[Federal Register Volume 62, Number 250 (Wednesday, December 31, 1997)]
[Rules and Regulations]
[Pages 68167-68173]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-33357]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Parts 1, 301, 601, and 602
[TD 8742]
RIN 1545-AU42 and 1545-AV20
Requirements Respecting the Adoption or Change of Accounting
Method; Extensions of Time To Make Elections
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Final regulations.
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SUMMARY: This document contains final regulations providing the
procedures for requesting an extension of time to make certain
elections under the Internal Revenue Code. In addition, the regulations
provide the standards that the Commissioner will use in determining
whether to grant taxpayers extensions of time to make certain elections
including changes in accounting method and accounting period. The
regulations also set forth the time for filing a Form 3115, Application
for Change in Accounting Method, with the Commissioner. The regulations
affect taxpayers requesting an extension of time to make certain
elections and taxpayers requesting to change their method of accounting
for federal income tax purposes.
DATES: These regulations are effective December 31, 1997.
FOR FURTHER INFORMATION CONTACT: Cheryl Lynn Oseekey, (202) 622-4970
(not a toll-free number).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collection of information contained in these final regulations
has been reviewed and approved by the Office of Management and Budget
in accordance with the Paperwork Reduction Act (44 U.S.C. 3507) under
control number 1545-1488. Responses to this collection of information
are required to obtain an extension of time to make an election.
An agency may not conduct or sponsor, and a person is not required
to respond to, a collection of information unless the collection of
information displays a valid control number.
The estimated annual burden per respondent is 10 hours.
Comments concerning the accuracy of this burden estimate and
suggestions for reducing this burden should be sent to the Internal
Revenue Service, Attn: IRS Reports Clearance Officer, T:FP, Washington,
DC 20224, and to the Office of Management and Budget, Attn: Desk
Officer for the Department of the Treasury, Office of Information and
Regulatory Affairs, Washington, DC 20503.
Books or records relating to this collection of information must be
retained as long as their contents may be material in the
administration of any internal revenue law. Generally, tax returns and
tax return information are confidential, as required by 26 U.S.C. 6103.
Background
On June 27, 1996, temporary regulations relating to the standards
the Commissioner will use to grant taxpayers extensions of time to make
certain elections were published in the Federal Register (TD 8680, 61
FR 33365), and cross-referenced to a notice of proposed rulemaking
published in the Federal Register on the same date (61 FR 33408). The
regulations, Secs. 301.9100-1T through 301.9100-3T, provide an
automatic 6-month extension from the due date of the return excluding
extensions to make statutory and regulatory elections whose due dates
are the due date of the return or the due date of the return including
extensions. The regulations also provide an automatic 12-month
extension of time to make certain regulatory elections. For regulatory
elections not eligible for the automatic extensions of time, the
regulations provide the standards the Commissioner will use to
determine whether to grant an extension of time to make the election. A
public hearing on the regulations was held on October 30, 1996.
On May 15, 1997, temporary regulations setting forth the time for
requesting a change in accounting method and the standards the
Commissioner will use to grant an extension of time to request a change
in
[[Page 68168]]
accounting method were published in the Federal Register (TD 8719, 62
FR 26740), and cross-referenced to a notice of proposed rulemaking
published in the Federal Register on the same date (62 FR 26755). On
May 27, 1997, corrections to TD 8719 were published in the Federal
Register (62 FR 28630).
The regulations extend the time for filing a Form 3115, Application for
Change in Accounting Method, pursuant to Secs. 1.446-1(e)(3)(i) and
601.204(b) by allowing a taxpayer to file its Form 3115 with the
Commissioner anytime during the taxable year in which the taxpayer
desires to make the change in method of accounting. The regulations
also revised Secs. 301.9100-1T and 301.9100-3T to provide that an
extension of time to file a Form 3115 beyond the year provided in the
regulations will be granted only in unusual and compelling
circumstances. No public hearing on the regulations was requested or
held.
One comment responding to the notice of proposed rulemaking
published in the Federal Register on June 27, 1996 (61 FR 33408) was
received. No comments responding to the notice of proposed rulemaking
published in the Federal Register on May 15, 1997 (62 FR 26755) were
received. After consideration of the comment received, the regulations
are adopted as modified by this Treasury decision.
Public Comment
The commentator recommended several modifications to the
regulations prior to their adoption as final regulations.
