Limitation on Use of Cash Method of Accounting -- Temporary and Proposed Regulations Under Section 448

 [4830-01]

 ACTION: Temporary regulations.

 SUMMARY: This document contains amendments to the temporary regulations under section 448 of the Internal Revenue Code of 1986 (the "Code"), relating to the limitation on the use of the cash receipts and disbursements method of accounting ("cash method"). Specifically, the regulations provide guidance to taxpayers that fail to change from the cash method in accordance with the provisions of section 448 and the regulations thereunder. The text of the amendments set forth in this document also serves as the text of the proposed regulations cross-referenced in the Notice of Proposed Rulemaking in the Proposed Rules section of this issue of the Federal Register.

 EFFECTIVE DATE: The amendments are effective for taxable years beginning after December 31, 1986.

 FOR FURTHER INFORMATION CONTACT: James A. Orefice, 202-566-3637, not a toll-free call.

SUPPLEMENTARY INFORMATION:

PAPERWORK REDUCTION ACT

The amendments are being issued without prior notice and public procedure pursuant to the Administrative Procedure Act (5 U.S.C. 553). For this reason, the collection of information requirements contained in this document have been reviewed and, pending receipt and evaluation of public comments, approved by the Office of Management and Budget ("OMB") under control number 1545-1147. The estimated annual burden per respondent or recordkeeper varies from 30 minutes to 90 minutes.

 These estimates are an approximation of the average time expected to be necessary for a collection of information. They are based on such information as is available to the Internal Revenue Service. Individual respondents may require greater or less time, depending on individual circumstances.

 For further information concerning these collections of information, where to submit comments on these collections of information, the accuracy of the estimated burden, and suggestions for reducing this burden, please refer to the preamble to the cross-reference notice of proposed rulemaking published elsewhere in this issue of the Federal Register.

BACKGROUND

 This document contains amendments to the Temporary Income Tax Regulations (26 CFR Part 1) under section 448 of the Code. These amendments would conform the regulations to section 801(a) of the Tax Reform Act of 1986 (Pub. L. 99-514, 100 Stat. 2345) and are issued under the authority contained in section 7805 of the Code (68A Stat. 917; 26 U.S.C. 7805).

NOTICE OF TEMPORARY REGULATIONS

 There is a need for immediate guidance with respect to the provisions contained in this Treasury decision. For this reason, it is impracticable to issue this Treasury decision with notice and public procedure under subsection (b) of section 553 of Title 5 of the United States Code.

EXPLANATION OF PROVISIONS

 Section 448 of the Code generally prohibits the use of the cash method by C corporations, partnerships with a C corporation partner, and tax shelters. In general, section 448 is effective for taxable years beginning after December 31, 1986.

 The Internal Revenue Service has received numerous inquiries from taxpayers that failed to comply with the effective date provisions of section 448. To provide guidance for these taxpayers, section 1.448-1T of the temporary regulations is amended to provide rules under section 448 for voluntary changes in methods of accounting. Generally, the regulations allow such a taxpayer to comply with the provisions of section 448 by amending its federal income tax return for the first taxable year the taxpayer is subject to section 448 (and any subsequent years) if the amended return (or returns) is filed on or before July 8, 1991. Filing an amended return under these regulations does not extend the time prescribed under the Code for filing an amended return.

 The regulations further provide that, if such a taxpayer does not amend its return (or returns) on or before July 8, 1991, the taxpayer must comply with the provisions of section 448 pursuant to the general method change requirements of section 1.446-1(e)(3) (including any applicable administrative procedure that is prescribed under the authority of section 1.446-1(e)(3) after January 7, 1991, specifically for purposes of complying with section 448). Thus, for example, a taxpayer may not use Rev. Proc. 85-36, 1985-2 C.B. 434, or Rev. Proc. 85-37, 1985-2 C.B. 438, to change its method of accounting to comply with the provisions of section 448. Absent issuance of an administrative procedure that is prescribed under section 1.446-1(e)(3) after January 7, 1991, specifically to comply with section 448, a taxpayer must request a change under section 1.446-1(e)(3) subject to any terms and conditions (including the year of change) as may be imposed by the Commissioner. A taxpayer to whom section 448 applies that changes from the cash method by filing Form 3115 after January 7, 1991, will generally be subject to terms and conditions designed to place the taxpayer in a position no more favorable than a taxpayer that timely complied with section 448. A taxpayer to whom section 448 applies that changes from the cash method by filing Form 3115 on or before January 7, 1991 (for a taxable year after the first taxable year the taxpayer is subject to section 448) will be subject to the terms and conditions prescribed by Rev. Proc. 84-74, 1984-2 C.B. 736.

