SERVICE TO CEASE ACCEPTING REQUESTS TO FILE LATE APPLICATIONS FOR CHANGE TO PRACTICAL CAPACITY METHOD.

Notice 89-59

Under section 1.9100-1(a) of the Income Tax Regulations, the Commissioner has discretionary authority to grant extensions of the time fixed by the regulations for making an election or application for relief. This authority applies to accounting method change requests filed more than 180 days after the beginning of the taxable year in which it is desired to make the change (the due date set in regulations section 1.446-1(e)(3)(i)).

Prior to the enactment of the Tax Reform Act of 1986, 1986-3 (Vol. 1) C.B. 1, section 1.471-11(d)(4) of the regulations permitted manufacturers of inventory to use the "practical capacity concept" in determining the amounts of fixed indirect production costs which were subject to inclusion in ending inventory. Section 1.263A- 1T(b)(2)(vii) of the temporary regulations provides that the use, directly or indirectly, of the practical capacity concept is not permitted under section 263A of the Internal Revenue Code and the temporary regulations thereunder. Accordingly, use of the practical capacity method is prohibited. Section 263A of the Code is effective for costs incurred after December 31, 1986, and, in the case of property that is inventory in the hands of the taxpayer, for taxable years beginning after December 31, 1986.

A number of taxpayers have indicated their intent to litigate the repeal of the practical capacity method. Forms 3115, Applications for Change in Accounting Method, have been submitted to exhaust the taxpayers' administrative remedies prior to a formal challenge.

Since April of 1988, we have been accepting late Forms 3115 requesting permission to use the practical capacity method, effective for tax years to which Code section 263A applies, under the provisions of section 1.9100-1(a) of the regulations. As a matter of administrative practice, these extensions have been approved, principally because issuance of the temporary regulations prohibiting use of the practical capacity method did not occur until August 7, 1987, and, subsequently, a hearing with respect to such regulations was not held until December 7, 1987. Although the requests for extension have been approved, the underlying accounting method requests have been denied pursuant to the temporary regulations cited above.

Due to the period of time that has passed, effective July 31, 1989, approval of an extension with respect to the filing of a request to use the practical capacity method for the first tax year to which section 263A of the Code applies will generally not be granted. Such an extension request will only be granted if the taxpayer demonstrates unusual and compelling circumstances for not filing the request within this time period. See Rev. Proc. 79-63, 1979-2 C.B. 578, for information that must be provided.

The principal author of this announcement is Susan M. Minasian of the Office of Assistant Chief Counsel (Income Tax and Accounting). For further information regarding this announcement contact Ms. Minasian on (202) 566-3762 (not a toll-free call).