, 
Income Tax Regulations, or administrative guidance published in the 
Internal Revenue Bulletin that deviates from the normal application of 
the cash receipts and disbursements method or an accrual method of 
accounting. The installment method under section 453, the mark-to-
market method under section 475, the amortization of bond premium under 
section 171, the percentage of completion method under section 460, the 
recurring item exception of Sec.  1.461-5, and the income deferral 
methods under section 455 and Sec.  1.451-5 are examples of special 
methods of accounting. See Sec.  1.446-1(c)(1)(iii).
    (3) Adoption of a method of accounting. Adoption of a method of 
accounting has the same meaning as provided in Sec.  1.446-1(e)(1).

[[Page 45677]]

    (4) Change in method of accounting. A change in method of 
accounting has the same meaning as provided in Sec.  1.446-1(e)(2).
    (5) Carryover method. A carryover method for the overall method of 
accounting is the overall method of accounting that each party to a 
section 381(a) transaction uses for each separate and distinct trade or 
business immediately prior to the date of distribution or transfer. The 
carryover method for a special method of accounting for an item is the 
special method of accounting for that item that each party to a section 
381(a) transaction uses for each separate and distinct trade or 
business immediately prior to the date of distribution or transfer.
    (6) Principal method. A principal method is an overall or special 
method of accounting that is determined under paragraph (c) of this 
section.
    (7) Permissible method of accounting. A permissible method of 
accounting is a method of accounting that is proper or permitted under 
the Internal Revenue Code or any applicable Income Tax Regulations.
    (8) Acquiring corporation. An acquiring corporation has the same 
meaning as provided in Sec.  1.381(a)-1(b)(2).
    (9) Distributor corporation. A distributor corporation means the 
corporation, foreign or domestic, that distributes its assets to 
another corporation described in section 332(b) in a distribution to 
which section 332 (relating to liquidations of subsidiaries) applies.
    (10) Transferor corporation. A transferor corporation means the 
corporation, foreign or domestic, that transfers its assets to another 
corporation in a transfer to which section 361 (relating to 
nonrecognition of gain or loss to corporations) applies, but only if--
    (i) The transfer is in connection with a reorganization described 
in section 368(a)(1)(A), (a)(1)(C), or (a)(1)(F), or
    (ii) The transfer is in connection with a reorganization described 
in section 368(a)(1)(D) or (a)(1)(G), provided the requirements of 
section 354(b) are met.
    (11) Parties to the section 381(a) transaction. Parties to the 
section 381(a) transaction means the acquiring corporation and the 
distributor or transferor corporation that participate in a transaction 
to which section 381(a) applies.
    (12) Date of distribution or transfer. The date of distribution or 
transfer has the same meaning as provided in section 381(b)(2) and 
Sec.  1.381(b)-1(b).
    (13) Separate and distinct trades or businesses. Separate and 
distinct trades or businesses has the same meaning as provided in Sec.  
1.446-1(d).
    (14) Gross receipts. Gross receipts means all the receipts, 
including amounts that are excludible from gross income, that must be 
taken into account under the method of accounting used in a 
representative period (determined without regard to this section) for 
federal income tax purposes. For example, gross receipts includes 
income from investments, amounts received for services, rents, total 
sales (net of returns and allowances), and both taxable and tax-exempt 
interest. See paragraph (e)(5) of this section for rules on determining 
the representative period.
    (15) Audit protection. Audit protection means, for purposes of 
paragraph (d)(1) of this section, that the IRS will not require an 
acquiring corporation that is required to change a method of accounting 
under paragraph (a)(3) of this section to change that method for a 
taxable year ending prior to the taxable year that includes the date of 
distribution or transfer.
    (16) Section 481(a) adjustment. The section 481(a) adjustment means 
an adjustment that must be taken into account as required under section 
481(a) to prevent amounts from being duplicated or omitted when the 
taxable income of an acquiring corporation is computed under a method 
of accounting different from the method used to compute taxable income 
for the preceding taxable year.
    (17) Cut-off basis. A cut-off basis means a manner in which a 
change in method of accounting is made without a section 481(a) 
adjustment and under which only the items arising after the beginning 
of the year of change (or, in the case of a change made under paragraph 
(d)(1) of this section, after the date of distribution or transfer) are 
accounted for under the new method of accounting.
    (18) Adjustment period. The adjustment period means the number of 
taxable years for taking into account the section 481(a) adjustment 
required as a result of a change in method of accounting.
    (19) Component trade or business. A component trade or business is 
a trade or business of a party to the section 381(a) transaction that 
will be combined and integrated with a trade or business of the other 
party to the section 381 transaction. See paragraph (e)(4)(ii) of this 
section for the determination of whether a trade or business is 
operated as a separate and distinct trade or business after the date of 
distribution or transfer.
    (c) Principal method--(1) In general. For each integrated trade or 
business, the principal method is generally the method of accounting 
used by the component trade or business of the acquiring corporation 
immediately prior to the date of distribution or transfer. If, however, 
the component trade or business of the distributor or transferor 
corporation is larger than the component trade or business of the 
acquiring corporation on the date of distribution or transfer, the 
principal method is the method used by the component trade or business 
of the distributor or transferor corporation immediately prior to that 
date. If the larger component trade or business does not have a special 
method of accounting for a particular item immediately prior to the 
date of distribution or transfer, the principal method for that item is 
the method of accounting used by the component trade or business that 
does have a special method of accounting for that item. See paragraph 
(e)(9) of this section for special rules concerning methods of 
accounting that are elected on a project-by-project, job-by-job, or 
other similar basis. For each integrated trade or business, the 
component trade or business of the distributor or transferor 
corporation is larger than the component trade or business of the 
acquiring corporation on the date of distribution or transfer if--
    (i) The aggregate of the adjusted bases of the assets held by each 
component trade or business of the distributor or transferor 
corporation (determined under section 1011 and any applicable Income 
Tax Regulations) exceeds the aggregate of the adjusted bases of the 
assets of each component trade or business of the acquiring corporation 
immediately prior to the date of distribution or transfer, and
    (ii) The aggregate of the gross receipts for a representative 
period of each component trade or business of the distributor or 
transferor corporation exceeds the aggregate of the gross receipts for 
the same period of each component trade or business of the acquiring 
corporation. See paragraph (e)(5) of this section for rules on 
determining the representative period.
    (2) Multiple component trades or businesses with different 
principal methods. If a party to the section 381(a) transaction has 
multiple component trades or businesses and more than one principal 
overall method of accounting or more than one principal special method 
of accounting for an item, then the acquiring corporation may choose 
which of the principal methods of accounting used by such component 
trades or businesses will be the

[[Page 45678]]

principal methods of the integrated trade or business. The acquiring 
corporation must choose a principal method that is a permissible method 
of accounting. In general, a change to a principal method in a 
transaction to which section 381(a) and paragraph (a)(3) of this 
section applies is made under paragraph (d)(1) of this section.
    (3) Examples. The following examples illustrate the rules of this 
paragraph (c). Unless otherwise noted, the principal method is a 
permissible method of accounting.