The commentator suggested that a request for extension of time to
make an election should not be denied on the basis that the taxpayer
fails to qualify for the underlying election. The commentator noted
that the regulations provide that the granting of Sec. 301.9100 relief
is not a determination that the taxpayer is otherwise eligible to make
the election. This suggested modification has not been adopted. The IRS
and the Treasury Department believe it is in the interest of sound tax
administration to deny Sec. 301.9100 relief when it becomes apparent in
considering the request for an extension of time that the taxpayer is
not otherwise eligible to make the election. This ensures that the
resources of the IRS are brought to bear in the resolution of the issue
regarding eligibility at the earliest stage of the administrative
process.
The commentator recommended that an extension of time to make an
election be made available even when alternative relief is provided by
a statute, a regulation published in the Federal Register, or a revenue
ruling, revenue procedure, notice, or announcement published in the
Internal Revenue Bulletin. This suggested modification has not been
adopted. The IRS and the Treasury Department want to retain the ability
to tailor relief for specific elections.
The commentator recommended measuring the 12-month automatic
extension for eligible regulatory elections whose deadlines are the due
date of the return or the due date of the return including extensions
from the extended due date when the taxpayer has obtained an extension.
This suggested modification has been adopted. The commentator also
recommended that the automatic 6-month extension for statutory and
regulatory elections be available even when the return for the year of
the election was not timely filed. This suggested modification has not
been adopted.
The commentator recommended that the regulations not provide that
the interests of the Government are ordinarily prejudiced if the
taxable year in which the regulatory election should have been made or
any affected taxable years are closed by the period of limitations on
assessment. This suggested modification was not adopted. There are two
policies that must be balanced in formulating the standards for
Sec. 301.9100 relief. The first is the policy of promoting efficient
tax administration by providing limited time periods for taxpayers to
choose among alterative tax treatments and encouraging prompt tax
reporting. The second is the policy of permitting taxpayers that are in
reasonable compliance with the tax laws to minimize their tax liability
by collecting from them only the amount of tax they would have paid if
they had been fully informed and well advised. The IRS and the Treasury
Department believe that the regulation achieves an appropriate balance
between these policies. Furthermore, the language of the regulation
does not foreclose in all circumstances consideration of whether the
interests of the Government will not be prejudiced.
The commentator questioned the special rules for accounting method
and accounting period regulatory elections. The regulations provide
limited relief for accounting methods or periods subject to advance
written consent from the Commissioner ordinarily not to exceed 90 days
from the deadline for filing the Form 3115, Application for Change in
Accounting Method, or the Form 1128, Application to Adopt, Change, or
Retain a Tax Year. The commentator suggested that the 90-day period be
extended. The regulations published in the Federal Register on May 15,
1997 (TD 8719, 62 FR 26740) and corrected on May 27, 1997 (62 FR 28630)
effectively extended the 90-day period for accounting methods by
allowing the Form 3115 to be filed anytime during the taxable year in
which the taxpayer desires to make the change in method of accounting.
This rule is incorporated into the final regulations. However, a
similar amendment was not made in regard to accounting period elections
because extending the 90-day period would delay the filing of the short
period return and result in less efficient tax administration.
The commentator recommended that the special rules for other
accounting method regulatory elections be modified by eliminating the
rule that, ordinarily, the interests of the Government are deemed to be
prejudiced when the election requires an adjustment under section
481(a). This suggested modification was not adopted. The IRS and the
Treasury Department believe it is in the interest of sound tax
administration to generally preclude taxpayers from requesting, or
otherwise making, a retroactive change in an adopted method of
accounting, whether the change is from a permissible or impermissible
method. See generally, Rev. Rul. 90-38 (1990-1 C.B. 57). In considering
an exception, the IRS and the Treasury Department believe that
Sec. 301.9100 relief is most appropriate for accounting method
elections that relate to nonrecurring transactions. These elections are
generally made on a cut-off basis and a missed election would preclude
accounting for a transaction in the year of the missed election under
the elective method. In contrast, accounting method elections subject
to section 481(a) generally will provide the benefit of the elective
method for a transaction in the year of the missed election through an
adjustment under section 481(a).
The commentator suggested that the regulations clarify when
taxpayers may obtain an extension of time to file a request to change
an accounting method or an accounting period under an unusual and
compelling circumstances standard. This suggested modification was not
adopted. What are unusual and compelling circumstances must be decided
on a case-by-case basis in light of all applicable facts and
circumstances.
[[Page 68169]]
Effective Date
The rules relating to the time for filing an application for change
in accounting method apply to Forms 3115 submitted on or after December
31, 1997.
The rules relating to requests for an extension of time apply to
requests submitted to the IRS on or after December 31, 1997. The rules
relating to automatic extensions apply to elections for which
corrective action is taken on or after December 31, 1997.
