Elections & Extensions - Tricks and traps to watch out for

SECTION 2. BACKGROUND
.01 Section 301.7701-3(a) of the Procedure and Administration Regulations provides in part that a business entity that is not classified as a corporation under § 301.7701-2(b)(1), (3), (4), (5), (6), (7), or (8) (an eligible entity) can elect its classification for federal tax purposes as provided in § 301.7701-3. An eligible entity with at least two members can elect to be classified as either an association (and thus as a corporation under § 301.7701-2(b)(2)) or a partnership, and an eligible entity with a single owner can elect to be classified as an association or to be disregarded as an entity separate from its owner. Section 301.7701-3(b) provides a default classification for an eligible entity that does not file an entity classification election. Thus, an entity classification election is necessary only when an eligible entity chooses to be classified initially as other than its default classification or when an eligible entity chooses to change its classification.

.02 Section 301.7701-3(c)(1)(i) provides the general rules for the time and place for filing an entity classification election. Section 301.7701-3(c)(1)(i) provides that, except as provided in paragraphs (c)(1)(iv) (limitation) or (c)(1)(v) (deemed elections) of § 301.7701-3, an eligible entity may elect to be classified other than as provided under § 301.7701-3(b), or to change its classification, by filing Form 8832, "Entity Classification Election," with the IRS service center designated on Form 8832. An election will not be accepted unless all of the information required by the form and instructions, including the taxpayer identifying number of the entity, is provided on Form 8832. See § 301.6109-1 for rules on applying for and displaying Employer Identification Numbers.

.03 Section 301.7701-3(c)(1)(ii) provides that an eligible entity required to file a federal tax or information return for the taxable year for which an election is made must attach a copy of its Form 8832 to its federal tax or information return for that year. If the entity is not required to file a return for that year, a copy of its Form 8832 must be attached to the federal income tax or information return of any direct or indirect owner of the entity for the taxable year of the owner that includes the date on which the election was effective.

.04 Section 301.7701-3(c)(1)(iii) provides that an election made under § 301.7701-3(c)(1)(i) will be effective on the date specified by the entity on Form 8832 or on the date filed if no such date is specified on the election form. The effective date specified on Form 8832 cannot be more than 75 days prior to the date on which the election is filed and cannot be more than 12 months after the date on which the election is filed. If an election specifies an effective date more than 75 days prior to the date on which the election is filed, it will be effective 75 days prior to the date it was filed. If an election specifies an effective date more than 12 months from the date on which the election is filed, it will be effective 12 months after the date it was filed.

.05 Section 301.7701-3(d)(1) provides in general that a foreign eligible entity’s classification is relevant when its classification affects the liability of any person for federal tax or information purposes.

.06 Under § 301.9100-1(c) the Commissioner may grant a reasonable extension of time to make a regulatory election or certain statutory elections under all subtitles of the Code, except subtitles E, G, H, and I.

.07 Section 301.9100-1(b) defines the term "regulatory election" as an election whose due date is prescribed by a regulation published in the Federal Register, or a revenue ruling, revenue procedure, notice, or announcement published in the Internal Revenue Bulletin. An entity classification election made pursuant to § 301.7701-3(c) is a regulatory election.

.08 The Commissioner has authority under § 301.9100-1 and § 301.9100-3 to grant an extension of time if a taxpayer fails to file a timely election under § 301.7701-3(c). Section 301.9100-3 provides that the Commissioner will grant an extension of time when the taxpayer provides the evidence to establish to the satisfaction of the Commissioner that the taxpayer has acted reasonably and in good faith and the grant of relief will not prejudice the interests of the government.

.09 Rev. Proc. 2002-59, 2002-2 C.B. 615, provides guidance under § 301.7701-3 for entities newly formed under local law to request relief for a late initial classification election filed by the due date for the first federal tax return (excluding extensions) of the entity’s desired classification for the year of the entity’s formation.

SECTION 3. SCOPE
.01 This revenue procedure supersedes Rev. Proc. 2002-59 by extending late entity classification relief to both initial classification elections and changes in classification elections along with extending the time for filing late entity classification elections to within 3 years and 75 days of the requested effective date of the eligible entity’s classification. Thus, the extended filing period no longer is limited, as it was under Rev. Proc. 2002-59, to entities newly formed under local law requesting relief to file an initial classification election and to the due date for the first federal tax return (excluding extensions) of the entity’s desired classification for the year of the entity’s formation. For those entities that satisfy the requirements set forth in Section 4.01, this revenue procedure is the exclusive means for obtaining relief for a late entity classification election and is in lieu of the letter ruling procedure that is used to obtain relief for a late entity classification election under § 301.9100-1 and § 301.9100-3. Accordingly, user fees do not apply to action under this revenue procedure.