    Example (1). Principal method is the method used by the 
acquiring corporation--(i) Facts. X Corporation and T Corporation 
each operate an employment agency. X Corporation uses the overall 
cash receipts and disbursements method of accounting, and T 
Corporation uses an overall accrual method of accounting. X 
Corporation acquires the assets of T Corporation in a transaction to 
which section 381(a) applies. The adjusted bases of the assets in X 
Corporation's employment agency immediately prior to the date of 
distribution or transfer exceed the adjusted bases of the assets in 
T Corporation's employment agency, and the gross receipts in X 
Corporation's employment agency for the representative period exceed 
the gross receipts of T Corporation's employment agency for the 
period. After the date of distribution or transfer, X Corporation's 
employment agency will not be operated as a trade or business that 
is separate and distinct from T Corporation's employment agency.
    (ii) Conclusion. Because after the date of distribution or 
transfer X Corporation will not operate its employment agency as a 
separate and distinct trade or business, X Corporation must use a 
principal method under paragraph (a)(3) of this section, unless 
either the principal method is impermissible and must be changed 
under paragraph (a)(4) of this section or X Corporation changes the 
principal method in accordance with paragraph (a)(5) of this 
section. Because on the date of distribution or transfer T 
Corporation's employment agency is not larger than X Corporation's 
employment agency, the principal method for the overall method of 
accounting is the cash receipts and disbursements method used by X 
Corporation's employment agency. X Corporation need not secure the 
Commissioner's consent to use this method of accounting. However, in 
accordance with paragraph (d)(1) of this section, X Corporation must 
change the method of accounting for the employment agency acquired 
from T Corporation to the cash receipts and disbursements method.
    Example (2). Principal method is the method used by the 
acquiring corporation--(i) Facts. The facts are the same as in 
Example (1), except that the gross receipts of T Corporation's 
employment agency for the representative period exceed the gross 
receipts of X Corporation's employment agency for the period.
    (ii) Conclusion. The result is the same as in Example (1). 
Although the gross receipts of T Corporation's employment agency 
exceed the gross receipts of X Corporation's employment agency, T 
Corporation's employment agency is not larger than X Corporation's 
employment agency because the adjusted bases of the assets of T 
Corporation's employment agency do not exceed the adjusted bases of 
the assets of X Corporation's employment agency. Thus, the principal 
method for the overall method of accounting is the cash receipts and 
disbursements method of accounting used by X Corporation's 
employment agency immediately prior to the date of distribution or 
transfer. X Corporation need not secure the Commissioner's consent 
to use this method of accounting. However, in accordance with 
paragraph (d)(1) of this section, X Corporation must change the 
method of accounting for the employment agency business acquired 
from T Corporation to the cash receipts and disbursements method.
    Example (3). Principal method is the method used by the 
distributor or transferor corporation--(i) Facts. The facts are the 
same as in Example (2), except that the adjusted bases of the assets 
held by T Corporation's employment agency immediately prior to the 
date of distribution or transfer exceed the adjusted bases of the 
assets held by X Corporation's employment agency.
    (ii) Conclusion. The principal method for the overall method of 
accounting is the accrual method of accounting used by T 
Corporation's employment agency immediately prior to the date of 
distribution or transfer because on the date of distribution or 
transfer T Corporation's employment agency is larger than X 
Corporation's employment agency. The adjusted bases of the assets of 
T Corporation's employment agency exceed the adjusted bases of the 
assets of X Corporation's employment agency, and the gross receipts 
of T Corporation's employment agency exceed the gross receipts of X 
Corporation's employment agency. X Corporation need not secure the 
Commissioner's consent to use this method of accounting. However, in 
accordance with paragraph (d)(1) of this section, X Corporation must 
change the method of accounting for the employment agency business 
it operated prior to the date of distribution or transfer to the 
accrual method of accounting used by T Corporation's employment 
agency immediately prior to the date of distribution or transfer.
    Example (4). Impermissible principal method--(i) Facts. The 
facts are the same as in Example (1), except that X Corporation is 
prohibited under section 448 from using the cash receipts and 
disbursements method of accounting after the date of distribution or 
transfer.
    (ii) Conclusion. Because section 448 prohibits X Corporation 
from using the cash receipts and disbursements method of accounting, 
X Corporation is not permitted to use the principal method for the 
overall method of accounting as determined in Example (1). Because 
after the date of distribution or transfer that method is not a 
permissible method, under paragraph (a)(4) of this section X 
Corporation must secure the Commissioner's consent to change to a 
permissible method in accordance with the procedures set forth in 
paragraph (d)(2) of this section.
    Example (5). Voluntary change not allowable--(i) Facts. The 
facts are the same as in Example (4), except that T Corporation 
wants to discontinue using the overall accrual method of accounting 
for its employment agency and change to the cash receipts and 
disbursements method for the taxable year in which the section 
381(a) transaction occurs or is expected to occur.
    (ii) Conclusion. Under paragraph (a)(5) of this section, the 
Commissioner will grant a request to change a method of accounting 
for the taxable year that includes the date of distribution or 
transfer only if the requested method is the method that the 
acquiring corporation must use after the date of distribution or 
transfer. The Commissioner will not consent to a request by T 
Corporation to change to the cash receipts and disbursements method 
for the taxable year in which the section 381(a) transaction occurs 
or is expected to occur because X Corporation cannot use the cash 
receipts and disbursements method after the date of distribution or 
transfer.
    Example (6). Principal methods are the acquiring corporation's 
methods--(i) Facts. X Corporation and T Corporation each publishes 
magazines. X Corporation acquires the assets of T Corporation in a 
transaction to which section 381(a) applies. Both X Corporation and 
T Corporation use an overall accrual method of accounting. X 
Corporation has elected to defer income from its subscription sales 
under section 455. T Corporation has not elected to defer income 
from its subscription sales under section 455 and instead has 
recognized the income from these sales in accordance with section 
451. The adjusted bases of the assets in X Corporation's publication 
business immediately prior to the date of distribution or transfer 
exceed the adjusted bases of the assets in T Corporation's 
publication business, and the gross receipts in X Corporation's 
publication business for the representative period exceed the gross 
receipts in T Corporation's publication business for the 
representative period. After the date of distribution or transfer, X 
Corporation will not operate its publication business as a trade or 
business that is separate and distinct from T Corporation's 
publication business.
    (ii) Conclusion. Because after the date of distribution or 
transfer X Corporation will not operate its publication business as 
a separate and distinct trade or business, X Corporation must use 
the principal method under paragraph (a)(3) of this section, unless 
either the principal method is impermissible and must be changed 
under paragraph (a)(4) of this section or X Corporation changes the 
principal method in accordance with paragraph (a)(5) of this 
section. The adjusted bases of the assets in T Corporation's 
publication business do not exceed the adjusted bases of the assets 
in X Corporation's publication business, and the gross receipts in T 
Corporation's publication business do not exceed the gross receipts 
in X Corporation's publication business. Because on the date of 
distribution or transfer T Corporation's publication business is not

[[Page 45679]]

larger than X Corporation's publication business, the principal 
method for the overall method of accounting is the accrual method 
used by X Corporation's publication business immediately prior to 
the date of distribution or transfer. The principal method for 
subscription sales is the section 455 deferral method used by X 
Corporation immediately prior to the date of distribution or 
transfer. X Corporation need not secure the Commissioner's consent 
to use the principal method for either the overall method of 
accounting or the special method of accounting. However, in 
accordance with paragraph (d)(1) of this section, X Corporation must 
change both the overall method of accounting and the special method 
of accounting for the publication business acquired from T 
Corporation to the accrual method and the section 455 deferral 
method used by X Corporation immediately prior to the date of 
distribution or transfer.
    Example (7). Principal methods are the acquiring corporation's 
methods--(i) Facts. The facts are the same as in Example (6), except 
that the adjusted bases of the assets in T Corporation's publication 
business immediately prior to the date of distribution or transfer 
exceed the adjusted bases of the assets in X Corporation's business.
    (ii) Conclusion. The result is the same as in Example (6). 
Because on the date of distribution or transfer T Corporation's 
publication business is not larger than X Corporation's publication 
business, the principal method for the overall method of accounting 
is the accrual method used by X Corporation's publication business 
immediately prior to the date of distribution or transfer. The 
principal method for subscription sales is the section 455 deferral 
method used by X Corporation immediately prior to the date of 
distribution or transfer. X Corporation need not secure the 
Commissioner's consent to use the principal method for either the 
overall method of accounting or the special method of accounting. 
However, in accordance with paragraph (d)(1) of this section, X 
Corporation must change both the overall method of accounting and 
the special method of accounting for the publication business 
acquired from T Corporation to the accrual method and the section 
455 deferral method used by X Corporation immediately prior to the 
date of distribution or transfer.
    Example (8). Principal method determination when larger 
component trade or business does not have a special method of 
accounting--(i) Facts. X Corporation and T Corporation both install 
ice skating rinks. Both X Corporation and T Corporation use an 
overall accrual method of accounting for their respective 
businesses. X Corporation completes its installation contracts 
within the contracting year and uses an accrual method of accounting 
to recognize the revenue from its installation contracts. T 
Corporation's installation contracts are subject to section 460, and 
T Corporation recognizes the revenue from such contracts under the 
percentage-of-completion method. X Corporation acquires the assets 
of T Corporation in a transaction to which section 381(a) applies. 
The adjusted bases of the assets in X Corporation's installation 
business immediately prior to the date of distribution or transfer 
exceed the adjusted bases of the assets in T Corporation's 
installation business, and the gross receipts in X Corporation's 
installation business for the representative period exceed the gross 
receipts in T Corporation's installation business for the 
representative period. After the date of distribution or transfer, X 
Corporation will not operate its installation business as a trade or 
business that is separate and distinct from T Corporation's 
installation business.
    (ii) Conclusion. Because after the date of distribution or 
transfer X Corporation will not operate its installation business as 
a separate and distinct trade or business, X Corporation must use a 
principal method under paragraph (a)(3) of this section, unless 
either the principal method is impermissible and must be changed 
under paragraph (a)(4) of this section or X Corporation changes the 
principal method in accordance with paragraph (a)(5) of this 
section. The adjusted bases of the assets in T Corporation's 
installation business do not exceed the adjusted bases of the assets 
in X Corporation's installation business, and the gross receipts in 
T Corporation's installation business do not exceed the gross 
receipts in X Corporation's installation business. Because on the 
date of distribution or transfer T Corporation's installation 
business is not larger than X Corporation's installation business, 
the principal method for the overall method of accounting is the 
accrual method used by X Corporation's installation business 
immediately prior to the date of distribution or transfer. X 
Corporation need not secure the Commissioner's consent to use the 
principal method for the overall method of accounting. However, in 
accordance with paragraph (d)(1) of this section, X Corporation must 
change the overall method of accounting for the installation 
business acquired from T Corporation to the accrual method used by X 
Corporation. Under paragraph (c) of this section, the principal 
method for T Corporation's long-term contracts is the percentage-of-
completion method used by T Corporation immediately prior to the 
date of distribution or transfer because X Corporation's 
installation business does not have a method of accounting for long-
term contracts. There is no change in method of accounting, and X 
Corporation need not secure the Commissioner's consent to use T 
Corporation's percentage-of-completion method.
    Example (9). Principal method determination with a combined 
trade or business and a separate and distinct trade or business--(i) 
Facts. X Corporation operates a tennis academy as a trade or 
business that is separate and distinct from its trade or business of 
operating a golf academy. X Corporation uses the overall cash 
receipts and disbursements method of accounting for the tennis 
academy and an overall accrual method of accounting for the golf 
academy. T Corporation operates a tennis academy and uses an accrual 
method of accounting for the overall method. X Corporation acquires 
the assets of T Corporation in a transaction to which section 381(a) 
applies. After the date of distribution or transfer, X Corporation 
will not operate its tennis academy as a trade or business that is 
separate and distinct from T Corporation's tennis academy. X 
Corporation will continue to operate its golf academy as a trade or 
business that is separate and distinct from the operation of the 
tennis academy. The adjusted bases of the assets in T Corporation's 
tennis academy exceed the adjusted bases of the assets in X 
Corporation's tennis academy immediately prior to the date of 
distribution or transfer. The gross receipts of T Corporation's 
tennis academy for the representative period exceed the gross 
receipts of X Corporation's tennis academy for that period.
    (ii) Conclusion. Because after the date of distribution or 
transfer X Corporation will not operate its tennis academy as a 
separate and distinct trade or business, X Corporation must use a 
principal method under paragraph (a)(3) of this section, unless 
either the principal method is impermissible and must be changed 
under paragraph (a)(4) of this section or X Corporation changes the 
principal method in accordance with paragraph (a)(5) of this 
section. Because on the date of distribution or transfer the tennis 
academy operated by T Corporation is larger than the tennis academy 
operated by X Corporation, the principal method for the overall 
method of accounting for the combined tennis academy business is the 
accrual method used by T Corporation's tennis academy immediately 
prior to the date of distribution or transfer. X Corporation need 
not secure the Commissioner's consent to use the principal method 
for the overall method of accounting. However, in accordance with 
paragraph (d)(1) of this section, X Corporation must change the 
method of accounting for its tennis academy to the accrual method. 
Because X Corporation will operate the golf academy as a separate 
trade or business, under paragraph (a)(2) of this section X 
Corporation must continue to use the accrual method that it used 
immediately prior to the date of distribution or transfer as the 
carryover method for the golf academy. There is no change in method 
of accounting, and X Corporation need not secure the Commissioner's 
consent to use the carryover method.
    Example (10). Principal method determination with multiple 
component trades or businesses--(i) Facts. The facts are the same as 
in Example (9), except that after the date of distribution or 
transfer X Corporation will not operate its golf academy as a trade 
or business that is separate and distinct from the tennis academy. 
In addition, X Corporation's component trades or businesses are 
larger than T Corporation's component trade or business: (1) the 
adjusted bases of the assets of X Corporation's tennis academy and 
golf academy businesses, in the aggregate, exceed the adjusted bases 
of the assets held by T Corporation's tennis academy; and (2) the 
gross receipts for the representative period of X Corporation's 
tennis academy and golf academy businesses, in the aggregate, exceed 
the gross receipts in T Corporation's tennis academy.
    (ii) Conclusion. Because on the date of distribution or transfer 
T Corporation's tennis academy is not larger than X Corporation's