Special Analyses
It has been determined that this Treasury decision is not a
significant regulatory action as defined in EO 12866. Therefore, a
regulatory assessment is not required. It also has been determined that
section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5)
does not apply to these regulations.
Sections 1.446-1(e)(3)(i) and 601.204(b) in this regulation,
originally published in the Federal Register for May 15, 1997 as a
temporary regulation and cross-reference notice of proposed rulemaking,
merely extend the time for filing a Form 3115, Application for Change
in Accounting Method, with the Commissioner and, therefore, do not
contain a new collection of information. Sections 301.9100-2 and
301.9100-3 of this regulation, originally published in the Federal
Register for June 27, 1996 as a temporary regulation and cross-
reference notice of proposed rulemaking, contain a collection of
information. However, an initial regulatory flexibility analysis was
not required because the regulations were published within 90 days of
the enactment of Subtitle D of the Contract with America Advancement
Act of 1996 (Public Law 104-21, 110 Stat. 847, 868 (1996)). With
respect to these final regulations, it is hereby certified that the
collection of information in those sections will not have a significant
economic impact on a substantial number of small entities. This
certification is based on the fact that, on average, no more than 500
requests for an extension of time to make an election are received on
an annual basis. Therefore, a Regulatory Flexibility Analysis under the
Regulatory Flexibility Act (5 U.S.C. chapter 6) is not required.
Pursuant to section 7805(f) of the Internal Revenue Code, these
regulations were submitted to the Small Business Administration for
comment on their impact on small business.
Drafting Information
The principal author of these regulations is Cheryl Lynn Oseekey,
Office of Assistant Chief Counsel (Income Tax and Accounting). However,
other personnel from the IRS and the Treasury Department participated
in their development.
List of Subjects
26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
26 CFR Part 301
Employment taxes, Estate taxes, Excise taxes, Gift taxes, Income
taxes, Penalties, Reporting and recordkeeping requirements.
26 CFR Part 601
Administrative practice and procedure, Freedom of information,
Reporting and recordkeeping requirements, Taxes.
26 CFR Part 602
Reporting and recordkeeping requirements.
Adoption of Amendments to the Regulations
Accordingly, 26 CFR parts 1, 301, 601, and 602 are amended as
follows:
PART 1--INCOME TAXES
Paragraph 1. The authority citation for part 1 continues to read in
part as follows:
Authority: 26 U.S.C. 7805. * * *
Sec. 1.446-1 [Amended]
Par. 2. Section 1.446-1 is amended as follows:
1. The first sentence of paragraph (e)(3)(i) is amended by removing
the language ``within 180 days after the beginning of'' and adding
``during'' in its place.
2. Paragraph (e)(3)(iii) is revised to read as follows:
Sec. 1.446-1 General rule for methods of accounting.
* * * * *
(e) * * *
(3) * * *
(iii) This paragraph (e)(3) applies to Forms 3115 filed on or after
December 31, 1997. For other Forms 3115, see Sec. 1.446-1(e)(3) in
effect prior to December 31, 1997 (Sec. 1.446-1(e)(3) as contained in
the 26 CFR part 1 edition revised as of April 1, 1997).
Sec. 1.446-1T [Removed]
Par. 3. Section 1.446-1T is removed.
PART 301--PROCEDURE AND ADMINISTRATION
Par. 4. The authority citation for part 301 continues to read in
part as follows:
Authority: 26 U.S.C. 7805. * * *
Par. 5. Section 301.9100-0 is added to read as follows:
Sec. 301.9100-0 Outline of regulations.
This section lists the paragraphs in Secs. 301.9100-1 through
301.9100-3.
Sec. 301.9100-1 Extensions of time to make elections.
(a) Introduction.
(b) Terms.
(c) General standards for relief.
(d) Exceptions.
(e) Effective dates.
Sec. 301.9100-2 Automatic extensions.
(a) Automatic 12-month extension.
(1) In general.
(2) Elections eligible for automatic 12-month extension.
(b) Automatic 6-month extension.
(c) Corrective action.
(d) Procedural requirements.
(e) Examples.
Sec. 301.9100-3 Other extensions.
(a) In general.
(b) Reasonable action and good faith.
(1) In general.
(2) Reasonable reliance on a qualified tax professional.
(3) Taxpayer deemed to have not acted reasonably or in good faith.
(c) Prejudice to the interests of the Government.
(1) In general.
(i) Lower tax liability.
(ii) Closed years.
(2) Special rules for accounting method regulatory elections.
(3) Special rules for accounting period regulatory elections.
(d) Effect of amended returns.