.02 An eligible entity may qualify for alternative relief under §301.7701-3(c)(1)(v)(C), which treats an entity as having made a classification election to be treated as an association when it timely elects to be an S corporation under § 1362(a)(1). Also, see Rev. Proc. 2004-48, 2004-2 C.B. 172, and Rev. Proc. 2007-62, 2007-41 I.R.B. 786, or their successors for special rules applicable to late S corporation elections and late entity classification elections.

.03 An entity that does not satisfy the requirements for relief under this revenue procedure may request relief by applying for a letter ruling. Additionally, eligible entities that do not qualify for relief under this revenue procedure, because they do not satisfy all of the requirements set forth in Section 4.01, and that request a letter ruling for late entity classification relief either must include as part of their letter ruling request the affirmative representation in Section 4.04 or an explanation why the entity cannot make the affirmative representation in Section 4.04. The procedural requirements for requesting a letter ruling are described in Rev. Proc. 2009-1, 2009-1 I.R.B. 1 (or its successor).

SECTION 4. RELIEF FOR LATE CLASSIFICATION ELECTIONS
.01 Eligibility for relief. An entity is eligible for relief under Section 4.03 of this revenue procedure for a late classification election if the following requirements are met: (1)(a) the entity failed to obtain its requested classification as of the date of its formation or upon the entity’s classification becoming relevant within the meaning of § 301.7701-3(d) solely because Form 8832 was not filed timely under § 301.7701-3(c)(1)(iii); or (b) the entity failed to obtain its requested change in classification (subject to the limitations of § 301.7701-3(c)(1)(iv)) solely because Form 8832 was not filed timely under § 301.7701-3(c)(1)(iii); and

(2)(a) the eligible entity seeking an extension of time to make an entity classification election has not filed a federal tax or information return for the first year in which the election was intended because the due date has not passed for that year’s federal tax or information return; or

(b) the eligible entity seeking an extension of time to make an entity classification election timely filed all required federal tax returns and information returns consistent with its requested classification for all of the years the entity intended the requested election to be effective and no inconsistent tax or information returns have been filed by or with respect to the entity during any of the taxable years. For changes in an eligible entity’s classification election, consistent filing of returns includes filing returns consistent with the deemed treatment of elective changes under § 301.7701-3(g).

Under this revenue procedure, if the eligible entity is not required to file a federal tax return or information return, each affected person, who is required to file a federal tax return or information return, must have timely filed all such returns consistent with the entity’s requested classification for all of the years the entity intended the requested election to be effective and no inconsistent tax or information returns have been filed during any of the taxable years. Solely for purposes of this section 4.01(2)(b), an entity and an affected person will be treated as having timely filed a required tax or information return if the return is filed within 6 months after its due date, excluding extensions. An indirect owner of an eligible entity (such as a partner in a partnership that holds an interest in the eligible entity) is not an affected person if an entity in which the indirect owner holds a direct or indirect interest would be required to attach a copy of the eligible entity’s Form 8832 to its federal tax or information return in the circumstances described in section 4.01(2)(b)(i) or (ii) . An affected person is either:

(i) with respect to the effective date of the eligible entity’s classification election, a person who would have been required under § 301.7701-3(c)(1)(ii) to attach a copy of the Form 8832 for the eligible entity to its federal tax or information return for the taxable year of the person which includes that date; or

(ii) with respect to any subsequent date after the entity’s requested effective date of the classification election, a person who would have been required under § 301.7701-3(c)(1)(ii) to attach a copy of the Form 8832 for the eligible entity to its federal tax or information return for the person’s taxable year that includes that subsequent date had the election first become effective on that subsequent date; and

(3) the eligible entity has reasonable cause for its failure to timely make the entity classification election; and

(4) 3 years and 75 days from the requested effective date of the eligible entity’s classification election have not passed.