[[Page 45680]]

combined tennis academy and golf academy, the principal method for 
the overall method of accounting is the method of accounting used by 
the component trades or businesses of X Corporation that will be 
combined with T Corporation's component trade or business on that 
date. Because on the date of distribution or transfer X Corporation 
operates two component trades or businesses with different overall 
methods of accounting that will be integrated after the date of 
distribution or transfer, X Corporation may choose under paragraph 
(c)(2) of this section which overall method (and any special method 
of accounting) used by its component trades or businesses will be 
the principal method. X Corporation may choose to use either the 
accrual method used by the golf academy or the cash receipts and 
disbursements method used by its tennis academy as the principal 
method after the date of distribution or transfer, if either method 
is a permissible method. In accordance with paragraph (d)(1) of this 
section, X Corporation must change T Corporation's overall method of 
accounting to the principal method. Under paragraph (a)(3) of this 
section, X Corporation also must change either its golf academy 
business or its tennis academy business, depending on which 
principal method X Corporation selects, to the principal method.

    (d) Procedures for changing a method of accounting--(1) Change made 
to principal method under paragraph (a)(3) of this section--(i) Section 
481(a) adjustment--(A) In general. An acquiring corporation that 
changes its method of accounting or the distributor or transferor 
corporation's method of accounting under paragraph (a)(3) of this 
section does not need to secure the Commissioner's consent to use the 
principal method. To the extent the use of a principal method 
constitutes a change in method of accounting, the change in method is 
treated as a change initiated by the acquiring corporation for purposes 
of section 481(a)(2). Any change to a principal method, whether the 
change relates to a trade or business of the acquiring corporation or a 
trade or business of the distributor or transferor corporation, must be 
reflected on the acquiring corporation's federal income tax return for 
the taxable year that includes the date of distribution or transfer. 
The amount of the section 481(a) adjustment and the adjustment period, 
if any, necessary to implement a change to the principal method are 
determined under Sec.  1.446-1(e) and the applicable administrative 
procedures that govern voluntary changes in methods of accounting under 
section 446(e). If the Internal Revenue Code, the Income Tax 
Regulations, or administrative procedures require that a method of 
accounting be implemented on a cut-off basis, the acquiring corporation 
must implement the change on a cut-off basis as of the date of 
distribution or transfer on its federal income tax return for the 
taxable year that includes the date of distribution or transfer. If the 
Internal Revenue Code, the Income Tax Regulations, or administrative 
procedures require a section 481(a) adjustment, the acquiring 
corporation must determine the section 481(a) adjustment and include 
the appropriate amount of the section 481(a) adjustment on its federal 
income tax return for the taxable year that includes the date of 
distribution or transfer and subsequent taxable year(s), as necessary. 
This adjustment is determined by the acquiring corporation as of the 
beginning of the day that is immediately after the date of distribution 
or transfer.
    (B) Example. The following example illustrates the rules of this 
paragraph (d)(1)(i):

    Example. X Corporation uses the overall cash receipts and 
disbursements method of accounting, and T Corporation uses an 
overall accrual method of accounting. X Corporation acquires the 
assets of T Corporation in a transaction to which section 381(a) 
applies. X Corporation determines that under the rules of paragraph 
(c)(1) of this section X Corporation must change the method of 
accounting for the business acquired from T Corporation to the cash 
receipts and disbursements method. X Corporation will determine the 
section 481(a) adjustment pertaining to the change to the cash 
receipts and disbursements method by consolidating the adjustments 
(whether the amounts thereof represent increases or decreases in 
items of income or deductions) arising with respect to balances in 
the various accounts, such as accounts receivable, as of the 
beginning of the day that immediately follows the day on which X 
Corporation acquires the assets of T Corporation. X Corporation will 
reflect this adjustment, or an appropriate part thereof, on its 
federal income tax return for the taxable year that includes the 
date of distribution or transfer.

    (ii) Audit protection. Notwithstanding any other provision in any 
other Income Tax Regulation or administrative procedure, no audit 
protection is provided for any change in method of accounting under 
paragraph (d)(1) of this section.
    (iii) Other terms and conditions. Except as otherwise provided in 
this section, other terms and conditions provided in Sec.  1.446-1(e) 
and the applicable administrative procedures for voluntary changes in 
method of accounting under section 446(e) apply to a change in method 
of accounting under this section. Thus, for example, if the 
administrative procedures for a particular change in method of 
accounting have a term and condition that provides for the acceleration 
of the section 481(a) adjustment period, this term and condition 
applies to a change made under this paragraph (d)(1). However, any 
scope limitation in the applicable administrative procedures will not 
apply for purposes of making a change under this paragraph (d)(1). For 
example, if the administrative procedures provide as a limitation that 
an identical change in method of accounting is barred for a period of 
years, this limitation will not bar a change to the principal method 
made under this section.
    (2) Change made to a method of accounting under paragraph (a)(4) or 
(a)(5) of this section--(i) In general. A party to a section 381(a) 
transaction that changes a method of accounting under either paragraph 
(a)(4) or paragraph (a)(5) of this section must follow the provisions 
of Sec.  1.446-(1)(e) and the applicable administrative procedures, 
including scope limitations, for voluntary changes in method of 
accounting under section 446(e), except as provided in paragraphs 
(d)(2)(ii) and (d)(2)(iii) of this section. An application on Form 
3115, ``Application for Change in Accounting Method,'' filed with the 
IRS to change a method of accounting under this paragraph (d)(2) should 
be labeled ``Filed under section 381(c)(4)'' at the top.
    (ii) Final year limitation. Any scope limitation relating to the 
final year of a trade or business will not apply to a taxpayer that 
changes its method of accounting in the final year of a trade or 
business that is terminated as the result of a section 381(a) 
transaction.
    (iii) Time to file. Under the authority of Sec.  1.446-1(e)(3)(ii), 
for a change in method of accounting requiring advance consent, the 
application for a change in method of accounting (for example, Form 
3115) must be filed with the IRS on or before the later of--
    (A) The due date for filing a Form 3115 as specified in Sec.  
1.446-1(e), for example, the last day of the taxable year in which the 
distribution or transfer occurred, or
    (B) The earlier of--
    (1) The day that is 180 days after the date of distribution or 
transfer, or
    (2) The day on which the acquiring corporation files its federal 
income tax return for the taxable year in which the distribution or 
transfer occurred.
    (e) Rules and procedures--(1) No method of accounting. If a party 
to a section 381(a) transaction is not using a method of accounting, 
does not have a method of accounting for a particular item, or came 
into existence as a result of the transaction, the party will not be 
treated as having a method of accounting different from that used by

[[Page 45681]]

another party to the section 381(a) transaction.
    (2) Elections and adoptions allowed. If an election does not 
require the Commissioner's consent, an acquiring corporation or a 
distributor or transferor corporation is not precluded from making any 
election that is otherwise permissible for the taxable year that 
includes the date of distribution or transfer. For purposes of this 
section, a corporation shall be deemed as having made any election as 
of the first day of the taxable year that includes the date of 
distribution or transfer. Similarly, where adoption is permissible, an 
acquiring corporation or a distributor or transferor corporation may 
adopt any permissible method of accounting for the taxable year that 
includes the date of distribution or transfer.
    (3) Elections continue after section 381(a) transaction--(i) 
General rule. An acquiring corporation is not required to renew any 
election not otherwise requiring renewal and previously made by it or 
by a distributor or transferor corporation for a carryover method or a 
principal method if the acquiring corporation uses the method after the 
section 381(a) transaction. If the acquiring corporation uses a method 
after the date of distribution or transfer, an election made by the 
acquiring corporation or by a distributor or transferor corporation for 
that method that was in effect on the date of distribution or transfer 
continues after the section 381(a) transaction as though the 
distribution or transfer had not occurred.
    (ii) Example. The following example illustrates the rules of this 
paragraph (e)(3):

    Example. The acquiring corporation, X Corporation, previously 
elected to amortize bond premium under section 171. X Corporation 
acquires the assets of T Corporation in a transaction to which 
section 381(a) applies. X Corporation determines under the rules of 
paragraph (c)(1) of this section that X Corporation's method of 
amortizing bond premium is the principal method. After the date of 
distribution or transfer, X Corporation is not required to renew its 
bond premium amortization election and is bound by it. Additionally, 
X Corporation would not be required to renew its election to 
amortize bond premium if the method were the carryover method under 
paragraph (a)(2) of this section.