(1) Second examination under section 7605(b).
(2) Suspension of the period of limitations under section 6501(a).
(e) Procedural requirements.
(1) In general.
(2) Affidavit and declaration from taxpayer.
(3) Affidavits and declarations from other parties.
(4) Other information.
(5) Filing instructions.
(f) Examples.
Par. 6. Section 301.9100-1 is revised to read as follows:
Sec. 301.9100-1 Extensions of time to make elections.
(a) Introduction. The regulations under this section and
Secs. 301.9100-2 and 301.9100-3 provide the standards the Commissioner
will use to determine whether to grant an extension of time to make a
regulatory election. The regulations under this section and
Sec. 301.9100-2 also provide an automatic extension of time to make
certain statutory elections. An extension of time is available for
elections that a taxpayer is otherwise eligible to make. However,
[[Page 68170]]
the granting of an extension of time is not a determination that the
taxpayer is otherwise eligible to make the election. Section 301.9100-2
provides automatic extensions of time for making regulatory and
statutory elections when the deadline for making the election is the
due date of the return or the due date of the return including
extensions. Section 301.9100-3 provides extensions of time for making
regulatory elections that do not meet the requirements of
Sec. 301.9100-2.
(b) Terms. The following terms have the meanings provided below--
Election includes an application for relief in respect of tax; a
request to adopt, change, or retain an accounting method or accounting
period; but does not include an application for an extension of time
for filing a return under section 6081.
Regulatory election means an election whose due date is prescribed
by a regulation published in the Federal Register, or a revenue ruling,
revenue procedure, notice, or announcement published in the Internal
Revenue Bulletin (see Sec. 601.601(d)(2) of this chapter).
Statutory election means an election whose due date is prescribed
by statute.
Taxpayer means any person within the meaning of section 7701(a)(1).
(c) General standards for relief. The Commissioner in exercising
the Commissioner's discretion may grant a reasonable extension of time
under the rules set forth in Secs. 301.9100-2 and 301.9100-3 to make a
regulatory election, or a statutory election (but no more than 6 months
except in the case of a taxpayer who is abroad), under all subtitles of
the Internal Revenue Code except subtitles E, G, H, and I.
(d) Exceptions. Notwithstanding the provisions of paragraph (c) of
this section, an extension of time will not be granted--
(1) For elections under section 4980A(f)(5); or
(2) For elections that are expressly excepted from relief or where
alternative relief is provided by a statute, a regulation published in
the Federal Register, or a revenue ruling, revenue procedure, notice,
or announcement published in the Internal Revenue Bulletin (see
Sec. 601.601(d)(2) of this chapter).
(e) Effective dates. In general, this section and Secs. 301.9100-2
and 301.9100-3 apply to all requests for an extension of time submitted
to the Internal Revenue Service (IRS) on or after December 31, 1997.
However, the automatic 12-month and 6-month extensions provided in
Sec. 301.9100-2 apply to elections for which corrective action is taken
on or after December 31, 1997. For other requests for an extension of
time, see Secs. 301.9100-1T through 301.9100-3T in effect prior to
December 31, 1997 (Secs. 301.9100-1T through 301.9100-3T as contained
in the 26 CFR part 1 edition revised as of April 1, 1997).
Par. 7. Sections 301.9100-2 and 301.9100-3 are added to read as
follows:
Sec. 301.9100-2 Automatic extensions.
(a) Automatic 12-month extension--(1) In general. An automatic
extension of 12 months from the due date for making a regulatory
election is granted to make elections described in paragraph (a)(2) of
this section provided the taxpayer takes corrective action as defined
in paragraph (c) of this section within that 12-month extension period.
For purposes of this paragraph (a), the due date for making a
regulatory election is the extended due date of the return if the due
date of the election is the due date of the return or the due date of
the return including extensions and the taxpayer has obtained an
extension of time to file the return. This extension is available
regardless of whether the taxpayer timely filed its return for the year
the election should have been made.
(2) Elections eligible for automatic 12-month extension. The
following regulatory elections are eligible for the automatic 12-month
extension described in paragraph (a)(1) of this section--
(i) The election to use other than the required taxable year under
section 444;
(ii) The election to use the last-in, first-out (LIFO) inventory
method under section 472;
(iii) The 15-month rule for filing an exemption application for a
section 501(c)(9), 501(c)(17), or 501(c)(20) organization under section
505;
(iv) The 15-month rule for filing an exemption application for a
section 501(c)(3) organization under section 508;
(v) The election to be treated as a homeowners association under
section 528;
(vi) The election to adjust basis on partnership transfers and
distributions under section 754;
(vii) The estate tax election to specially value qualified real
property (where the Internal Revenue Service (IRS) has not yet begun an
examination of the filed return) under section 2032A(d)(1);
(viii) The chapter 14 gift tax election to treat a qualified
payment right as other than a qualified payment under section
2701(c)(3)(C)(i); and
(ix) The chapter 14 gift tax election to treat any distribution
right as a qualified payment under section 2701(c)(3)(C)(ii).