SPECIAL ANALYSES

 It has been determined that these rules are not major rules as defined in Executive Order 12291. Therefore, a Regulatory Impact Analysis is not required. It has also been determined that section 553(b) of the Administrative Procedure Act (5 U.S.C. Chapter 5) and the Regulatory Flexibility Act (5 U.S.C. Chapter 6) do not apply to these regulations, and, therefore, a final Regulatory Flexibility Analysis is not required. Pursuant to section 7805(f) of the Internal Revenue Code, the notice of proposed rulemaking for the regulations was submitted to the Chief Counsel of Advocacy of the Small Business Administration for comment on their impact on small business.

DRAFTING INFORMATION

 The principal author of these amendments to the temporary regulations is James A. Orefice of the Office of Assistant Chief Counsel (Income Tax and Accounting), Internal Revenue Service. However, personnel from other offices of the Internal Revenue Service and Treasury Department participated in developing the regulation, both on matters of substance and style.

LIST OF SUBJECTS

26 CFR 1.441-1 - 1.483-2

Accounting, Deferred compensation plans, Income taxes.

26 CFR Part 602

Reporting and recordkeeping requirements.

ADOPTION OF AMENDMENTS TO THE REGULATIONS

Accordingly, 26 CFR Parts 1 and 602 are amended as follows:

PART 1 -- [AMENDED]

Paragraph 1. The authority for Part 1 continues to read in part:

Authority: 26 U.S.C 7805. * * *

Par. 2. Section 1.448-1T is amended as follows:

1. Paragraph (g)(1) is revised to read as set forth below.

2. Paragraph (g)(2)(i) is revised to read as set forth below.

3. Paragraph (g)(2)(ii)(A) is revised to read as set forth below.

4. A new paragraph (g)(2)(iii) is added to read as set forth below.

5. Paragraph (g)(3)(ii) is revised to read as set forth below.

6. Paragraph (h)(2) is revised to read as set forth below.

7. Paragraph (h)(3)(i) is revised to read as set forth below.

8. A new paragraph (h)(4) is added to read as set forth below.

SECTION 1.448-1T LIMITATION ON THE USE OF THE CASH RECEIPTS AND DISBURSEMENTS METHOD OF ACCOUNTING (TEMPORARY).

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(g) TREATMENT OF ACCOUNTING METHOD CHANGE AND TIMING RULES FOR SECTION 481(a) ADJUSTMENT -- (1) TREATMENT OF CHANGE IN ACCOUNTING METHOD. Notwithstanding any other procedure published prior to January 7, 1991, concerning changes from the cash method, any taxpayer to whom section 448 applies must change its method of accounting in accordance with the provisions of this paragraph (g) and paragraph (h) of this section. In the case of any taxpayer required by this section to change its method of accounting for any taxable year, the change shall be treated as a change initiated by the taxpayer. The adjustments required under section 481(a) with respect to the change in method of accounting of such a taxpayer shall not be reduced by amounts attributable to taxable years preceding the Internal Revenue Code of 1954. Paragraph (h)(2) of this section provides procedures under which a taxpayer may change to an overall accrual method of accounting for the first taxable year the taxpayer is subject to this section ("first section 448 year"). If the taxpayer complies with the provisions of paragraph (h)(2) of this section for its first section 448 year, the change shall be treated as made with the consent of the Commissioner. Paragraph (h)(3) of this section provides procedures under which a taxpayer may change to other than an overall accrual method of accounting for its first section 448 year. Unless the taxpayer complies with the provisions of paragraph (h)(2) or (h)(3) of this section for its first section 448 year, the taxpayer must comply with the provisions of paragraph (h)(4) of this section. See paragraph (h) of this section for rules to effect a change in method of accounting.