    (4) Appropriate times for certain determinations--(i) Determining 
the method of accounting. The method of accounting used by a party to a 
section 381(a) transaction on the date of distribution or transfer is 
the method of accounting used by that party as of the end of the day 
that is immediately prior to the date of distribution or transfer.
    (ii) Determining whether there are separate and distinct trades or 
businesses after the date of distribution or transfer. Whether an 
acquiring corporation will operate the trades or businesses of the 
parties to a section 381(a) transaction as separate and distinct trades 
or businesses after the date of distribution or transfer will be 
determined as of the date of distribution or transfer based upon the 
facts and circumstances. Intent to combine books and records of the 
trades or businesses may be demonstrated by contemporaneous records and 
documents or by other objective evidence that reflects the acquiring 
corporation's ultimate plan of operation, even though the actual 
combination of the books and records may extend beyond the end of the 
taxable year that includes the date of distribution or transfer.
    (5) Representative period for aggregating gross receipts. The 
representative period for measuring gross receipts is generally the 12 
consecutive months preceding the date of distribution or transfer. If a 
component trade or business was not in existence for the 12 consecutive 
months preceding the date of distribution or transfer, then all 
component trades or businesses of each integrated trade or business 
will compare their gross receipts for the period that such trade or 
business was in existence. For example, if the acquiring corporation's 
component trade or business was formed in August and the date of 
distribution or transfer occurred in December of the same year, the 
gross receipts for those five months will be compared with the gross 
receipts of the other component trades or businesses for the same 
period.
    (6) Establishing a method of accounting. A method of accounting 
used by the distributor or transferor corporation immediately prior to 
the date of distribution or transfer that continues to be used by the 
acquiring corporation after the date of distribution or transfer is an 
established method of accounting for purposes of section 446(e), 
whether or not such method is proper or is permitted under the Internal 
Revenue Code or any applicable Income Tax Regulations.
    (7) Other applicable provisions. This section does not preempt any 
other provision of the Internal Revenue Code or the Income Tax 
Regulations that is applicable to the acquiring corporation's 
circumstances. For example, income, deductions, credits, allowances, 
and exclusions may be allocated among the parties to a section 381(a) 
transaction and other taxpayers under sections 269 and 482, if 
appropriate. Similarly, transfers of contracts accounted for using a 
long-term contract method of accounting are governed by the rules 
provided in Sec.  1.460-4(k). Further, if other paragraphs of section 
381(c) apply for purposes of determining the methods of accounting to 
be used following the date of distribution or transfer, section 
381(c)(4) and this Sec.  1.381(c)(4)-1 will not apply to the tax 
treatment of the items. For example, this section does not apply to 
inventories that an acquiring corporation obtains in a transaction to 
which section 381(a) applies. Instead, the rules of section 381(c)(5) 
govern the inventory method to be used by the acquiring corporation 
after the distribution or transfer. Similarly, if the acquiring 
corporation assumes an obligation of the distributor or transferor 
corporation that gives rise to a liability after the date of 
distribution or transfer and to which Sec.  1.381(c)(16)-1 applies, the 
deductibility of the item is determined under this section only after 
the rules of section 381(c)(16) are applied.
    (8) Character of items of income and deduction. After the date of 
distribution or transfer, items of income and deduction have the same 
character in the hands of the acquiring corporation as they would have 
had in the hands of the distributor or transferor corporation if no 
distribution or transfer had occurred.
    (9) Method of accounting selected by project or job. If other 
sections of the Internal Revenue Code, Income Tax Regulations, or other 
administrative guidance permit an acquiring corporation to elect a 
method of accounting on a project-by-project, job-by-job, or other 
similar basis, then for purposes of this section the method elected 
with respect to each project or job is the established method only for 
that project or job. For example, the election under section 460 to 
classify a contract to perform both manufacturing and construction 
activities as a long-term construction contract if at least 95 percent 
of the estimated total allocable contract costs are reasonably 
allocated to the construction activities is made on a contract-by-
contract basis. Accordingly, the method of accounting previously 
elected for a project or job generally continues after the date of 
distribution or transfer. However, if the trades or businesses of the 
parties to a section 381(a) transaction are not operated as separate 
and distinct trades or businesses after the date of distribution or 
transfer, and two or more of the parties to the section 381(a) 
transaction previously worked on the same project or job and used 
different

[[Page 45682]]

methods of accounting for the project or job immediately before the 
distribution or transfer, then the acquiring corporation must determine 
the principal method for that project or job under paragraph (c) of 
this section and make changes, if necessary, to the principal method in 
accordance with paragraph (d)(1) of this section.
    (10) Impermissible method of accounting. This section does not 
limit the Commissioner's ability under section 446(b) to determine 
whether a taxpayer's method of accounting is an impermissible method or 
otherwise fails to clearly reflect income. For example, an acquiring 
corporation may not use the method of accounting determined under 
paragraph (a)(2) of this section if the method fails to clearly reflect 
the acquiring corporation's income within the meaning of section 
446(b).
    (f) Effective/applicability date. This section applies to corporate 
reorganizations and tax-free liquidations described in section 381(a) 
that occur on or after August 31, 2011.
0
Par. 4. Section 1.381(c)(5)-1 is revised to read as follows:


Sec.  1.381(c)(5)-1  Inventory method.

    (a) Introduction--(1) Purpose. This section provides guidance 
regarding the inventory method an acquiring corporation must use 
following a distribution or transfer to which sections 381(a) and 
381(c)(5) apply and how to implement any associated change in method of 
accounting. See Sec.  1.381(c)(4)-1 for guidance regarding the method 
of accounting or combination of methods (other than inventory and 
depreciation methods) an acquiring corporation must use following a 
distribution or transfer to which sections 381(a) and 381(c)(4) apply. 
See Sec.  1.381(c)(6)-1 for guidance regarding the depreciation method 
an acquiring corporation must use following a distribution or transfer 
to which sections 381(a) and 381(c)(6) apply.
    (2) Carryover method requirement for separate and distinct trades 
or businesses. In a transaction to which section 381(a) applies, if an 
acquiring corporation continues to operate a trade or business of the 
parties to the section 381(a) transaction as a separate and distinct 
trade or business after the date of distribution or transfer, the 
acquiring corporation must use a carryover method as defined in 
paragraph (b)(4) of this section for each continuing trade or business, 
unless either the carryover method is impermissible and must be changed 
under paragraph (a)(4) of this section or the acquiring corporation 
changes the carryover method in accordance with paragraph (a)(5) of 
this section. The acquiring corporation need not secure the 
Commissioner's consent to continue a carryover method.
    (3) Principal method requirement for trades or businesses not 
operated as separate and distinct trades or businesses. In a 
transaction to which section 381(a) applies, if an acquiring 
corporation does not operate the trades or businesses of the parties to 
the section 381(a) transaction as separate and distinct trades or 
businesses after the date of distribution or transfer, the acquiring 
corporation must use a principal method determined under paragraph (c) 
of this section, unless either the principal method is impermissible 
and must be changed under paragraph (a)(4) of this section or the 
acquiring corporation changes the principal method in accordance with 
paragraph (a)(5) of this section. The acquiring corporation must change 
to a principal method in accordance with paragraph (d)(1) of this 
section for each integrated trade or business and need not secure the 
Commissioner's consent to use a principal method.
    (4) Carryover method or principal method not a permissible method. 
If a carryover method or principal method is not a permissible 
inventory method, the acquiring corporation must secure the 
Commissioner's consent to change to a permissible inventory method as 
provided in paragraph (d)(2) of this section. If the acquiring 
corporation must use a single inventory method for a particular type of 
goods after the date of distribution or transfer regardless of the 
number of separate and distinct trades or businesses operated on that 
date, the acquiring corporation must use the principal method for that 
type of goods as determined under paragraph (c) of this section, unless 
either the principal method is impermissible and must be changed under 
this paragraph (a)(4) or the acquiring corporation changes the 
principal method in accordance with paragraph (a)(5) of this section.
    (5) Voluntary change. Any party to a section 381(a) transaction may 
request permission under section 446(e) to change an inventory method 
for the taxable year in which the transaction occurs or is expected to 
occur. For trades or businesses that will not operate as separate and 
distinct trades or businesses after the date of distribution or 
transfer, a change in method of accounting for the taxable year that 
includes that date will be granted only if the requested inventory 
method is the method that the acquiring corporation must use after the 
date of distribution or transfer. The time and manner of obtaining the 
Commissioner's consent to change to a different inventory method is 
described in paragraph (d)(2) of this section.
    (6) Examples. The following examples illustrate the rules of this 
paragraph (a). Unless otherwise noted, the carryover method is a 
permissible inventory method.

    Example (1). Carryover method for separate and distinct trades 
or businesses after the date of distribution or transfer--(i) Facts. 
X Corporation manufactures radios and television sets. X Corporation 
uses the first-in, first-out (FIFO) method of inventory 
identification, the cost method of valuing its inventories, and 
capitalizes inventory costs in accordance with section 263A. T 
Corporation manufactures washing machines and dryers. T Corporation 
uses the last-in, first-out (LIFO) method of inventory 
identification, the cost method of valuing its inventories, and 
capitalizes inventory costs under section 263A using methods other 
than those used by X Corporation. X Corporation acquires the 
inventory of T Corporation in a transaction to which section 381(a) 
applies. After the date of distribution or transfer, X Corporation 
operates its radio and television manufacturing business as a trade 
or business that is separate and distinct from its washing machines 
and dryers manufacturing business.
    (ii) Conclusion. Because after the date of distribution or 
transfer X Corporation operates its manufacturing businesses as 
separate and distinct trades or businesses, under paragraph (a)(2) 
of this section X Corporation must use the carryover methods for 
each continuing trade or business, unless either the carryover 
methods are impermissible and must be changed under paragraph (a)(4) 
of this section or X Corporation changes the carryover methods in 
accordance with paragraph (a)(5) of this section. As defined in 
paragraph (b)(4) of this section, the carryover methods for the 
radios and television sets manufacturing business are the FIFO 
method, the cost basis of valuation, and X Corporation's methods of 
accounting for section 263A costs immediately prior to the date of 
distribution or transfer. The carryover methods for the washing 
machines and dryers manufacturing business are the LIFO method, the 
cost basis of valuation, and T Corporation's methods of accounting 
for section 263A costs immediately prior to the date of distribution 
or transfer. There is no change in method of accounting, and X 
Corporation need not secure the Commissioner's consent to use any 
carryover method.
    Example (2). Carryover method not permissible--(i) Facts. X 
Corporation manufactures food and beverages and uses the FIFO method 
of inventory identification, the cost method of valuing its 
inventories, and capitalizes costs in accordance with section 263A. 
T Corporation sells sporting equipment. T Corporation uses the FIFO 
method of inventory identification and the cost method of valuing 
its inventories. T Corporation does not capitalize costs under 
section 263A because it meets the small reseller exception under 
section 263A. X

[[Page 45683]]