.02 Procedural requirements for requesting relief. Within 3 years and 75 days from the requested effective date of the eligible entity’s classification election, the eligible entity must file with the applicable IRS service center (determined in accordance with the instructions to Form 8832) a completed Form 8832, signed in accordance with § 301.7701-3(c)(2). The Form 8832 must indicate that it is being filed pursuant to this revenue procedure in accordance with the Form 8832 and accompanying instructions. The Form 8832 must include both a declaration that the elements required for relief in Section 4.01 of this revenue procedure have been satisfied and a statement explaining the reason for the failure to file a timely entity classification election (referred to as "the reasonable cause statement"). (Until Form 8832 is modified to include the declaration contained in this revenue procedure and space for a reasonable cause statement, the eligible entity should write "Filed Pursuant to Rev. Proc. 2009-39(sic)" { ed. (preferably in red ) and it should actually say: "Filed Pursuant to Rev. Proc. 2009-41" } at the top of Form 8832 and attach both the declaration and the reasonable cause statement to its Form 8832 that is filed with the applicable IRS service center. The declaration and reasonable cause statement must be accompanied by a dated declaration, signed by an authorized representative of the eligible entity and the affected person(s), if any, which states: "Under penalties of perjury, I (we) declare that I (we) have examined this election, including accompanying documents, and, to the best of my (our) knowledge and belief, the election contains all the relevant facts relating to the election, and such facts are true, correct, and complete." The individual or individuals who sign must have personal knowledge of the facts and circumstances related to the election. The copy of the Form 8832 that is required under §301.7701-3(c)(1)(ii) to be attached to either the eligible entity’s or the affected person’s return does not need the writing at the top of the Form 8832 or the attachments described in this section 4.02.)

.03 Relief for late entity classification elections. Upon receipt of a completed Form 8832 requesting relief under Section 4.01 of this revenue procedure, the IRS service center will determine whether the requirements for granting the late entity classification election have been satisfied and will notify the entity of the result of its determination. An entity receiving relief under this revenue procedure is treated as having made a timely entity classification election as of the requested effective date of the election.

.04 Eligible entities that do not meet all of the eligibility requirements under Section 4.01 of this revenue procedure. Eligible entities requesting a letter ruling because they do not meet all of the eligibility requirements of Section 4.01 of this revenue procedure must include either the following representation as part of the entity’s request for a letter ruling or an explanation regarding why they do not qualify to do so: "All required U.S. tax and information returns of the entity (or, if the entity was not required to file any such returns under the desired classification, then all required U.S. tax and information returns of each affected person as defined in Section 4.02 of Rev. Proc. 2009-39) were filed timely or within 6 months of the due date of the respective return (excluding extensions) as if the entity classification election had been in effect on the requested date. No U.S. tax or information returns were filed inconsistently with those described in the prior sentence."

SECTION 5. EFFECTIVE DATE
.01 In general. Except as provided in section 5.02, this revenue procedure is effective September 28, 2009, the date of publication of this revenue procedure in the Internal Revenue Bulletin. This revenue procedure applies to requests pending with the IRS service center pursuant to Rev. Proc. 2002-59 on September 28, 2009, and to requests received thereafter. It also applies to all ruling requests pending in the national office on September 28, 2009, and to requests for relief received thereafter.

.02 Transition rule for pending letter ruling requests. If an entity has filed a request for a letter ruling seeking relief for a late entity classification election and that letter ruling request is pending in the national office on September 28, 2009, the entity may rely on this revenue procedure, withdraw that letter ruling request and receive a refund of its user fee. However, the national office will process letter ruling requests pending on September 28, 2009, unless, prior to the earlier of November 12, 2009, or the issuance of the letter ruling, the entity notifies the national office that it will rely on this revenue procedure and withdraw its letter ruling request.

SECTION 7. PAPERWORK REDUCTION ACT
The collections of information contained in this revenue procedure have been reviewed and approved by the Office of Management and Budget (OMB) in accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 3507(d)) under control number 1545-1771.

The collection of information in these regulations is in Sections 4.02 and 4.04 of this revenue procedure. The information will help the IRS to determine if an eligible entity meets the requirements of Section 4.01 of this revenue procedure. The collection of information is required to obtain permission to file a late entity classification election. The information will be reported on Form 8832 or submitted as part of a letter ruling request. The time needed to complete and file a letter ruling request or a Form 8832 will vary depending on individual circumstances. The estimated burden for eligible entities filing a letter ruling request or Form 8832 are included in the estimates shown in the Paperwork Reduction Act of the annually published letter ruling revenue procedure and the instructions for Form 8832 respectively. An agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless the collection of information displays a valid control number.