(b) Automatic 6-month extension. An automatic extension of 6 months
from the due date of a return excluding extensions is granted to make
regulatory or statutory elections whose due dates are the due date of
the return or the due date of the return including extensions provided
the taxpayer timely filed its return for the year the election should
have been made and the taxpayer takes corrective action as defined in
paragraph (c) of this section within that 6-month extension period.
This paragraph (b) does not apply to regulatory or statutory elections
that must be made by the due date of the return excluding extensions.
(c) Corrective action. For purposes of this section, corrective
action means taking the steps required to file the election in
accordance with the statute or the regulation published in the Federal
Register, or the revenue ruling, revenue procedure, notice, or
announcement published in the Internal Revenue Bulletin (see
Sec. 601.601(d)(2) of this chapter). For those elections required to be
filed with a return, corrective action includes filing an original or
an amended return for the year the regulatory or statutory election
should have been made and attaching the appropriate form or statement
for making the election. Taxpayers who make an election under an
automatic extension (and all taxpayers whose tax liability would be
affected by the election) must file their return in a manner that is
consistent with the election and comply with all other requirements for
making the election for the year the election should have been made and
for all affected years; otherwise, the IRS may invalidate the election.
(d) Procedural requirements. Any return, statement of election, or
other form of filing that must be made to obtain an automatic extension
must provide the following statement at the top of the document:
``FILED PURSUANT TO Sec. 301.9100-2''. Any filing made to obtain an
automatic extension must be sent to the same address that the filing to
make the election would have been sent had the filing been timely made.
No request for a letter ruling is required to obtain an automatic
extension. Accordingly, user fees do not apply to taxpayers taking
corrective action to obtain an automatic extension.
(e) Examples. The following examples illustrate the provisions of
this section:
[[Page 68171]]
Example 1. Automatic 12-month extension. Taxpayer A fails to
make an election described in paragraph (a)(2) of this section when
filing A's 1997 income tax return on March 16, 1998, the due date of
the return. This election does not affect the tax liability of any
other taxpayer. The applicable regulation requires that the election
be made by attaching the appropriate form to a timely filed return
including extensions. In accordance with paragraphs (a) and (c) of
this section, A may make the regulatory election by taking the
corrective action of filing an amended return with the appropriate
form by March 15, 1999 (12 months from the March 16, 1998 due date
of the return). If A obtained a 6-month extension to file its 1997
income tax return, A may make the regulatory election by taking the
corrective action of filing an amended return with the appropriate
form by September 15, 1999 (12 months from the September 15, 1998
extended due date of the return).
Example 2. Automatic 6-month extension. Taxpayer B fails to make
an election not described in paragraph (a)(2) of this section when
filing B's 1997 income tax return on March 16, 1998, the due date of
the return. This election does not affect the tax liability of any
other taxpayer. The applicable regulation requires that the election
be made by attaching the appropriate form to a timely filed return
including extensions. In accordance with paragraphs (b) and (c) of
this section, B may make the regulatory election by taking the
corrective action of filing an amended return with the appropriate
form by September 15, 1998 (6 months from the March 16, 1998 due
date of the return).
Sec. 301.9100-3 Other extensions.
(a) In general. Requests for extensions of time for regulatory
elections that do not meet the requirements of Sec. 301.9100-2 must be
made under the rules of this section. Requests for relief subject to
this section will be granted when the taxpayer provides the evidence
(including affidavits described in paragraph (e) of this section) to
establish to the satisfaction of the Commissioner that the taxpayer
acted reasonably and in good faith, and the grant of relief will not
prejudice the interests of the Government.
(b) Reasonable action and good faith--(1) In general. Except as
provided in paragraphs (b)(3)(i) through (iii) of this section, a
taxpayer is deemed to have acted reasonably and in good faith if the
taxpayer--
(i) Requests relief under this section before the failure to make
the regulatory election is discovered by the Internal Revenue Service
(IRS);
(ii) Failed to make the election because of intervening events
beyond the taxpayer's control;
(iii) Failed to make the election because, after exercising
reasonable diligence (taking into account the taxpayer's experience and
the complexity of the return or issue), the taxpayer was unaware of the
necessity for the election;
(iv) Reasonably relied on the written advice of the Internal
Revenue Service (IRS); or
(v) Reasonably relied on a qualified tax professional, including a
tax professional employed by the taxpayer, and the tax professional
failed to make, or advise the taxpayer to make, the election.