Corporation acquires the inventory of T Corporation in a transaction 
to which section 381(a) applies. After the date of distribution or 
transfer, X Corporation operates the food and beverages business as 
a trade or business that is separate and distinct from the sporting 
equipment business, and X Corporation does not qualify for the small 
reseller exception under section 263A for its sporting equipment 
business.
    (ii) Conclusion. Because after the date of distribution or 
transfer X Corporation operates the food and beverages business as a 
separate and distinct trade or business, under paragraph (a)(2) of 
this section X Corporation must use the carryover methods for each 
continuing trade or business, unless either the carryover methods 
are impermissible and must be changed under paragraph (a)(4) of this 
section or X Corporation changes the carryover methods in accordance 
with paragraph (a)(5) of this section. As defined in paragraph 
(b)(4) of this section, the carryover methods for the food and 
beverages business are the FIFO method, the cost basis of valuation, 
and X Corporation's methods of capitalizing costs under section 263A 
immediately prior to the date of distribution or transfer. The 
carryover methods for the sporting equipment business are the FIFO 
method and the cost basis of valuation. There is no change in method 
of accounting, and X Corporation need not secure the Commissioner's 
consent to use any carryover method. However, because X Corporation 
does not qualify for the small reseller exception under section 263A 
for its sporting equipment business, X Corporation's method of not 
capitalizing additional section 263A costs is an impermissible 
carryover method under paragraph (a)(4) of this section. X 
Corporation must secure the Commissioner's consent to change to a 
permissible method of capitalizing costs under section 263A for the 
sporting equipment business as provided in paragraph (d)(2) of this 
section.

    (b) Definitions. (1) Inventory method. An inventory method is a 
method of accounting used to account for merchandise on hand (including 
finished goods, work in process, and raw materials) at the beginning of 
a year for purposes of computing taxable income for that year. The term 
includes not only the method for identifying inventory, for example, 
the FIFO inventory method or the LIFO inventory method, but also all 
other methods necessary to account for merchandise.
    (2) Adoption of a method of accounting. Adoption of a method of 
accounting has the same meaning as provided in Sec.  1.446-1(e)(1).
    (3) Change in method of accounting. A change in method of 
accounting has the same meaning as provided in Sec.  1.446-1(e)(2).
    (4) Carryover method. A carryover method is an inventory method 
that each party to a section 381(a) transaction uses for each separate 
and distinct trade or business immediately prior to the date of 
distribution or transfer.
    (5) Principal method. A principal method is an inventory method 
that is determined under paragraph (c) of this section.
    (6) Permissible method of accounting. A permissible method of 
accounting is a method of accounting that is proper or permitted under 
the Internal Revenue Code or any applicable Income Tax Regulations.
    (7) Acquiring corporation. An acquiring corporation has the same 
meaning as provided in Sec.  1.381(a)-1(b)(2).
    (8) Distributor corporation. A distributor corporation means the 
corporation, foreign or domestic, that distributes its assets to 
another corporation described in section 332(b) in a distribution to 
which section 332 (relating to liquidations of subsidiaries) applies.
    (9) Transferor corporation. A transferor corporation means the 
corporation, foreign or domestic, that transfers its assets to another 
corporation in a transfer to which section 361 (relating to 
nonrecognition of gain or loss to corporations) applies, but only if--
    (i) The transfer is in connection with a reorganization described 
in section 368(a)(1)(A), (a)(1)(C), or (a)(1)(F), or
    (ii) The transfer is in connection with a reorganization described 
in section 368(a)(1)(D) or (a)(1)(G), provided the requirements of 
section 354(b) are met.
    (10) Parties to the section 381(a) transaction. Parties to the 
section 381(a) transaction means the acquiring corporation and the 
distributor or transferor corporation that participate in a transaction 
to which section 381(a) applies.
    (11) Date of distribution or transfer. The date of distribution or 
transfer has the same meaning as provided in section 381(b)(2) and 
Sec.  1.381(b)-1(b).
    (12) Separate and distinct trades or businesses. Separate and 
distinct trades or businesses has the same meaning as provided in Sec.  
1.446-1(d).
    (13) Audit protection. Audit protection means, for purposes of 
paragraph (d)(1) of this section, that the IRS will not require an 
acquiring corporation that is required to change a method of accounting 
under paragraph (a)(3) of this section to change that method for a 
taxable year ending prior to the taxable year that includes the date of 
distribution or transfer.
    (14) Section 481(a) adjustment. The section 481(a) adjustment means 
an adjustment that must be taken into account as required under section 
481(a) to prevent amounts from being duplicated or omitted when the 
taxable income of an acquiring corporation is computed under a method 
of accounting different from the method used to compute taxable income 
for the preceding taxable year.
    (15) Cut-off basis. A cut-off basis means a manner in which a 
change in method of accounting is made without a section 481(a) 
adjustment and under which only the items arising after the beginning 
of the year of change (or, in the case of a change made under paragraph 
(d)(1) of this section, after the date of distribution or transfer) are 
accounted for under the new method of accounting. When it implements 
the change on a cut-off basis, a taxpayer using the LIFO inventory 
method to identify its inventory goods that makes a change in method of 
accounting within the LIFO inventory method from one LIFO method or 
sub-method to another LIFO method or sub-method uses the new LIFO 
inventory method to determine its current-year cost and base-year cost 
of ending inventories for the year of change, but does not recompute 
the cost of beginning inventories for the year of change using the new 
LIFO inventory method.
    (16) Adjustment period. The adjustment period means the number of 
taxable years for taking into account the section 481(a) adjustment 
required as a result of a change in method of accounting.
    (17) Component trade or business. A component trade or business is 
a trade or business of a party to the section 381(a) transaction that 
will be combined and integrated with a trade or business of the other 
party to the section 381 transaction. See paragraph (e)(7)(ii) of this 
section for the determination of whether a trade or business is 
operated as a separate and distinct trade or business after the date of 
distribution or transfer.
    (c) Principal method--(1) In general. For each integrated trade or 
business, the principal method for a particular type of goods is 
generally the inventory method used by the component trade or business 
of the acquiring corporation immediately prior to the date of 
distribution or transfer for that type of goods. If, however, on the 
date of distribution or transfer the component trade or business of the 
distributor or transferor corporation holds more inventory of a type of 
goods than the component trade or business of the acquiring 
corporation, the principal method for such goods is the inventory 
method used by the component trade or business of the distributor or 
transferor corporation immediately prior to that date. For each 
integrated trade or

[[Page 45684]]

business, the component trade or business of the distributor or 
transferor corporation holds more inventory if, for a particular type 
of goods, the aggregate of the fair market value of the goods held by 
each component trade or business of the distributor or transferor 
corporation exceeds the aggregate of the fair market value of the goods 
held by each component trade or business of the acquiring corporation 
immediately prior to the date of distribution or transfer. 
Alternatively, as a simplifying convention, the acquiring corporation 
may elect to apply the preceding sentence to the aggregate fair market 
value of the entire inventories, held by each component trade or 
business of the acquiring corporation and each component trade or 
business of the distributor or transferor corporation, that will be 
integrated after the date of distribution or transfer. If the component 
trade or business with the larger aggregate fair market value of the 
entire inventories does not have an inventory method for a particular 
type of goods immediately prior to the date of distribution or 
transfer, the principal method for that type of goods is the inventory 
method used by the component trade or business that does have an 
inventory method for that type of goods.
    (2) Multiple component trades or businesses with different 
principal methods. If a party to the section 381(a) transaction has 
multiple component trades or businesses and more than one principal 
inventory method for a particular type of goods, then the acquiring 
corporation may choose which of the inventory methods used by such 
component trades or businesses will be the principal method of the 
integrated trade or business. The acquiring corporation must choose a 
principal method that is a permissible method of accounting. In 
general, a change to a principal method in a transaction to which 
section 381(a) and paragraph (a)(3) of this section apply is made under 
paragraph (d)(1) of this section.
    (3) Examples. The following examples illustrate the rules of this 
paragraph (c). Unless otherwise noted, the principal method is a 
permissible inventory method.