Books or records relating to a collection of information must be retained as long as their contents may become material in the administration of any internal revenue law. Generally, tax returns and tax return information are confidential, as required by 26 U.S.C. 6103.

Extensions of Time to Make Elections:

DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Parts 301 and 602
[TD 8680]
RIN 1545-AU41
Extensions of Time to Make Elections
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Temporary regulations.
SUMMARY: This document contains temporary regulations concerning extensions of time for making certain elections under the Internal Revenue Code (Code). The regulations provide the standards that the Commissioner will use to grant taxpayers extensions of time for making these elections. The text of these temporary regulations also serves as the text of the proposed regulations set forth in the notice of proposed rulemaking on this subject in the Proposed Rules section of this issue of the Federal Register.

DATES: These regulations are effective June 27, 1996.    For dates of applicability, see §301.9100-1T(h) of these regulations.
FOR FURTHER INFORMATION CONTACT: Robert A. Testoff at (202) 622-4960 (not a toll-free number).

SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
     These regulations 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 contained in these regulations has been reviewed and, pending receipt and evaluation of public comments, approved by the Office of Management and Budget under control number 1545-1488.
Responses to this collection of information are required to obtain an extension of time for making an election.
     An agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless the collection of information displays a valid control number.
     For further information concerning this collection of information, where to submit comments on the collection of information and the accuracy of the estimated burden, and suggestions for reducing this burden, please refer to the preamble to the cross-referencing notice of proposed rulemaking published in the Proposed Rules section of this issue of the Federal Register.
     Books or records relating to a collection of information must be retained as long as their contents may become material in the administration of any internal revenue law. Generally, tax returns and tax return information are confidential, as required by 26 U.S.C. 6103. Background
     This document contains temporary regulations amending the Regulations on Procedure and Administration (26 CFR part 301) concerning extensions of time for making certain elections. The regulations provide the standards that the Commissioner will use to grant taxpayers extensions of time for making these elections.
These standards provide relief to taxpayers who reasonably and in good faith fail to make a timely election when granting relief will not prejudice the interests of the government. The regulations provide a means by which taxpayers can be in the same position they would have been in had they made their elections in a timely fashion.
Explanation of Provisions
     These temporary regulations provide the standards the Commissioner will use to determine whether to grant an extension of time to make an election when the deadline for making the election is prescribed by regulation, revenue ruling, revenue procedure, notice, or announcement published in the Federal Register or the Internal Revenue Bulletin (regulatory election). Under section 6081(a), these regulations also provide an automatic extension of time to make an election when the deadline for making the election is prescribed by statute (statutory election) and the deadline for making the election is the due date of the return or the due date of the return including extensions. These regulations adopt and revise the standards for relief provided in Rev. Proc. 92-85, 1992-2 C.B. 490.
Automatic Extensions
     Rev. Proc. 92-85 provides an automatic 12-month extension for certain regulatory elections listed in Appendix A of that revenue procedure. The temporary regulations continue the automatic 12-month extension and update the list of eligible regulatory elections.

     Rev. Proc. 92-85 also provides an automatic 6-month extension for statutory elections when the deadline for making the election is prescribed as the due date of the return or the due date of the return including extensions. The temporary regulations expand the automatic 6-month extension to include regulatory elections.

Other Extensions
     Rev. Proc. 92-85 provides relief for certain regulatory elections that do not qualify for relief under the automatic extensions. Rev. Proc. 92-85 requires a taxpayer to demonstrate that (1) it acted reasonably and in good faith and (2) granting relief will not prejudice the interests of the government. The temporary regulations continue to provide extensions for such regulatory elections upon a showing of reasonable action and good faith and no prejudice to the interests of the government.
     The temporary regulations adopt the standards for reasonable action and good faith in Rev. Proc. 92-85. The regulations provide that a taxpayer is deemed to have acted reasonably and in good faith if: (1) the taxpayer applies for relief before the failure to make the regulatory election is discovered by the IRS; (2) the taxpayer inadvertently failed to make the election because of intervening events beyond its control; (3) the taxpayer failed to make the election because after exercising reasonable diligence the taxpayer was unaware of the necessity for the election; (4) the taxpayer reasonably relied on written advice of the IRS; or (5) the taxpayer relied on a qualified tax professional, including a professional employed by the taxpayer, and the professional failed to make or advise the taxpayer to make the election. However, a taxpayer is deemed to have not acted reasonably and in good faith if: (1) the taxpayer is requesting relief for an election to alter a return position for which an accuracy-related penalty could have been imposed under section 6662; (2) the taxpayer was fully informed of the required election and related tax consequences and chose not to file the election; or (3) the taxpayer uses hindsight in requesting relief.

