Rev. Rul. 55-539

SECTION 1. PURPOSE.

The purpose of this Revenue Ruling is to set forth the procedure for the reporting and payment of the increase in tax liability resulting from the enactment of Public Law 74, 69 Stat. 134, page 748 of this Bulletin, repealing sections 452 and 462 of the Internal Revenue Code of 1954.

SEC. 2. BACKGROUND.

Section 452( relating to prepaid income) and section 462 (relating to reserves for estimated expenses), enacted as part of the Internal Revenue Code of 1954, have been repealed by Public Law 74, supra , as to all years subject to such Code. The effect of the repeal will generally be to increase the tax liability of taxpayers who elected the methods of accounting provided by sections 452 and 462 of the Code. References in this Revenue Ruling are to sections of the Internal Revenue Code of 1954 unless otherwise specified.

SEC. 3. REQUIREMENT FOR FILING STATEMENT.

.01 Where a return reflecting an election under section 452 or 462 of the Code was filed prior to the enactment of Public Law 74, supra , the taxpayer must file on or before December 15, 1955, a statement on the prescribed from showing the increase in tax liability resulting from the repeal of sections 452 and 462 of the Code. For example, corporation X filed its income tax return for the calendar year 1954 on March 15, 1955, and elected under section 6152 of the Code to pay the unpaid amount of the tax shown thereon in two equal installments. Such installment payments were due on March 15, 1955, and June 15, 1955, respectively. The corporation elected to compute its tax for such taxable year under the methods of accounting provided by sections 452 and 462 of the Code. Corporation X's tax liability is increased by reason of the enactment of Public Law 74, supra , and since the last date prescribed for paying its tax expires before December 15, 1955, it is required to submit the prescribed statement on or before December 15, 1955, showing its increase in tax liability.

.02 A taxpayer who has a taxable year ending on or before the date of enactment of Public Law 74, supra , but who has not filed his return before such time may file his return using the methods of accounting provided by sections 452 and 462 of the Code. In such case, he must file a statement at the time and in the manner provided under subsection .01 of this section.

.03 A taxpayer having a taxable year ending after the date of enactment of Public Law 74, supra , may not elect to compute his tax under sections 452 and 462 of the Code for such taxable year. Such a taxpayer must file his return and pay the tax as if such sections had never been enacted.

.04 A taxpayer who made an election under section 452 or 462 of the Code, but whose tax liability is not increased by reason of the enactment of Public Law 74, supra , is nevertheless required to file a statement in accordance with the procedure outlined in subsection .01 or .02 of this section if his gross income is increased or his deductions are decreased as the result of the repeal of sections 452 and 462 of the Code. For the purpose of the preceding sentence, the term `taxpayer' includes a partnership. In addition, a partner, stockholder, distributee, etc., shall file a statement in accordance with the procedure outlined in subsection .01 or .02 showing any increase in his tax liability resulting from the effects of the repeal on the gross income or deductions of the taxpayer mentioned in the preceding sentences.

.05 A statement shall also be filed for a taxable year other than the year to which an election under section 452 or 462 of the Code is applicable if the repeal of such sections increases the tax liability of the other year. Thus, a statement must be filed, on or before December 15, 1955, in accordance with the procedure outlined in subsection .01 or .02 of this section, for any taxable year to which a net operating loss is carried from the year to which an election under section 452 or 462 of the Code is applicable, provided that the repeal of such sections affects the amount of the tax liability for such year. A separate statement must also be filed for a year in which there is a net operating loss which is changed by reason of the repeal of section 452 and 462 of the Code. Where there is a short taxable year involved, a taxpayer may have 2 taxable years to which elections under sections 452 and 462 of the Code are applicable. In such a case, a statement must be filed for each year in accordance with the procedure outlined in subsection .01 or .02.

SEC. 4. FORM AND CONTENT OF STATEMENT.

.01 The statement shall be filed on Form 2175, Statement to be Filed Pursuant to Repeal of Sections 452 and 462 of the Internal Revenue Code of 1954, which may be obtained from District Directors of Internal Revenue. It shall be filed with the office of the District Director in which the return was filed. The statement shall be prepared in accordance with the instructions contained thereon and shall show the following information:

1. The name and address of the taxpayer;

2. The amounts of each type of income deferred under section 452 of the Code as of the close of the taxable year;

3. The balance in each reserve under section 462 of the Code at the end of the taxable year;

4. The taxable income of the taxpayer as reported on the income tax return and the taxable income as computed without the application of sections 452 and 462 of the Code;

5. The tax liability of the taxpayer as reported on the income tax return and the tax liability as computed without the application of sections 452 and 462 of the Code; and

6. The details of the recomputation of taxable income and tax liability including any changes in other items of income, deductions, and credits resulting from the repeal of sections 452 and 462 of the Code.

