Rev. Rul. 80-39

ISSUE

In granting a change in method of accounting with respect to a trade or business, what condition will the Internal Revenue Service impose on the taxpayer regarding the remaining balance of the adjustment required by section 481(a) of the Internal Revenue Code in the event the taxpayer ceases to operate that trade or business? FACTS

M, a domestic corporation, carries out its business operations through several divisions. Each division is in a different trade or business, and each keeps a complete and separate set of books and records. Division I has been in existence for 15 years and has accounted for income and expenses under its present method of accounting during that time.

M seeks permission to change its method of accounting for the trade or business conducted in division I from its present method to another method. In accordance with Rev. Proc. 70-27, 1970-2 C.B. 508, M filed an Application for Change in Method of Accounting (Form 3115) with respect to the trade or business conducted in division I with the Service, proposing that M take the necessary resulting section 481(a) adjustment into account ratable over 10 taxable years. One of the conditions prescribed by the Service is that if M ceases to engage in the trade or business for which the change in method of accounting is granted at any time prior to the expiration of the 10-year period, M will take into account, for federal income tax purposes for the year in which M ceases to engage in that trade or business, the balance of the section 481(a) adjustment not previously taken into account in computing taxable income.

LAW AND ANALYSIS

Section 1.446-1(e)(3)(i) of the Income Tax Regulations provides that permission to change a taxpayer's method of accounting will not be granted unless the taxpayer and the Service agree to the terms, conditions, and adjustments under which the change will be effected. Under this provision, the Service may prescribe the necessary terms and conditions under which a change in method of accounting will be effected in order to prevent amounts from being duplicated or omitted.

The section 481(a) adjustment applicable to the trade or business conducted in division I is totally unrelated to M's other trades or businesses. Should M continue to spread the section 481(a) adjustment applicable to the trade or business conducted in division I over years subsequent to the time that M ceases to engage in that trade or business, such continued spread of the adjustment would distort the income of M during such period.

HOLDING

The Service will impose a condition that requires the remaining balance of a section 481(a) adjustment applicable to the business conducted in division I of the taxpayer to be taken into account in the year in which the taxpayer ceases to engage in that trade or business.