    Example (1). Principal methods are the methods used by the 
acquiring corporation--(i) Facts. X Corporation and T Corporation 
each manufacture tennis equipment. X Corporation's manufacturing 
business uses the FIFO method of inventory identification, the cost 
method of valuing inventories, and allocates indirect costs to the 
property produced using the burden rate method provided in Sec.  
1.263A-1(f)(3)(i). T Corporation's manufacturing business uses the 
LIFO method of inventory identification, the cost method of valuing 
its inventories, and allocates indirect costs to the property it 
produces using the standard cost method provided in Sec.  1.263A-
1(f)(3)(ii). X Corporation acquires the inventory of T Corporation 
in a transaction to which section 381(a) applies. The fair market 
value of each particular type of goods held by X Corporation's 
manufacturing business immediately prior to the date of distribution 
or transfer exceeds the fair market value of each particular type of 
goods held by T Corporation's manufacturing business on that date. 
After the date of distribution or transfer, X Corporation will not 
operate its manufacturing business as a trade or business that is 
separate and distinct from T Corporation's manufacturing business.
    (ii) Conclusion. Because after the date of distribution or 
transfer X Corporation will not operate its manufacturing business 
as a separate and distinct trade or business, X Corporation must use 
the principal methods under paragraph (a)(3) of this section, unless 
either the principal methods are impermissible and must be changed 
under paragraph (a)(4) of this section or X Corporation changes the 
principal methods in accordance with paragraph (a)(5) of this 
section. The fair market value of each particular type of goods held 
by T Corporation's manufacturing business immediately prior to the 
date of distribution or transfer does not exceed the fair market 
value of each particular type of goods held by X Corporation's 
manufacturing business on that date. Because on the date of 
distribution or transfer T Corporation's manufacturing business does 
not hold more inventory than X Corporation's manufacturing business, 
the principal methods are the FIFO method of inventory 
identification, the cost method of valuation, and X Corporation's 
method of allocating indirect costs under section 263A using the 
burden rate method. X Corporation need not secure the Commissioner's 
consent to use these methods. However, in accordance with paragraph 
(d)(1) of this section, X Corporation must change the inventory 
methods for the manufacturing business acquired from T Corporation 
to the principal methods.
    Example (2). Principal methods are the methods used by the 
acquiring corporation--(i) Facts. The facts are the same as in 
Example (1), except that the fair market value of each particular 
type of goods held by X Corporation's manufacturing business 
immediately prior to the date of distribution or transfer is 
identical to the fair market value of each particular type of goods 
held by T Corporation's manufacturing business on that date.
    (ii) Conclusion. The result is the same as in Example (1). The 
principal methods are the FIFO method of inventory identification, 
the cost method of valuation, and X Corporation's method of 
allocating indirect costs under section 263A using the burden rate 
method. X Corporation need not secure the Commissioner's consent to 
use the principal methods. However, in accordance with paragraph 
(d)(1) of this section, X Corporation must change the inventory 
methods for the manufacturing business acquired from T Corporation 
to the principal methods.
    Example (3). Principal methods are the methods used by the 
distributor or transferor corporation--(i) Facts. The facts are the 
same as in Example (1), except that the fair market value of each 
particular type of goods held by T Corporation's manufacturing 
business immediately prior to the date of distribution or transfer 
exceeds the fair market value of each particular type of goods held 
by X Corporation's manufacturing business on that date.
    (ii) Conclusion. Because after the date of distribution or 
transfer X Corporation will not operate its manufacturing business 
as a separate and distinct trade or business, X Corporation must use 
the principal methods under paragraph (a)(3) of this section, unless 
either the principal methods are impermissible and must be changed 
under paragraph (a)(4) of this section or X Corporation changes the 
principal methods in accordance with paragraph (a)(5) of this 
section. The fair market value of each particular type of goods held 
by T Corporation's manufacturing business immediately prior to the 
date of distribution or transfer exceeds the fair market value of 
each particular type of goods held by X Corporation's manufacturing 
business on that date. Because on the date of distribution or 
transfer T Corporation's manufacturing business holds more inventory 
than X Corporation's manufacturing business, the principal methods 
are the LIFO method of inventory identification, the cost method of 
valuation, and T Corporation's method of allocating indirect costs 
under section 263A using the standard cost method. X Corporation 
need not secure the Commissioner's consent to use the principal 
methods. However, in accordance with paragraph (d)(1) of this 
section, X Corporation must change the inventory methods for the 
manufacturing business operated by X Corporation prior to the date 
of distribution or transfer to the principal methods.
    Example (4). Voluntary change allowable--(i) Facts. The facts 
are the same as in Example (1), except that T Corporation wants to 
discontinue using the LIFO method for its manufacturing business and 
change to the FIFO method for the taxable year in which the section 
381(a) transaction occurs or is expected to occur.
    (ii) Conclusion. Under paragraph (a)(5) of this section, the 
Commissioner will grant a request to change a method of accounting 
for the taxable year that includes the date of distribution or 
transfer only if the requested method is the method that the 
acquiring corporation must use after the date of distribution or 
transfer. The Commissioner will consent to a request by T 
Corporation to change to the FIFO method for the taxable year in 
which the section 381(a) transaction occurs or is expected to occur 
because X Corporation will use this method after the date of 
distribution or transfer.
    Example (5). Principal method determination when larger 
component trade or business does not have a method of

[[Page 45685]]

accounting for a particular type of goods--(i) Facts. The facts are 
the same as in Example (1), except that T Corporation's 
manufacturing business has a particular type of goods that is not 
held by X Corporation's manufacturing business.
    (ii) Conclusion. The result is similar to Example (1). In 
general, the principal methods are the FIFO method of inventory 
identification, the cost method of valuation, and X Corporation's 
method of allocating indirect costs to the property produced using 
the burden rate method. X Corporation need not secure the 
Commissioner's consent to use the principal methods. However, in 
accordance with paragraph (d)(1) of this section, X Corporation must 
change the inventory methods for the manufacturing business acquired 
from T Corporation to the principal methods. Under paragraph (c) of 
this section, the principal methods for the particular type of goods 
held only by T Corporation's manufacturing business are the LIFO 
method of inventory identification, the cost method of valuation, 
and T Corporation's method of allocating indirect costs to the 
property it produces using the standard cost method. X Corporation 
must determine whether the principal methods for the type of goods 
previously held by T Corporation are permissible given that such 
methods are different than the principal methods that must be used 
by X for all other goods. If X Corporation's use of the standard 
cost method would be impermissible after the date of distribution or 
transfer, X Corporation must change to a permissible method under 
section 263A for those goods in accordance with paragraph (a)(4) of 
this section.
    Example (6). Inventory convention elected--(i) Facts. X 
Corporation manufactures planes and T Corporation manufactures 
planes and communications satellites. X Corporation's manufacturing 
business uses the FIFO method of inventory identification and values 
its inventories at cost or market, whichever is lower, while T 
Corporation's manufacturing business uses the LIFO method of 
inventory identification and values its inventories at cost. X 
Corporation's manufacturing business and T Corporation's 
manufacturing business, use the same methods to capitalize costs 
under section 263A. X Corporation acquires the inventory of T 
Corporation in a transaction to which section 381(a) applies. In 
lieu of determining the fair market value of each particular type of 
goods held on the date of distribution or transfer, X Corporation 
elects to value the entire inventories of its manufacturing business 
and the entire inventories of T Corporation's manufacturing business 
in accordance with paragraph (c)(1) of this section. The fair market 
value of the inventory held by T Corporation's manufacturing 
business immediately prior to the date of distribution or transfer 
does not exceed the fair market value of the inventory held by X 
Corporation's manufacturing business on that date. After the date of 
distribution or transfer, X Corporation will not operate its 
manufacturing business as a trade or business that is separate and 
distinct from T Corporation's manufacturing business.
    (ii) Conclusion. Because after the date of distribution or 
transfer X Corporation will not operate its manufacturing business 
as a separate and distinct trade or business, X Corporation must use 
the principal methods under paragraph (a)(3) of this section, unless 
either the principal methods are impermissible and must be changed 
under paragraph (a)(4) of this section or X Corporation changes the 
principal methods in accordance with paragraph (a)(5) of this 
section. The fair market value of the entire inventory held by T 
Corporation's manufacturing business immediately prior to the date 
of distribution or transfer does not exceed the fair market value of 
the entire inventory of X Corporation's manufacturing business on 
that date. Because on the date of distribution or transfer T 
Corporation's manufacturing business does not hold more inventory 
than X Corporation's manufacturing business, the principal methods 
are the FIFO method, the cost or market, whichever is lower, method 
of valuation, and X Corporation's method of capitalizing costs under 
section 263A on the date of distribution or transfer. X Corporation 
need not secure the Commissioner's consent to use the principal 
methods. However, in accordance with paragraph (d)(1) of this 
section, X Corporation must change the inventory methods for the 
manufacturing business acquired from T Corporation to the principal 
methods.
    Example (7). Principal method determination with a combined 
trade or business and a separate and distinct trade or business--(i) 
Facts. X Corporation manufactures tennis equipment in a trade or 
business that is separate and distinct from its trade or business of 
manufacturing golf equipment. X Corporation uses the FIFO method of 
inventory identification for its tennis equipment and the LIFO 
method of inventory identification for its golf equipment. X 
Corporation values the goods in both inventories at cost and 
allocates indirect costs to the property produced using the burden 
rate method provided in Sec.  1.263A-1(f)(3)(i). T Corporation 
manufactures tennis equipment. T Corporation's manufacturing 
business uses the FIFO method of inventory identification, values 
inventories at cost, and allocates indirect costs to the property it 
produces using the standard cost method provided in Sec.  1.263A-
1(f)(3)(ii). X Corporation acquires the inventory of T Corporation 
in a transaction to which section 381(a) applies. Immediately prior 
to the date of distribution or transfer, the fair market value of T 
Corporation's inventories in the tennis equipment manufacturing 
business exceeds the fair market value of the inventories held by X 
Corporation's tennis equipment manufacturing business. After the 
date of distribution or transfer, X Corporation will not operate its 
tennis equipment manufacturing business as a trade or business that 
is separate and distinct from T Corporation's tennis equipment 
manufacturing business, but X Corporation will operate its golf 
equipment manufacturing business as a trade or business that is 
separate and distinct from the tennis equipment manufacturing 
business.
    (ii) Conclusion. Because after the date of distribution or 
transfer X Corporation will not operate its tennis equipment 
manufacturing business as a separate and distinct trade or business, 
X Corporation must use the principal methods under paragraph (a)(3) 
of this section, unless either the principal methods are 
impermissible and must be changed under paragraph (a)(4) of this 
section or X Corporation changes the principal methods in accordance 
with paragraph (a)(5) of this section. Under paragraph (c)(1) of 
this section, X Corporation elects to compare the fair market values 
of the entire inventories of the component trades or businesses on 
the date of distribution or transfer to determine whether T 
Corporation holds more inventory than X Corporation. The fair market 
value of the inventory held by T Corporation's tennis equipment 
manufacturing business exceeds the fair market value of the tennis 
equipment held by X Corporation's tennis equipment manufacturing 
business. Because on the date of distribution or transfer T 
Corporation's tennis equipment manufacturing business holds more 
inventory than X Corporation's tennis equipment manufacturing 
business, the principal methods for the combined tennis equipment 
business are the FIFO method of inventory identification, the cost 
basis of valuation, and T Corporation's methods of allocating 
indirect costs under section 263A using the standard cost method 
provided in Sec.  1.263A-1(f)(3)(ii). X Corporation need not secure 
the Commissioner's consent to use the principal methods. However, in 
accordance with paragraph (d)(1) of this section, X Corporation must 
change the methods of accounting for its tennis equipment 
manufacturing business to the principal methods. Under paragraph 
(a)(2) of this section, because X Corporation will operate the golf 
equipment manufacturing business as a separate trade or business, 
for the inventories held by the golf equipment manufacturing 
business X Corporation must continue to use the LIFO method of 
inventory identification, use the cost basis of valuation, and 
allocate indirect costs under section 263A using the burden rate 
method provided in Sec.  1.263A-1(f)(3)(i). There are no changes in 
method of accounting for the golf manufacturing business, and X 
Corporation need not secure the Commissioner's consent to use these 
carryover methods.
    Example (8). Principal method determination with multiple 
component trades or businesses--(i) Facts. The facts are the same as 
in Example (7), except that after the date of distribution or 
transfer X Corporation will not operate the golf equipment 
manufacturing business as a trade or business that is separate and 
distinct from the tennis equipment manufacturing business. In 
addition, the fair market value of the inventories of X 
Corporation's tennis equipment manufacturing business and golf 
equipment manufacturing business, in the aggregate, exceed the fair 
market value of the inventories of T Corporation's tennis equipment 
manufacturing business.
    (ii) Conclusion. Because on the date of distribution or transfer 
T Corporation's tennis equipment manufacturing business does not