(2) Reasonable reliance on a qualified tax professional. For
purposes of this paragraph (b), a taxpayer will not be considered to
have reasonably relied on a qualified tax professional if the taxpayer
knew or should have known that the professional was not--
(i) Competent to render advice on the regulatory election; or
(ii) Aware of all relevant facts.
(3) Taxpayer deemed to have not acted reasonably or in good faith.
For purposes of this paragraph (b), a taxpayer is deemed to have not
acted reasonably and in good faith if the taxpayer--
(i) Seeks to alter a return position for which an accuracy-related
penalty has been or could be imposed under section 6662 at the time the
taxpayer requests relief (taking into account any qualified amended
return filed within the meaning of Sec. 1.6664-2(c)(3) of this chapter)
and the new position requires or permits a regulatory election for
which relief is requested;
(ii) Was informed in all material respects of the required election
and related tax consequences, but chose not to file the election; or
(iii) Uses hindsight in requesting relief. If specific facts have
changed since the due date for making the election that make the
election advantageous to a taxpayer, the IRS will not ordinarily grant
relief. In such a case, the IRS will grant relief only when the
taxpayer provides strong proof that the taxpayer's decision to seek
relief did not involve hindsight.
(c) Prejudice to the interests of the Government--(1) In general.
The Commissioner will grant a reasonable extension of time to make a
regulatory election only when the interests of the Government will not
be prejudiced by the granting of relief. This paragraph (c) provides
the standards the Commissioner will use to determine when the interests
of the Government are prejudiced.
(i) Lower tax liability. The interests of the Government are
prejudiced if granting relief would result in a taxpayer having a lower
tax liability in the aggregate for all taxable years affected by the
election than the taxpayer would have had if the election had been
timely made (taking into account the time value of money). Similarly,
if the tax consequences of more than one taxpayer are affected by the
election, the Government's interests are prejudiced if extending the
time for making the election may result in the affected taxpayers, in
the aggregate, having a lower tax liability than if the election had
been timely made.
(ii) Closed years. The interests of the Government are ordinarily
prejudiced if the taxable year in which the regulatory election should
have been made or any taxable years that would have been affected by
the election had it been timely made are closed by the period of
limitations on assessment under section 6501(a) before the taxpayer's
receipt of a ruling granting relief under this section. The IRS may
condition a grant of relief on the taxpayer providing the IRS with a
statement from an independent auditor (other than an auditor providing
an affidavit pursuant to paragraph (e)(3) of this section) certifying
that the interests of the Government are not prejudiced under the
standards set forth in paragraph (c)(1)(i) of this section.
(2) Special rules for accounting method regulatory elections. The
interests of the Government are deemed to be prejudiced except in
unusual and compelling circumstances if the accounting method
regulatory election for which relief is requested--
(i) Is subject to the procedure described in Sec. 1.446-1(e)(3)(i)
of this chapter (requiring the advance written consent of the
Commissioner);
(ii) Requires an adjustment under section 481(a) (or would require
an adjustment under section 481(a) if the taxpayer changed to the
method of accounting for which relief is requested in a taxable year
subsequent to the taxable year the election should have been made);
(iii) Would permit a change from an impermissible method of
accounting that is an issue under consideration by examination, an
appeals office, or a federal court and the change would provide a more
favorable method or more favorable terms and conditions than if the
change were made as part of an examination; or
(iv) Provides a more favorable method of accounting or more
favorable terms and conditions if the election is made by a certain
date or taxable year.
(3) Special rules for accounting period regulatory elections. The
interests of the Government are deemed to be prejudiced except in
unusual and compelling circumstances if an election is an accounting
period regulatory election (other than the election to use
[[Page 68172]]
other than the required taxable year under section 444) and the request
for relief is filed more than 90 days after the due date for filing the
Form 1128, Application to Adopt, Change, or Retain a Tax Year (or other
required statement).
(d) Effect of amended returns--(1) Second examination under section
7605(b). Taxpayers requesting and receiving an extension of time under
this section waive any objections to a second examination under section
7605(b) for the issue(s) that is the subject of the relief request and
any correlative adjustments.
(2) Suspension of the period of limitations under section 6501(a).