.02 The taxable income and the change in tax liability shown on the statement shall be recomputed as if the taxpayer had not made an election under sections 452 and 462 of the Code. Such items as the treatment of vacation pay and advance receipts of subscription income shall be reported under the law and regulations applicable to the taxable year as if sections 452 and 462 of the Code had not been enacted. The tax liability for the year shall be recomputed by restoring to taxable income the amount of income deferred under section 452 of the Code and the amount of the deduction under section 462 of the Code. Other deductions or credits affected by such changes in taxable income shall be adjusted. For example, if the deduction for contributions allowed for the taxable year had been limited under section 170(b) of the Code, the amount of such deduction shall be recomputed giving effect to the increase in adjusted gross income or taxable income, as the case may be, by reason of the adjustments required by the repeal of sections 452 and 462 of the Code.

SEC. 5. EFFECT OF FILING STATEMENT.

.01 If the taxpayer files a timely statement in accordance with the provisions of section 3 of this Revenue Ruling, the amount of the increase in tax shown on such statement for a year to which an election under section 452 or 462 of the Code is applicable shall, for all purposes of the Internal Revenue Code, be considered as tax shown on the return for such year. (See, however, subsection .02 below.) In general, such increase shall be assessed and collected in the same manner as if it had been tax shown on the return as originally filed. For example, taxpayer A filed his return showing the tax liability computed under the methods of accounting provided by sections 452 and 462 of the Code as $1,000 and filed the statement in accordance with section 3 of this Revenue Ruling. The tax computed as though sections 452 and 462 of the Code had not been enacted is $1,200, and the difference of $200 is the increase in the tax attributable to the repeal of sections 452 and 462 of the Code. This increase is considered for all purposes of the Internal Revenue Code to be a part of the tax shown on the return for such taxable year. Additions to the tax for fraud or negligence under section 6653 of the Code will be determined by reference to $1,200 (that is, $1,000 plus $200) as tax shown on the return.

.02 In the case of a year which is affected by a net operating loss carryback from a year to which an election under section 452 or 462 of the Code applies, that portion of the amount of increase in tax shown on the statement for the year to which the loss is carried back and which is attributable to a decrease in such net operating loss shall not be treated as tax shown on the return.

SEC. 6. INTEREST PROVISIONS.

.01 If the statement is filed in accordance with section 3 of this Revenue Ruling and that portion of the increase in tax which is due before December 15, 1955 (determined without regard to any extension of time for payment and without regard to the provisions of section 4 of Public Law 74, supra ), is paid in full on or before December 15, 1955, no interest shall be due with respect to such portion. For example, corporation M's return for the calendar year 1954 was filed on March 15, 1955, and the tax liability shown thereon was paid in equal installments on March 15, 1955, and June 15, 1955. It filed a statement on December 15, 1955, showing the increase in it tax liability resulting from the repeal of sections 452 and 462 of the Code and paid at that time the increase in tax shown thereon. No interest will be imposed with respect to the amount of such payment. Interest shall be computed under the applicable provisions of the Internal Revenue Code on any portion of the increase in tax shown on the statement which is due on or after December 15, 1955, but which is not paid when due.

.02 Subsection .01 of this section shall apply only if the tax liability shown on the return as filed for the year was based upon a reasonable interpretation and application of sections 452 and 462 of the Code as those sections existed prior to repeal.

.03 No interest shall be imposed with respect to any increase in tax resulting from the repeal of sections 452 and 462 of the Code for any period prior to June 16, 1955, the day after the date of the enactment of Public Law 74, supra .

SEC. 7. PROVISIONS FOR ESTIMATED TAX.

.01 Any addition to the tax under section 294(d) of the Internal Revenue Code of 1939 (relating to estimated tax) shall be computed as if the tax for the year for which the estimate was made were computed with sections 452 and 462 of the Code still applicable to such taxable year. For the purpose of the preceding sentence, it is not necessary for the taxpayer actually to have made an election under section 452 or 462 of the Code; it is only necessary for the taxpayer to have taken such sections into account in estimating his tax liability for the year.

.02 In the case of an underpayment of estimated tax under section 6654 of the Code, any additions to the tax for installments due before December 15, 1955, shall be computed without regard to any increase in tax resulting from the repeal of sections 452 and 462 of the Code. Any additions to the tax with respect to installments due on or after December 15, 1955, shall be imposed in accordance with the applicable provisions of the Internal Revenue Code and as though sections 452 and 462 of the Code had not been enacted. Thus, a taxpayer whose declaration of estimated tax was based upon an estimate of his taxable income for the year of the estimate, which was determined as though sections 452 and 462 of the Code were applicable, must file an amended declaration on or before the due date of the next installment of estimated tax, due on or after December 15, 1955. Such amended declaration shall reflect an estimate of the tax without the application of these sections. If the taxpayer bases his estimate on the tax for the preceding taxable year under section 6654(d)(1)(A) of the Code, an amended declaration must be filed on or before the due date of the next installment, due on or after December 15, 1955, if the tax for the preceding taxable year is increased as the result of the repeal of sections 452 and 462 of the Code. If the taxpayer bases his estimate on the tax computed under section 6654(d)(1)(B) of the Code, he must file an amended declaration on or before the due date of the next installment, due on or after December 15, 1955, taking into account the repeal of sections 452 and 462 of the Code with respect to the preceding taxable year. Any increase in estimated tax shown on an amended declaration filed in accordance with this subsection must be paid in accordance with section 6153(c) of the Code.