(2) TIMING RULES FOR SECTION 481(a) ADJUSTMENT -- (i) IN GENERAL. Except as otherwise provided in paragraphs (g)(2)(ii) and (g)(3) of this section, a taxpayer required by this section to change from the cash method must take the section 481 (a) adjustment into account ratably (beginning with the year of change) over the shorter of --

(A) The number of taxable years the taxpayer used the cash method, or

(B) 4 taxable years, provided the taxpayer complies with the provisions of paragraph (h)(2) or (h)(3) of this section for its first section 448 year.

(ii) HOSPITAL TIMING RULES -- (A) IN GENERAL. In the case of a hospital that is required by this section to change from the cash method, the section 481 (a) adjustment shall be taken into account ratably (beginning with the year of change) over 10 years, provided the taxpayer complies with the provisions of paragraph (h)(2) or (h)(3) of this section for its first section 448 year.

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(iii) UNTIMELY CHANGE IN METHOD OF ACCOUNTING TO COMPLY WITH THIS SECTION. Unless a taxpayer (including a hospital and a cooperative) required by this section to change from the cash method complies with the provisions of paragraph (h)(2) or (h)(3) of this section for its first section 448 year within the time prescribed by those paragraphs, the taxpayer must take the section 481(a) adjustment into account under the provisions of any applicable administrative procedure that is prescribed by the Commissioner after January 7, 1991, specifically for purposes of complying with this section. Absent such an administrative procedure, a taxpayer must request a change under section 1.446-1(e)(3) and shall be subject to any terms and conditions (including the year of change) as may be imposed by the Commissioner. A taxpayer to whom section 448 applies that changes from the cash method by filing Form 3115 after January 7, 1991, will generally be subject to terms and conditions designed to place the taxpayer in a position no more favorable than a taxpayer that timely complied with this section.

(3) * * *

(ii) COOPERATIVES. Notwithstanding paragraph (g)(2)(i) of this section, in the case of a cooperative (within the meaning of section 1381(a)) that is required by this section to change from the cash method, the entire section 481(a) adjustment may, at the cooperative's option, be taken into account in the year of change, provided the cooperative complies with the provisions of paragraph (h)(2) or (h)(3) of this section for its first section 448 year.

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(h) * * *

(2) AUTOMATIC RULE FOR CHANGES TO AN OVERALL ACCRUAL METHOD -- (i) TIMELY CHANGES IN METHOD OF ACCOUNTING. Notwithstanding any other available procedures to change to the accrual method of accounting, a taxpayer to whom paragraph (h) of this section applies who desires to make a change to an overall accrual method for its first section 448 year must make that change under the provisions of this paragraph (h)(2). A taxpayer changing to an overall accrual method under this paragraph (h)(2) must file a current Form 3115 by the time prescribed in paragraph (h)(2)(ii). In addition, the taxpayer must set forth on a statement accompanying the Form 3115 the period over which the section 481(a) adjustment will be taken into account and the basis for such conclusion. Moreover, the taxpayer must type or legibly print the following statement at the top of page 1 of the Form 3115: "Automatic Change to Accrual Method -- Section 448." The consent of the Commissioner to the change in method of accounting is granted to taxpayers who change to an overall accrual method under this paragraph (h)(2). See paragraph (g)(2)(i), (g)(2)(ii), or (g)(3) of this section, whichever is applicable, for rules to account for the section 481(a) adjustment.

(ii) TIME AND MANNER FOR FILING FORM 3115 -- (A) IN GENERAL. Except as provided in paragraph (h)(2)(ii)(B) of this section, the Form 3115 required by paragraph (h)(2)(i) must be filed no later than the due date (determined with regard to extensions) of the taxpayer's federal income tax return for the first section 448 year and must be attached to that return.