A request for relief under this section does not suspend the period of
limitations on assessment under section 6501(a). Thus, for relief to be
granted, the IRS may require the taxpayer to consent under section
6501(c)(4) to an extension of the period of limitations on assessment
for the taxable year in which the regulatory election should have been
made and any taxable years that would have been affected by the
election had it been timely made.
(e) Procedural requirements--(1) In general. Requests for relief
under this section must provide evidence that satisfies the
requirements in paragraphs (b) and (c) of this section, and must
provide additional information as required by this paragraph (e).
(2) Affidavit and declaration from taxpayer. The taxpayer, or the
individual who acts on behalf of the taxpayer with respect to tax
matters, must submit a detailed affidavit describing the events that
led to the failure to make a valid regulatory election and to the
discovery of the failure. When the taxpayer relied on a qualified tax
professional for advice, the taxpayer's affidavit must describe the
engagement and responsibilities of the professional as well as the
extent to which the taxpayer relied on the professional. The affidavit
must be accompanied by a dated declaration, signed by the taxpayer,
which states: ``Under penalties of perjury, I declare that I have
examined this request, including accompanying documents, and, to the
best of my knowledge and belief, the request contains all the relevant
facts relating to the request, and such facts are true, correct, and
complete.'' The individual who signs for an entity must have personal
knowledge of the facts and circumstances at issue.
(3) Affidavits and declarations from other parties. The taxpayer
must submit detailed affidavits from the individuals having knowledge
or information about the events that led to the failure to make a valid
regulatory election and to the discovery of the failure. These
individuals must include the taxpayer's return preparer, any individual
(including an employee of the taxpayer) who made a substantial
contribution to the preparation of the return, and any accountant or
attorney, knowledgeable in tax matters, who advised the taxpayer with
regard to the election. An affidavit must describe the engagement and
responsibilities of the individual as well as the advice that the
individual provided to the taxpayer. Each affidavit must include the
name, current address, and taxpayer identification number of the
individual, and be accompanied by a dated declaration, signed by the
individual, which states: ``Under penalties of perjury, I declare that
I have examined this request, including accompanying documents, and, to
the best of my knowledge and belief, the request contains all the
relevant facts relating to the request, and such facts are true,
correct, and complete.''
(4) Other information. The request for relief filed under this
section must also contain the following information--
(i) The taxpayer must state whether the taxpayer's return(s) for
the taxable year in which the regulatory election should have been made
or any taxable years that would have been affected by the election had
it been timely made is being examined by a district director, or is
being considered by an appeals office or a federal court. The taxpayer
must notify the IRS office considering the request for relief if the
IRS starts an examination of any such return while the taxpayer's
request for relief is pending;
(ii) The taxpayer must state when the applicable return, form, or
statement used to make the election was required to be filed and when
it was actually filed;
(iii) The taxpayer must submit a copy of any documents that refer
to the election;
(iv) When requested, the taxpayer must submit a copy of the
taxpayer's return for any taxable year for which the taxpayer requests
an extension of time to make the election and any return affected by
the election; and
(v) When applicable, the taxpayer must submit a copy of the returns
of other taxpayers affected by the election.
(5) Filing instructions. A request for relief under this section is
a request for a letter ruling. Requests for relief should be submitted
in accordance with the applicable procedures for requests for a letter
ruling and must be accompanied by the applicable user fee.
(f) Examples. The following examples illustrate the provisions of
this section:
Example 1. Taxpayer discovers own error. Taxpayer A prepares A's
1997 income tax return. A is unaware that a particular regulatory
election is available to report a transaction in a particular
manner. A files the 1997 return without making the election and
reporting the transaction in a different manner. In 1999, A hires a
qualified tax professional to prepare A's 1999 return. The
professional discovers that A did not make the election. A promptly
files for relief in accordance with this section. Assume paragraphs
(b)(3) (i) through (iii) of this section do not apply. Under
paragraph (b)(1)(i) of this section, A is deemed to have acted
reasonably and in good faith because A requested relief before the
failure to make the regulatory election was discovered by the IRS.
Example 2. Reliance on qualified tax professional. Taxpayer B
hires a qualified tax professional to advise B on preparing B's 1997
income tax return. The professional was competent to render advice
on the election and B provided the professional with all the
relevant facts. The professional fails to advise B that a regulatory
election is necessary in order for B to report income on B's 1997
return in a particular manner. Nevertheless, B reports this income
in a manner that is consistent with having made the election. In
2000, during the examination of the 1997 return by the IRS, the
examining agent discovers that the election has not been filed. B
promptly files for relief in accordance with this section, including
attaching an affidavit from B's professional stating that the
professional failed to advise B that the election was necessary.
