Rev. Proc. 78-25

Section 1. Purpose.

The purpose of this Revenue Procedure is to amplify Rev. Proc. 75-25, 1975-1 C.B. 720, with respect to whether the estimated costs of future improvements added to the basis of real property pursuant to the Revenue Procedure may be adjusted because the estimated costs were determined in a later year to be either underestimated or overestimated.

Sec. 2. Background.

Rev. Proc. 75-25 supersedes Mim. 4027, XII-1 C.B. 60 (1933), for requests filed after May 12, 1975. Rev. Proc. 75-25 and Mim. 4027 grant a subdivider of real estate the election of accounting for costs on an estimated basis provided certain conditions are met and provided the subdivider executes Form 921, Consent Fixing Period of Limitations Upon Assessment of Income and Profit Tax.

Sec. 3. Procedure.

A subdivider may not adjust the estimated cost of future improvements for a prior taxable year when events after filing the prior year federal income tax return show the original estimate has been either understated or overstated. If it is determined in a later taxable year that a greater or lesser amount should have been claimed, the remedy is to make the correction in and for the year the determination is made. See sections 1.461-1(a)(2) and 1.451-1(a) of the Income Tax Regulations.

Sec. 4. Effect on Other Documents.

Rev. Proc. 75-25 is amplified.