[[Page 45686]]

hold more inventory than X Corporation's tennis equipment 
manufacturing business and golf equipment manufacturing business, in 
the aggregate, the principal method for identifying inventory is the 
method used by X Corporation's component trade or business on the 
date of distribution or transfer. However, because on the date of 
distribution or transfer X Corporation operates two separate and 
distinct trades or businesses with different inventory 
identification methods that will be combined after the date of 
distribution or transfer, X Corporation may choose under paragraph 
(c)(2) of this section which method used by its component trades or 
businesses will be the principal method. After the date of 
distribution or transfer, X Corporation may use either the FIFO 
method of inventory identification used by the tennis equipment 
manufacturing business or the LIFO method of inventory 
identification used by the golf equipment manufacturing business as 
the principal method of identification, if either method is a 
permissible method. For the integrated trade or business, X 
Corporation will use the cost method of valuation and allocate 
indirect costs under section 263A using the burden rate method 
provided in Sec.  1.263A-1(f)(3)(i). In accordance with paragraph 
(d)(1) of this section, X Corporation must change the inventory 
methods of T Corporation's manufacturing business to the principal 
methods. Under paragraph (a)(3) of this section, X Corporation also 
must change either its golf equipment manufacturing business or its 
tennis equipment manufacturing business, depending on which 
principal method X Corporation selects, to the principal method.

    (d) Procedures for changing a method of accounting--(1) Change made 
to principal method under paragraph (a)(3) of this section--(i) Section 
481(a) adjustment--(A) In general. An acquiring corporation that 
changes its method of accounting or the distributor or transferor 
corporation's method of accounting under paragraph (a)(3) of this 
section does not need to secure the Commissioner's consent to use a 
principal method. To the extent the use of a principal method 
constitutes a change in method of accounting, the change in method is 
treated as a change initiated by the acquiring corporation for purposes 
of section 481(a)(2). Any change to a principal method, whether the 
change relates to a trade or business of the acquiring corporation or a 
trade or business of the distributor or transferor corporation, must be 
reflected on the acquiring corporation's federal income tax return for 
the taxable year that includes the date of distribution or transfer. 
The amount of the section 481(a) adjustment and the adjustment period, 
if any, necessary to implement a change to the principal method are 
determined under Sec.  1.446-1(e) and the applicable administrative 
procedures that govern voluntary changes in methods of accounting under 
section 446(e). If the Internal Revenue Code, the Income Tax 
Regulations, or administrative procedures require that a method of 
accounting be implemented on a cut-off basis, the acquiring corporation 
must implement the change, on a cut-off basis as of the date of 
distribution or transfer, on its federal income tax return for the 
taxable year that includes the date of distribution or transfer. If the 
Internal Revenue Code, the Income Tax Regulations, or administrative 
procedures require a section 481(a) adjustment, the acquiring 
corporation must determine the section 481(a) adjustment and include 
the appropriate amount of the section 481(a) adjustment on its federal 
income tax return for the taxable year that includes the date of 
distribution or transfer and subsequent taxable year(s), as necessary. 
This adjustment is determined by the acquiring corporation as of the 
beginning of the day that is immediately after the date of distribution 
or transfer.
    (B) Example. The following example illustrates the rules of this 
paragraph (d)(1)(i):

    Example. X Corporation uses the FIFO method of inventory 
identification, and T Corporation uses the LIFO method of inventory 
identification. X Corporation acquires the inventory of T 
Corporation in a transaction to which section 381(a) applies. X 
Corporation determines that under the rules of paragraph (c)(1) of 
this section, X Corporation must change the inventory method for the 
business acquired from T Corporation to the FIFO method. X 
Corporation will determine the section 481(a) adjustment pertaining 
to the change to the FIFO method (whether the amounts thereof 
represent increases or decreases in income) as of the beginning of 
the day that immediately follows the day on which X Corporation 
acquires the inventory of T Corporation. X Corporation will reflect 
this adjustment, or an appropriate part thereof, on its federal 
income tax return for the taxable year that includes the date of 
distribution or transfer.

    (ii) Audit protection. Notwithstanding any other provision in any 
other Income Tax Regulation or administrative procedure, no audit 
protection is provided for any change in method of accounting under 
paragraph (d)(1) of this section.
    (iii) Other terms and conditions. Except as otherwise provided in 
this section, other terms and conditions provided in Sec.  1.446-1(e) 
and the applicable administrative procedures for voluntary changes in 
method of accounting under section 446(e) apply to a change in method 
of accounting under this section. Thus, for example, if the 
administrative procedures for a particular change in method of 
accounting have a term and condition that provides for the acceleration 
of the section 481(a) adjustment period, this term and condition 
applies to a change made under this paragraph (d)(1). However, any 
scope limitation in the applicable administrative procedures will not 
apply for purposes of making a change under this paragraph (d)(1). For 
example, if the administrative procedures provide as a limitation that 
an identical change in method of accounting is barred for a period of 
years, this limitation will not bar a change to the principal method 
made under this section.
    (2) Change made to a method of accounting under paragraph (a)(4) or 
(a)(5) of this section--(i) In general. A party to a section 381(a) 
transaction that changes a method of accounting under either paragraph 
(a)(4) or paragraph (a)(5) of this section must follow the provisions 
of Sec.  1.446-(1)(e) and the applicable administrative procedures, 
including scope limitations, for voluntary changes in method of 
accounting under section 446(e), except as provided in paragraphs 
(d)(2)(ii) and (d)(2)(iii) of this section. An application on Form 
3115, ``Application for Change in Accounting Method,'' filed with the 
IRS to change a method of accounting under this paragraph (d)(2) should 
be labeled ``Filed under section 381(c)(5)'' at the top.
    (ii) Final year limitation. Any scope limitation relating to the 
final year of a trade or business will not apply to a taxpayer that 
changes its method of accounting in the final year of a trade or 
business that is terminated as the result of a section 381(a) 
transaction.
    (iii) Time to file. Under the authority of Sec.  1.446-1(e)(3)(ii), 
for a change in method of accounting requiring advance consent, the 
application for a change in method of accounting (for example, Form 
3115), must be filed with the IRS on or before the later of--
    (A) The due date for filing a Form 3115 as specified in Sec.  
1.446-1(e), for example, the last day of the taxable year in which the 
distribution or transfer occurred, or
    (B) The earlier of--
    (1) The day that is 180 days after the date of distribution or 
transfer, or
    (2) The day on which the acquiring corporation files its federal 
income tax return for the taxable year in which the distribution or 
transfer occurred.
    (e) Rules and procedures--(1) Inventory method selected for a 
particular type of goods. If other sections of the Internal Revenue 
Code or Income Tax Regulations allow a taxpayer to elect an inventory 
method for a particular type of goods, the

[[Page 45687]]

method elected with respect to those goods is the established inventory 
method only for those goods. For example, an election to use the LIFO 
inventory method to identify specified goods in inventory, such as 
certain products in finished goods, is the inventory method only for 
those products.
    (2) No method of accounting. If a party to a section 381(a) 
transaction is not using an inventory method, does not have an 
inventory method for a particular type of goods, or came into existence 
as a result of the transaction, the party will not be treated as having 
an inventory method different from that used by another party to the 
section 381(a) transaction.
    (3) Elections and adoptions allowed. If an election does not 
require the Commissioner's consent, an acquiring corporation or a 
distributor or transferor corporation is not precluded from making any 
election that is otherwise permissible for the taxable year that 
includes the date of distribution or transfer. For example, an 
acquiring corporation may elect to identify its inventory using the 
LIFO inventory method in the year of the distribution or transfer. For 
purposes of this section, a corporation shall be deemed as having made 
any election as of the first day of the taxable year that includes the 
date of distribution or transfer. Similarly, where adoption is 
permissible, an acquiring corporation or a distributor or transferor 
corporation may adopt any permissible method of accounting for the 
taxable year that includes the date of distribution or transfer.
    (4) Elections continue after section 381(a) transaction--(i) 
General rule. An acquiring corporation is not required to renew any 
election not requiring renewal and previously made by it or by a 
distributor or transferor corporation for a carryover method or a 
principal method if the acquiring corporation uses the method after the 
section 381(a) transaction. If the acquiring corporation uses a method 
after the date of distribution or transfer, an election made by the 
acquiring corporation or by a distributor or transferor corporation for 
that method that was in effect on the date of distribution or transfer 
continues after the section 381(a) transaction as though the 
distribution or transfer had not occurred.
    (ii) Example. The following example illustrates the rules of 
paragraph (e)(4):

    Example. Since its incorporation in 1982, X Corporation elected 
to use the LIFO inventory method under section 472 to identify its 
inventory of tennis balls. Since its incorporation in 2002, T 
Corporation elected to use the FIFO inventory method to identify its 
inventory of tennis balls. X Corporation acquires the assets of T 
Corporation in a transaction to which section 381(a) applies. 
Immediately prior to the date of distribution or transfer, the fair 
market value of X Corporation's inventory in its tennis balls 
exceeds the fair market value of the tennis balls inventory held by 
T Corporation. After the date of distribution or transfer, X 
Corporation will not operate its business as a trade or business 
that is separate and distinct from T Corporation's business. Because 
on the date of distribution or transfer T Corporation does not hold 
more inventory than X Corporation, the principal method for 
identifying inventory is the method used by X Corporation on the 
date of distribution or transfer. After the date of distribution or 
transfer, X Corporation need not renew its election to identify 
inventory using the LIFO inventory method, and X Corporation is 
bound by the election.