Assume paragraphs (b)(3) (i) through (iii) of this section do not
apply. Under paragraph (b)(1)(v) of this section, B is deemed to
have acted reasonably and in good faith because B reasonably relied
on a qualified tax professional and the tax professional failed to
advise B to make the election.
Example 3. Accuracy-related penalty. Taxpayer C reports income
on its 1997 income tax return in a manner that is contrary to a
regulatory provision. In 2000, during the examination of the 1997
return, the IRS raises an issue regarding the reporting of this
income on C's return and asserts the accuracy-related penalty under
section 6662. C requests relief under this section to elect an
alternative method of reporting the income. Under paragraph
(b)(3)(i) of this section, C is deemed to have not acted reasonably
and in good faith because C seeks to alter a return position for
which an accuracy-related penalty could be imposed under section
6662.
Example 4. Election not requiring adjustment under section
481(a). Taxpayer D prepares D's 1997 income tax return. D is unaware
that a particular accounting method regulatory election is
available. D files D's 1997 return without making the election and
uses another permissible method of accounting. The applicable
regulation provides that the election is made on a cut-off basis
(without an adjustment under section 481(a)). In 1998, D requests
relief under this section to make the election under the regulation.
If D were granted an extension of time to make the election, D would
pay no
[[Page 68173]]
less tax than if the election had been timely made. Assume that
paragraphs (c)(2) (i), (iii), and (iv) of this section do not apply.
Under paragraph (c)(2)(ii) of this section, the interests of the
Government are not deemed to be prejudiced because the election does
not require an adjustment under section 481(a).
Example 5. Election requiring adjustment under section 481(a).
The facts are the same as in Example 4 of this paragraph (f) except
that the applicable regulation provides that the election requires
an adjustment under section 481(a). Under paragraph (c)(2)(ii) of
this section, the interests of the Government are deemed to be
prejudiced except in unusual or compelling circumstances.
Example 6. Under examination by the IRS. A regulation permits an
automatic change in method of accounting for an item on a cut-off
basis. Taxpayer E reports income on E's 1997 income tax return using
an impermissible method of accounting for the item. In 2000, during
the examination of the 1997 return by the IRS, the examining agent
notifies E in writing that its method of accounting for the item is
an issue under consideration. Any change from the impermissible
method made as part of an examination is made with an adjustment
under section 481(a). E requests relief under this section to make
the change pursuant to the regulation for 1997. The change on a cut-
off basis under the regulation would be more favorable than if the
change were made with an adjustment under section 481(a) as part of
an examination. Under paragraph (c)(2)(iii) of this section, the
interests of the Government are deemed to be prejudiced except in
unusual and compelling circumstances because E seeks to change from
an impermissible method of accounting that is an issue under
consideration in the examination on a basis that is more favorable
than if the change were made as part of an examination.
Secs. 301.9100-1T, 301.9100-2T, and 301.9100-3T [Removed]
Par. 8. Sections 301.9100-1T, 301.9100-2T, and 301.9100-3T are
removed.
PART 601--STATEMENT OF PROCEDURAL RULES
Par. 9. The authority citation for part 601 continues to read as
follows:
Authority: 26 U.S.C. 301 and 552, unless otherwise noted.
Sec. 601.204 [Amended]
Par. 10. Section 601.204 is amended as follows:
1. In paragraph (b), the fourth sentence is amended by removing the
language ``within 180 days after the beginning of'' and adding
``during'' in its place.
2. In paragraph (b), the last sentence is removed.
Sec. 601.204T [Removed]
Par. 11. Section 601.204T is removed.
PART 602--OMB CONTROL NUMBERS UNDER THE PAPERWORK REDUCTION ACT
Par. 12. The authority citation for part 602 continues to read as
follows:
Authority: 26 U.S.C. 7805.
Par. 13. Section 602.101(c) is amended by removing the entries for
Secs. 301.9001-2T and 301.9001-3T, and adding the following entry in
numerical order to the table to read as follows:
Sec. 602.101 OMB control numbers.
* * * * *
(c) * * *
------------------------------------------------------------------------
Current OMB
CFR part or section where identified and described control No.
------------------------------------------------------------------------
* * * * *
301.9100-1................................................. 1545-1488
* * * * *
------------------------------------------------------------------------
Michael P. Dolan,
Deputy Commissioner of Internal Revenue.
Approved: December 10, 1997.
Donald C. Lubick,
Acting Assistant Secretary of the Treasury.
[FR Doc. 97-33357 Filed 12-30-97; 8:45 am]
BILLING CODE 4830-01-U