(B) EXTENSION OF FILING DEADLINE. Notwithstanding paragraph (h)(2)(ii)(A) of this section, the filing of the Form 3115 required by paragraph (h)(2)(i) shall not be considered late if such Form 3115 is attached to a timely filed amended income tax return for the first section 448 year, provided that --

(1) The taxpayer's first section 448 year is a taxable year that begins (or, pursuant to section 1.441-2T(b)(1), is deemed to begin) in 1987, 1988, 1989, or 1990,

(2) The taxpayer has not been contacted for examination, is not before appeals, and is not before a federal court with respect to an income tax issue (each as defined in applicable administrative pronouncements), unless the taxpayer also complies with any requirements for approval in those applicable administrative pronouncements, and

(3) Any amended return required by this paragraph (h)(2)(ii)(B) is filed on or before July 8, 1991. Filing an amended return under this paragraph (h)(2)(ii)(B) does not extend the time for making any other election. Thus, for example, taxpayers that comply with this section by filing an amended return pursuant to this paragraph (h)(2)(ii)(B) may not elect out of section 448 pursuant to paragraph (i)(2) of this section.

(3) CHANGES TO A METHOD OTHER THAN OVERALL ACCRUAL METHOD -- (i) IN GENERAL. A taxpayer to whom paragraph (h) of this section applies who desires to change to a special method of accounting must make that change under the provisions of this paragraph (h)(3), except to the extent other special procedures have been promulgated regarding the special method of accounting. Such a taxpayer includes taxpayers who change to both an accrual method of accounting and a special method of accounting such as a long-term contract method. In order to change an accounting method under this paragraph (h)(3), a taxpayer must submit an application for change in accounting method under the applicable administrative procedures in effect at the time of change, including the applicable procedures regarding the time and place of filing the application for change in method. Moreover, a taxpayer who changes an accounting method under this paragraph (h)(3) must type or legibly print the following statement on the top of page 1 of Form 3115: "Change to a Special Method of Accounting -- Section 448." The filing of a Form 3115 by any taxpayer requesting a change of method of accounting under this paragraph (h)(3) for its taxable year beginning in 1987 will not be considered late if the form is filed with the appropriate office of the Internal Revenue Service on or before the later of: the date that is the 180th day of the taxable year of change; or September 14, 1987. If the Commissioner approves the taxpayer's application for change in method of accounting, the timing of the adjustment required under section 481(a), if applicable, will be determined under the provisions of paragraph (g)(2)(i), (g)(2)(ii), or (g)(3) of this section, whichever is applicable. If the Commissioner denies the taxpayer's application for change in accounting method, or if the taxpayer's application is untimely, the taxpayer must change to an overall accrual method of accounting under the provisions of either paragraph (h)(2) or (h)(4) of this section, whichever is applicable.

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(4) UNTIMELY CHANGE IN METHOD OF ACCOUNTING TO COMPLY WITH THIS SECTION. Unless a taxpayer to whom paragraph (h) of this section applies complies with the provisions of paragraph (h)(2) or (h)(3) of this section for its first section 448 year, the taxpayer must comply with the requirements of section 1.446-1(e)(3) (including any applicable administrative procedure that is prescribed thereunder after January 7, 1991, specifically for purposes of complying with this section) in order to secure the consent of the Commissioner to change to a method of accounting that is in compliance with the provisions of this section. The taxpayer shall be subject to any terms and conditions (including the year of change) as may be imposed by the Commissioner. A taxpayer to whom section 448 applies that changes from the cash method by filing Form 3115 after January 7, 1991, will generally be subject to terms and conditions designed to place the taxpayer in a position no more favorable than a taxpayer that timely complied with this section.

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PART 602 -- OMB CONTROL NUMBERS UNDER THE PAPERWORK REDUCTION ACT

Par. 3. The authority citation for Part 602 continues to read as follows:

Authority: 26 U.S.C. 7805.

Par. 4. Section 602.101 (c) is amended by adding to the table in the appropriate place "section 1.448-1T . . . 1545-1147".