     The temporary regulations adopt the standards for prejudice to the interests of the government in Rev. Proc. 92-85. The regulations provide that the interests of the government are deemed to be prejudiced if granting relief would result in a taxpayer having a lower tax liability than the taxpayer would have had if the regulatory election had been timely made. In addition, the interests of the government are ordinarily deemed to be prejudiced if the tax year in which the election should have been made or any affected tax years are closed by the statute of limitations.

Accounting Method and Period Elections
     Rev. Proc. 92-85 provides limited relief (ordinarily not to exceed 90 days from the deadline for filing Form 3115, Application for Change in Accounting Method) for requests to change an accounting method subject to the procedure described in §1.446-1(e)(3)(i) (requiring the advance written consent of the Commissioner). The temporary regulations continue this limited relief. Rev. Proc. 92-85 provides an automatic 12-month extension for the election to use the last-in, first-out (LIFO) inventory method under section 472 and also provides relief for the section 472 election beyond the automatic 12-month extension.
Rev. Proc. 92-85 is otherwise inapplicable to accounting method regulatory elections, except for three specific elections listed in Appendix B of that revenue procedure.
     The temporary regulations provide relief for all accounting method regulatory elections. For example, relief will now be available for elections under sections 197 (amortization of goodwill and certain other intangibles) and 468A (special rules for nuclear decommissioning costs).
       The temporary regulations provide additional rules regarding what constitutes prejudice to the interests of the government for accounting method regulatory elections. The temporary regulations provide that the interests of the government are deemed to be prejudiced except in unusual and compelling circumstances if: (1) the election requires an adjustment under section 481(a); (2) the taxpayer is under examination, requests relief to change from an impermissible method of accounting, and granting relief will provide the taxpayer a more favorable method of accounting or more favorable terms and conditions than the taxpayer would receive if the change is made as part of the examination; or (3) the election provides a more favorable method of accounting or more favorable terms and conditions if the election is made by a certain date or taxable year.

Rev. Proc. 92-85 provides an automatic 12-month extension for elections to use other than the required taxable year under section 444.

Rev. Proc. 92-85 also provides limited relief (ordinarily not to exceed 90 days from the deadline for filing Form 1128, Application to Adopt, Change, or Retain a Tax Year) for accounting period regulatory elections subject to Rev. Proc. 87-32, 1987-2 C.B. 396. Rev. Proc. 92-85 is otherwise inapplicable to accounting period regulatory elections. The temporary regulations extend the limited relief for elections subject to Rev. Proc. 87-32 to all other accounting period regulatory elections except for the section 444 election, and provide relief for the section 444 election beyond the automatic 12-month extension.

Effect on other documents
     Rev. Proc. 92-85, 1992-2 C.B. 490, as modified and clarified by Rev. Proc. 93-28, 1993-2 C.B. 344, is obsolete as of June 27, 1996.
     Rev. Proc. 92-20, 1992-1 C.B. 685, is modified as of June 27, 1996, to the extent that the provisions of this regulation apply to applications for relief with respect to requests to change an accounting method subject to the procedures of Rev. Proc. 92-20.
     Rev. Proc. 87-32, 1987-2 C.B. 396, is modified as of June 27, 1996, to the extent that the provisions of this regulation apply to applications for relief with respect to requests to change an accounting period subject to the procedures of Rev. Proc. 87-32.
Special Analyses
     It has been determined that this Treasury decision is not a significant regulatory action as defined in EO 12866. Therefore, a regulatory assessment 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 Regulatory Flexibility Analysis is not required.
Pursuant to section 7805(f) of the Internal Revenue Code, these temporary regulations will be submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on their impact on small businesses.
Drafting Information
     The principal author of these regulations is Robert A. Testoff of the Office of Assistant Chief Counsel (Income Tax and Accounting). However, other personnel from the IRS and Treasury Department participated in their development.
List of Subjects
26 CFR Part 301
     Employment taxes, Estate taxes, Excise taxes, Gift taxes, Income taxes, Penalties, Reporting and recordkeeping requirements.
26 CFR Part 602
     Reporting and recordkeeping requirements.
Adoption of Amendments to the Regulations
     Accordingly, 26 CFR parts 301 and 602 are amended as follows:
PART 301--PROCEDURE AND ADMINISTRATION
     Paragraph 1. The authority citation for part 301 is amended by adding entries in numerical order to read as follows:
     Authority: 26 U.S.C. 7805 * * *
Section 301.9100-1T also issued under 26 U.S.C. 6081;
Section 301.9100-2T also issued under 26 U.S.C. 6081;
Section 301.9100-3T also issued under 26 U.S.C. 6081; * * *
     Par. 2. Sections 301.9100-1T through 301.9100-3T are added to read as follows:

§ 301.9100-1T Extensions of time to make elections (temporary). [Removed]
     (a) - (c) [Reserved].
     (d) Introduction. The regulations under this section and §§301.9100-2T through 301.9100-3T provide the standards the Commissioner will use to determine whether to grant an extension of time to make a regulatory election. The regulations under this section and §§301.9100-2T through 301.9100-3T also provide an automatic extension of time to make certain statutory elections. An extension of time is available for elections that a taxpayer is otherwise eligible to make and the granting of an extension of time is not a determination that the taxpayer is otherwise eligible to make the election. Section 301.9100-2T provides automatic extensions of time for making regulatory and statutory elections when the deadline for making the election is the due date of the return or the due date of the return including extensions. Section 301.9100-3T provides extensions of time for making regulatory elections that do not meet the requirements of §301.9100-2T.

     (e) Terms. The following terms have the meanings provided below:
      Election includes an application for relief in respect of tax; a request to adopt, change, or retain an accounting method or accounting period; but does not include an application for an extension of time for filing a return under section 6081.

     Regulatory election means an election whose deadline is prescribed by a regulation published in the Federal Register, or a revenue ruling, revenue procedure, notice, or announcement published in the Internal Revenue Bulletin.

     Statutory election means an election whose deadline is prescribed by statute.

     Taxpayer means any person within the meaning of section 7701(a)(1).

     (f) General standards for relief. The Commissioner in the Commissioner's discretion may grant a reasonable extension of time to make a regulatory election, or a statutory election (but no more than 6 months except in the case of a taxpayer who is abroad), under all subtitles of the Internal Revenue Code except subtitles E, G, H, and I, provided the taxpayer demonstrates to the satisfaction of the Commissioner that--
     (1) The taxpayer acted reasonably and in good faith; and
     (2) Granting relief will not prejudice the interests of the government.
     (g) Exceptions. Notwithstanding the provisions of paragraph (f) of this section, an extension of time will not be granted--
     (1) For elections under section 4980A(f)(5);
     (2) For elections required to be made prior to November 20, 1970, in the case of an election--
     (i) Required to be made in or with the taxpayer's original
income tax return;
     (ii) Required to be exercised by filing a claim for credit or refund, unless the election is required to be exercised on or before a date that precedes the date of expiration of the period of limitations provided in section 6511;
     (iii) Required to be filed in a petition to the Tax Court;
     (iv) To change a previous election;
     (v) To change an accounting method as described in §§1.77-1 of this chapter and 1.446-1 of this chapter;
     (vi) To change an accounting period as described in §1.442-1 of this chapter; or
     (vii) To change the method of treating bad debts as described in §1.166-1 of this chapter; or
     (3) For elections that are expressly excepted from relief or where alternative relief is provided by a statute, a regulation published in the Federal Register, or a revenue ruling, revenue procedure, notice, or announcement published in the Internal Revenue Bulletin.
     (h) Effective dates. In general, this section and §§301.9100-2T through 301.9100-3T are effective for all requests for relief being considered by the IRS on June 27, 1996, and for all requests for relief submitted on or after June 27, 1996.
However, the automatic 12-month extension and the automatic 6-month extension provided in §301.9100-2T are effective for elections whose due dates are on or after June 27, 1996.