    (5) Adopting the LIFO inventory method. A party to a section 381(a) 
transaction will be deemed to be using the LIFO inventory method for a 
particular type of goods on the date of distribution or transfer if 
that party elects under section 472 to adopt that inventory method with 
respect to those goods for its taxable year within which the date of 
distribution or transfer occurs. See section 472 for the requirements 
to adopt the LIFO inventory method.
    (6) Inventory layers treatment--(i) Adjustments required after a 
section 381(a) transaction. An acquiring corporation that determines 
the principal method of taking an inventory after a section 381(a) 
transaction under paragraphs (a)(3) and (c) of this section after the 
date of distribution or transfer may need to integrate inventories and 
make appropriate adjustments as provided in paragraphs (e)(6)(ii) and 
(e)(6)(iii) of this section.
    (ii) LIFO inventory method used after the section 381(a) 
transaction--(A) LIFO inventory method used by the acquiring 
corporation and the distributor or transferor corporation--(1) 
Principal method is the dollar-value LIFO method. If, under paragraphs 
(a)(3) and (c) of this section, the acquiring corporation changes its 
inventory method or the inventory method of the distributor or 
transferor corporation from the specific goods LIFO method of pricing 
inventories to the dollar-value LIFO method of pricing inventories 
(dollar-value LIFO method) for a particular type of goods, the 
inventory accounted for under the specific goods method shall be placed 
on the dollar-value method as provided in Sec.  1.472-8(f), and then 
the inventory shall be integrated with the inventory previously 
accounted for under the dollar-value LIFO method. If pools of each 
corporation are permitted or required to be combined, the pools must be 
combined as provided in Sec.  1.472-8(g)(2). For purposes of combining 
pools, all base year inventories or layers of increment that occur in 
taxable years including the same December 31 shall be combined. A base 
year inventory or layer of increment occurring in any short taxable 
year of a distributor or transferor corporation shall be merged with 
and considered a layer of increment of its immediately preceding 
taxable year.
    (2) Principal method is the specific goods LIFO method. If, under 
paragraphs (a)(3) and (c) of this section, the acquiring corporation 
changes its inventory method or the inventory method of the distributor 
or transferor corporation from the dollar-value LIFO method of pricing 
inventories to the specific goods LIFO method of pricing inventories, 
the acquiring corporation shall treat the inventory being changed to 
the specific goods LIFO method as having the same acquisition dates and 
costs as such inventory had under the dollar-value LIFO method.
    (B) Change from the FIFO inventory method to either the specific 
goods LIFO method or the dollar-value LIFO method. If, under paragraphs 
(a)(3) and (c) of this section, the acquiring corporation changes its 
inventory method or the inventory method of the distributor or 
transferor corporation from the FIFO inventory method to either the 
specific goods LIFO method or the dollar-value method of pricing LIFO 
inventories, the inventory accounted for under the FIFO inventory 
method shall be treated by the acquiring corporation as having been 
acquired at their average unit cost in a single transaction on the date 
of the distribution or transfer. Thus, if an inventory of a particular 
type of goods is combined in an existing dollar-value pool, the goods 
shall be treated as if they were purchased by the acquiring corporation 
at the average unit cost on the date of the distribution or transfer 
with respect to such pool. Alternatively, if the goods are not combined 
in an existing pool, the goods will be treated as if they were 
purchased by the acquiring corporation at the average unit cost on the 
date of the distribution or transfer with respect to a new pool, with 
the base-year being the year of the section 381(a) transaction. 
Adjustments resulting from a restoration to cost of any write-down to 
market value of the inventories shall be taken into account by the 
acquiring corporation ratably in each of the three taxable years 
beginning with the taxable year that includes the

[[Page 45688]]

date of the distribution or transfer. See section 472(d).
    (iii) FIFO inventory method used after the section 381(a) 
transaction--(A) FIFO inventory method used by the acquiring 
corporation and the distributor or transferor corporation. If, under 
paragraphs (a)(3) and (c) of this section, the FIFO inventory method is 
the principal method and the component trades or businesses of both the 
acquiring corporation and the distributor or transferor corporation use 
the FIFO method immediately prior to the distribution or transfer, the 
acquiring corporation must treat the inventory that must change to the 
principal method as having the same acquisition dates and costs as such 
inventory had immediately prior to the date of distribution or 
transfer. However, if the principal method of valuing inventories is 
the cost or market, whichever is lower, method, the acquiring 
corporation must treat the inventories that must change to the 
principal method as having been acquired at cost or market, whichever 
is lower.
    (B) Change from either the specific goods LIFO method or the 
dollar-value LIFO method to the FIFO inventory method. If, under 
paragraphs (a)(3) and (c) of this section, the acquiring corporation 
changes its inventory method or the inventory method of the distributor 
or transferor corporation from either the specific goods LIFO method or 
the dollar-value LIFO method to the FIFO inventory method, the 
acquiring corporation must treat the inventory accounted for under the 
LIFO method as having the same acquisition dates and costs that the 
inventory would have had if the FIFO inventory method had been used on 
the date of distribution or transfer. However, if the principal method 
of valuing inventories is the cost or market, whichever is lower, 
method, the acquiring corporation must treat the inventories accounted 
for under the LIFO method as having been acquired at cost or market, 
whichever is lower.
    (7) Appropriate times for certain determinations--(i) Determining 
the inventory method. The inventory method used by a party to a section 
381(a) transaction on the date of distribution or transfer is the 
method used by that party as of the end of the day that is immediately 
prior to the date of distribution or transfer.
    (ii) Determining whether there are separate and distinct trades or 
businesses after the date of distribution or transfer. Whether an 
acquiring corporation will operate the trades or businesses of the 
parties to a section 381(a) transaction as separate and distinct trades 
or businesses after the date of distribution or transfer will be 
determined as of the date of distribution or transfer based upon the 
facts and circumstances. Intent to combine books and records of the 
trades or businesses may be demonstrated by contemporaneous records and 
documents or by other objective evidence that reflects the acquiring 
corporation's ultimate plan of operation, even though the actual 
combination of the books and records may extend beyond the end of the 
taxable year that includes the date of distribution or transfer.
    (8) Establishing an inventory method. An inventory method used by 
the distributor or transferor corporation immediately prior to the date 
of distribution or transfer that continues to be used by the acquiring 
corporation after the date of distribution or transfer is an 
established method of accounting for purposes of section 446(e), 
whether or not such method is proper or is permitted under the Internal 
Revenue Code or any applicable Income Tax Regulations.
    (9) Other applicable provisions. This section does not preempt any 
other provision of the Internal Revenue Code or the Income Tax 
Regulations that is applicable to the acquiring corporation's 
circumstances. Section 381(c)(5) and this Sec.  1.381(c)(5)-1 determine 
only the inventory method to be used after a section 381(a) 
transaction. If other paragraphs of section 381(c) apply for purposes 
of determining the methods of accounting to be used following the date 
of distribution or transfer, section 381(c)(5) and this Sec.  
1.381(c)(5)-1 will not apply to the tax treatment of the items. 
Specifically, section 381(c)(5) and this Sec.  1.381(c)(5)-1 do not 
apply to assets other than inventory that an acquiring corporation 
obtains in a transaction to which section 381(a) applies.
    (10) Use of the cash receipts and disbursements method of 
accounting. If immediately prior to the date of distribution or 
transfer, an acquiring corporation or a distributor or transferor 
corporation uses the cash receipts and disbursements method of 
accounting within the meaning of section 446(c)(1) and Sec.  1.446-
1(c)(1)(i), or is not required to use an inventory method for its 
goods, section 381(c)(5) and Sec.  1.381(c)(5)-1 do not apply. Instead, 
section 381(c)(4) and Sec.  1.381(c)(4)-1 must be applied to determine 
the methods of accounting that continue after the transaction.
    (11) Character of items of income and deduction. After the date of 
distribution or transfer, items of income and deduction have the same 
character in the hands of the acquiring corporation as they would have 
had in the hands of the distributor or transferor corporation if no 
distribution or transfer had occurred.
    (12) Impermissible inventory method. This section does not limit 
the Commissioner's ability under section 446(b) to determine whether a 
taxpayer's inventory method is an impermissible method or otherwise 
fails to clearly reflect income. For example, an acquiring corporation 
may not use the method of accounting determined under paragraph (a)(2) 
of this section if the method fails to clearly reflect the acquiring 
corporation's income within the meaning of section 446(b).
    (f) Effective/applicability date. This section applies to corporate 
reorganizations and tax-free liquidations described in section 381(a) 
that occur on or after August 31, 2011.

0
Par. 5. Section 1.446-1 is amended by:
0
1. Revising the first sentence and adding a second new sentence in 
paragraph (e)(3)(i).
0
2. Revising the first sentence in paragraph (e)(4)(i).
0
3. Adding paragraph (e)(4)(iii).
    The revisions and addition read as follows:


Sec.  1.446-1  General rule for methods of accounting.

* * * * *
    (e) * * *
    (3)(i) Except as otherwise provided under the authority of 
paragraph (e)(3)(ii) of this section, to secure the Commissioner's 
consent to a taxpayer's change in method of accounting the taxpayer 
generally must file an application on Form 3115, ``Application for 
Change in Accounting Method,'' with the Commissioner during the taxable 
year in which the taxpayer desires to make the change in method of 
accounting. See Sec. Sec.  1.381(c)(4)-1(d)(2) and 1.381(c)(5)-1(d)(2) 
for rules allowing additional time, in some circumstances, for the 
filing of an application on Form 3115 with respect to a transaction to 
which section 381(a) applies. * * *
* * * * *
    (4) * * * (i) * * * Except as provided in paragraphs (e)(3)(iii), 
(e)(4)(ii), and (e)(4)(iii) of this section, paragraph (e) of this 
section applies on or after December 30, 2003. * * *
* * * * *
    (iii) Effective/applicability date for paragraph (e)(3)(i). The 
rules of paragraph (e)(3)(i) of this section apply

[[Page 45689]]

to corporate reorganizations and tax-free liquidations described in 
section 381(a) that occur on or after August 31, 2011.

    Approved: July 20, 2011.
 Steven T. Miller,
Deputy Commissioner for Services and Enforcement.
Emily S. McMahon,
Acting Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 2011-19256 Filed 7-29-11; 8:45 am]
BILLING CODE 4830-01-P