Rev. Proc. 77-6

Section 1. Purpose.

The purpose of this Revenue Procedure is to modify section 3.04 of Rev. Proc. 68-31, 1968-2 C.B. 917, concerning the language of a restricted consent on Form 872, Consent Fixing Period of Limitation Upon Assessment of Income Tax.

Sec. 2. Background.

.01 Section 3.04 of Rev. Proc. 68-31 provides that where resolution of the principal issues subject to the restricted consent has an "automatic effect" on other items, the restricted consent will cover both the principal issues and the "related or automatic items". Automatic effect means any direct or indirect effect on other items caused by an adjustment to the principal issues. In order to avoid any misunderstanding of the above quoted phrases, they are being changed to read "a direct or indirect effect" and "consequential changes", respectively.

.02 To illustrate the principle of consequential changes, assume the principal issue subject to a restricted consent involves the allowability of an exemption for a claimed dependent. If resolution of the issue results in an adjustment to disallow the exemption, the prime effect of the adjustment is an increase in taxable income in the amount of the exemption. One possible direct consequence of the adjustment is the disallowance of any medical expenses claimed for the disallowed dependent. If this direct consequence reduces the total itemized deductions to the point that the standard deduction is greater, the disallowance of all itemized deductions and the allowance of the standard deduction would be indirect consequences of the adjustment to the principal issue.

.03 To illustrate further, any adjustment to a principal issue that increases adjusted gross income can have a direct consequence on a deduction for medical expenses and contributions due to the statutory limitations on those items based on a percentage of adjusted gross income.

Sec. 3. Modified Procedure.

In order to reflect the above clarifications, section 3.04 of Rev. Proc. 68-31 is modified to read as follows:

.04 Where resolution of the principal issues subject to the restricted consent has a direct or indirect effect on other items, the restricted consent will cover both the principal issues and the consequential changes to other items.

Sec. 4. Effect on other Documents.

This Revenue Procedure modifies Rev. Proc. 68-31.

Sec. 5. Effective Date.

This Revenue Procedure is effective February 7, 1977.