§ 301.9100-2T Automatic extensions (temporary). [Removed]
     (a) Automatic 12-month extension--(1) In general. An automatic extension of 12 months from the original deadline for making a regulatory election is granted to make elections described in paragraph (a)(2) of this section provided the taxpayer takes corrective action as defined in paragraph (c) of this section within that 12-month extension period.
     (2) Elections eligible for automatic 12-month extension. The following regulatory elections are eligible for the automatic 12-month extension described in paragraph (a)(1) of this section--
     (i) The election to use other than the required taxable year under section 444;
     (ii) The election to use the last-in, first-out (LIFO) inventory method under section 472;
     (iii) The 15-month rule for filing an exemption application for a section 501(c)(9), 501(c)(17), or 501(c)(20) organization under section 505;
     (iv) The 15-month rule for filing an exemption application for a section 501(c)(3) organization under section 508;
     (v) The election to be treated as a homeowners association under section 528;
     (vi) The election to adjust basis on partnership transfers and distributions under section 754;
     (vii) The estate tax election to specially value qualified real property (where the IRS has not yet begun an examination of the filed return) under section 2032A(d)(1);
     (viii) The chapter 14 gift tax election to treat a qualified payment right as other than a qualified payment under section 2701(c)(3)(C)(i); and
     (ix) The chapter 14 gift tax election to treat any distribution right as a qualified payment under section
2701(c)(3)(C)(ii).
     (b) Automatic 6-month extension. An automatic extension of 6 months from the due date of a return excluding extensions is granted to make regulatory or statutory elections whose deadlines are prescribed as the due date of the return or the due date of the return including extensions in the case of a taxpayer that timely filed its return for the year the election should have been made, provided the taxpayer takes corrective action as defined in paragraph (c) of this section within that 6-month extension period. This extension does not apply, however, to regulatory or statutory elections that must be made by the due
date of the return excluding extensions.
     (c) Corrective action. For purposes of this section, corrective action means filing an original or an amended return for the year the regulatory or statutory election should have been made and attaching the appropriate form or statement for making the election. For those elections not required to be filed with a return, corrective action means taking the steps required to file the election in accordance with the statute, the regulation published in the Federal Register, or the revenue ruling, revenue procedure, notice, or announcement published in the Internal Revenue Bulletin. Taxpayers who make an election under an automatic extension (and all taxpayers whose tax liability would be affected by the election) must report their income in a manner that is consistent with the election and comply with all other requirements for making the election for the year the election should have been made and for all affected years; otherwise, the Service may invalidate the election.
     (d) Procedural requirements. Any return, statement of election, or other form of filing that must be made to obtain an automatic extension must provide the following statement at the top of the document: "FILED PURSUANT TO § 301.9100-2T". Any filing made to obtain an automatic extension must be sent to the same address that the filing to make the election would have been sent had the filing been timely made. No request for a letter ruling is required to obtain an automatic extension. Accordingly, user fees do not apply to taxpayers taking corrective action to obtain an automatic extension.
     (e) The following example illustrates the rules of this section:
     Example. Taxpayer A fails to make a certain election when filing A's 1996 income tax return on March 17, 1997, the due date of the return. This election does not affect the tax liability of any other taxpayer. The applicable regulation requires that the election be made by attaching the appropriate form to a timely filed return including extensions. In accordance with paragraphs (b) and (c) of this section, A may make the regulatory election by filing an amended return with the appropriate form by September 15, 1997 (6 months from the March 17, 1997, due date).