.03 Corporations required to file a declaration of estimated tax under section 6016 of the Code for taxable years ending on or after December 31, 1955, shall estimate their tax liability for such year as if sections 452 and 462 of the Code had never been enacted. Thus, if the corporation bases its estimated tax liability on its operations for the preceding taxable year under section 6655(d)(1) or (2) of the Code, the effect of the repeal of sections 452 and 462 of the Code with respect to such year must be taken into account.

SEC. 8. EXTENSION OF TIME FOR MAKING CERTAIN PAYMENTS.

.01 If the allowance of any deduction is dependent upon the making of a payment within a period of time specified in the Internal Revenue Code, the period within which the payment is to be made is extended where the amount to be paid is increased by reason of the repeal of sections 452 and 462 of the Code, provided that:

1. The taxpayer, because of a pre-existing obligation, is required to make a payment or an additional payment to another person by reason of the enactment of Public Law 74, supra;

2. The deductibility of the payment is contingent upon its being made within a period prescribed by the Code, which period expires after the close of the taxable year; and

3. The payment or additional payment is made on or before December 15, 1955.

If the foregoing conditions are met, the payment shall be treated as having been made within the time specified in the Code and it shall be deductible for the year to which the payment relates, subject to the other conditions provided by the Code. The provisions of this paragraph may be illustrated by the following:

Example 1 . Section 267 of the Code (relating to losses, expenses and interest between related taxpayers) applies to amounts accrued by taxpayer A for salary payable to B . For the calendar year 1954, A is obligated to pay B a salary equal to five percent of A's taxable income for the taxable year. The amount accrued as salary payable to B for 1954 is $5,000 with the taxable income reflecting the application of section 462 of the Code. As a result of the repeal of section 462 of the Code, the salary payable to B for 1954 is increased to $6,000. The additional $1,000 is paid to B on December 15, 1955. In recomputing A's tax liability for 1954, the additional deduction of $1,000 for salary payable to B will be treated as having been made within two and one-half months after the close of the taxable year and will be deductible in that year.

Example 2 . On March 1, 1955, corporation X , a calendar year taxpayer using an accrual method of accounting, makes a payment described in section 404(a)(6) of the Code (relating to contributions to an employees' trust) of $10,000 which is accrued for 1954 and is determined on the basis of the amount of taxable income for that year. The taxpayer filed its return on March 15, 1955. By reason of the repeal of section 462 of the Code, X's taxable income is increased so that it is required to make an additional contribution of $2,000 to the employees' trust. The additional payment is made on December 15, 1955. For purposes of recomputing X's tax liability for 1954, this additional payment is deemed to have been made on the last day of 1954.

The time for inclusion in the taxable income of the payee of any additional payment of the type described in this subsection shall be determined without regard to section 4(c)(3) of Public Law 74, supra , and the provisions of this subsection.

.02 Under section 4(c)(4) of Public Law 74, supra , the period during which distributions may be recognized as dividends paid under section 561 of the Code for a taxable year to which section 452 or 462 of the Code applies may be extended under conditions set forth below.

1. In the case of the accumulated earnings tax or the personal holding company tax, if

a. The income of a corporation is increased for a taxable year by reason of the repeal of sections 452 and 462 of the Code so that it would become liable for the tax (or an increase in the tax) imposed on accumulated earnings or personal holding companies unless additional dividends are distributed;

b. It distributes dividends to its stockholders after the 15th day of the 3rd month following the close of its taxable year and on or before December 15, 1955, which dividends are attributable to an increase in its accumulated taxable income or undistributed personal holding company income, as the case may be, resulting from the repeal of sections 452 and 462 of the Code; and

c. It elects in its statement, submitted under section 3 of this Revenue Ruling, to have the provisions of section 4(c)(4) of Public Law 74, supra , apply- then such dividends are to be treated as having been paid on the last day of the taxable year to which the statement applies.

2. In the case of a regulated investment company taxable under section 852 of the Code, if

a. Its investment company taxable income is increased by reason of the repeal of sections 452 and 462 of the Code (without regard to any deduction for dividends paid as provided for in this subdivision);

b. It distributes dividends to its stockholders after the 15th day of the 3rd month following the close of its taxable year and on or before December 15, 1955, which dividends are attributable to an increase in its investment company income resulting from the repeal of sections 452 and 462 of the Code; and

c. It elects in its statement, submitted under section 3 of this Revenue Ruling to have the provisions of section 4(c)(4) of Public Law 74, supra , apply- then such dividends are to be treated as having been paid on the last day of the taxable year to which the statement applies. The dividends paid are to be determined under this subdivision without regard to the provisions of section 855 of the Code.

3. An election made under this subsection is irrevocable. The time for inclusion in the taxable income income of the distributee of any distributions of the type described in this subsection shall be determined without regard to section 4(c)(4) of Public Law 74, supra , and the provisions of this subsection.

¹ Based on IR Circular No. 55-83, dated July 12, 1955; Revenue Ruling amplified by Revenue Procedure 55-8, page 908