Rev. Rul. 69-336

Advice has been requested as to the application of Revenue Ruling 68-631, C.B. 1968-2, 198, to an accrual basis taxpayer who has consistently deducted additional State taxes (including those with respect to which there has been no contest) for the taxable year in which the additional taxes were finally determined.

Revenue Ruling 68-631, which revoked Revenue Ruling 57-105, C.B. 1957-1, 193, holds in part that the Internal Revenue Service will no longer consider the mere filing of a return as a contest in the absence of some objective act of protest or affirmative evidence of denial of liability by the taxpayer and that, in the absence of such act or evidence, any additional State taxes found to be due upon audit will be deemed, for Federal income purposes, to relate back to the year for which the taxes were originally imposed.

Section 446 of the Internal Revenue Code of 1954 in substance requires the permission of the Commissioner of Internal Revenue before a taxpayer changes his method of accounting for Federal income tax purposes. See section 1.446-1(e) of the Income Tax Regulations, relating to requirements respecting the adoption or change of accounting method. A consistent method for the deduction of additional State taxes is considered to be a method of accounting.

Accordingly, it is held that for Federal income tax purposes a taxpayer may not change his method of accounting for such additional State taxes without first obtaining the permission of the Commissioner.

The publication of Revenue Ruling 68-631 does not constitute the granting of advance permission of the Commissioner for a change in method of accounting. Thus, a taxpayer who has for Federal income tax purposes consistently deducted additional State taxes for the taxable year during which such additional taxes were finally determined or paid, must continue such treatment in the absence of permission to change his method of accounting under section 446 of the Code and the regulations thereunder.

Any taxpayer who wishes to change his method of accounting for additional State taxes so as to deduct all additional State taxes in the taxable year to which they relate (where no contest within the meaning of Revenue Ruling 68-631 exists) must request the permission of the Commissioner.

Furthermore, where a taxpayer, for Federal income tax purposes, has deducted additional State taxes under a consistent method of accounting for such items, pursuant to section 446(b) of the Code, the Internal Revenue Service will not change the taxpayer's method of accounting for such additional State taxes unless the method used does not clearly reflect income.

To the extent that Revenue Ruling 68-631 may be construed as requiring or permitting a taxpayer to change his method of accounting without permission, it is hereby modified. Claims for credit or refund under Revenue Ruling 68-631 will be allowed only where no method of accounting for additional State taxes covered by that Revenue Ruling has been adopted and consistently followed by the taxpayer.

¹ Also released as Technical Information Release 1014, dated May 29, 1969.