§ 301.9100-3T Other extensions (temporary). [Removed]
     (a) In general. Requests for extensions of time for regulatory elections that do not meet the requirements of §301.9100-2T must be made under the rules of this section.
Requests for relief subject to this section will be granted when the taxpayer provides the evidence (including affidavits described in paragraph (e) of this section) to establish that the taxpayer acted reasonably and in good faith, and granting relief will not prejudice the interests of the government.
     (b) Reasonable action and good faith--(1) In general.
Except as provided in paragraphs (b)(3)(i) through (iii) of this section, a taxpayer is deemed to have acted reasonably and in good faith if the taxpayer--
     (i) Requests relief under this section before the failure to make the regulatory election is discovered by the IRS;
     (ii) Inadvertently failed to make the election because of intervening events beyond the taxpayer's control;
     (iii) Failed to make the election because, after exercising reasonable diligence (taking into account the taxpayer's experience and the complexity of the return or issue), the taxpayer was unaware of the necessity for the election;
      (iv) Reasonably relied on the written advice of the IRS; or
      (v) Reasonably relied on a qualified tax professional, including a tax professional employed by the taxpayer, and the tax professional failed to make, or advise the taxpayer to make,
the election.
     (2) Reasonable reliance on a qualified tax professional. For purposes of this paragraph (b), a taxpayer will not be considered to have reasonably relied on a qualified tax professional if the taxpayer knew or should have known that the professional was not--
     (i) Competent to render advice on the regulatory election; or
    (ii) Aware of all relevant facts.
    (3) Taxpayer deemed to have not acted reasonably or in good faith. For purposes of this paragraph (b), a taxpayer is deemed to have not acted reasonably and in good faith if the taxpayer--
    (i) Seeks to alter a return position for which an accuracy-related penalty has been or could be imposed under section 6662 at the time the taxpayer requests relief (taking into account any qualified amended return filed within the meaning of §1.6664-2(c)(3)) of this chapter and the new position requires or permits a regulatory election for which relief is requested;
    (ii) Was fully informed of the required election and related tax consequences, but chose not to file the election; or
    (iii) Uses hindsight in requesting relief. If specific facts have changed since the original deadline for making the election that make the election advantageous to a taxpayer, the IRS will not ordinarily grant relief. In such a case, the IRS will grant relief only when the taxpayer provides strong proof that the taxpayer's decision to seek relief did not involve hindsight.
    (c) Prejudice to the interests of the government--(1) In general--(i) Lower tax liability. The interests of the
government are prejudiced if granting relief would result in a taxpayer having a lower tax liability in the aggregate for all years to which the regulatory election applies than the taxpayer would have had if the election had been timely made (taking into account the time value of money). Similarly, if the tax consequences of more than one taxpayer are affected by the election, the government's interests are prejudiced if extending the time for making the election may result in the affected taxpayers, in the aggregate, having a lower tax liability than if the election had been timely made.
    (ii) Closed years. The interests of the government are ordinarily prejudiced if the tax year in which the regulatory election should have been made or any tax years that would have been affected by the election had it been timely made are closed by the period of limitations on assessment under section 6501(a) before the taxpayer's receipt of a ruling granting relief under this section. The IRS may condition a grant of relief on the taxpayer providing the IRS with a statement from an independent auditor (other than an auditor providing an affidavit pursuant to paragraph (e)(3) of this section) certifying that the requirements of paragraph (c)(1)(i) of this section are satisfied.
    (2) Special rules for accounting method regulatory elections. The interests of the government are deemed to be prejudiced except in unusual and compelling circumstances if the accounting method regulatory election is--
    (i) Subject to the procedure described in §1.446-1(e)(3)(i) of this chapter (requiring the advance written consent of the Commissioner), and the request for relief under this section is filed more than 90 days after the deadline for filing the Form 3115, Application for Change in Accounting Method;
    (ii) Not an election described in paragraph (c)(2)(i) of this section and requires an adjustment under section 481(a) (or would require an adjustment under section 481(a) if the taxpayer changed to the method of accounting for which relief is requested in a taxable year subsequent to the taxable year the election should have been made);
    (iii) Not an election described in paragraph (c)(2)(i) of this section, the taxpayer is under examination and requests relief under this section to change from an impermissible method of accounting, and granting relief will provide the taxpayer a more favorable method of accounting or more favorable terms and conditions than the taxpayer would receive if the change from the impermissible method is made as part of the examination; or
    (iv) Not an election described in paragraph (c)(2)(i) of this section and the election provides a more favorable method of accounting or more favorable terms and conditions if the election is made by a certain date or taxable year.
    (3) Special rules for accounting period regulatory elections. The interests of the government are deemed to be prejudiced except in unusual and compelling circumstances if an election is an accounting period regulatory election (other than the election to use other than the required taxable year under section 444) and the request for relief is filed more than 90 days after the deadline for filing the Form 1128, Application to Adopt, Change, or Retain a Tax Year (or other required statement).
    (d) Effect of amended returns--(1) Second examination under section 7605(b). Taxpayers requesting and receiving an extension of time under this section waive any objections to a second examination under section 7605(b) for the issue(s) that is the subject of the relief request and any correlative adjustments.
    (2) Suspension of the period of limitations under section 6501(a). A request for relief under this section does not suspend the period of limitations on assessment under section 6501(a). Thus, for relief to be granted, the IRS may require the taxpayer to consent under section 6501(c)(4) to an extension of the period of limitations on assessment for the tax year in which the regulatory election should have been made and any tax years that would have been affected by the election had it been timely made.
    (e) Procedural requirements--(1) In general. Requests for relief under this section must provide evidence that satisfies the requirements in paragraphs (b) and (c) of this section, and must provide additional information as required by this paragraph (e).
    (2) Affidavit and declaration from taxpayer. The taxpayer, or the individual who acts on behalf of the taxpayer with respect to tax matters, must submit a detailed affidavit describing the events that led to the failure to make a valid regulatory election and to the discovery of the failure. When the taxpayer relied on a qualified tax professional for advice, the taxpayer's affidavit must describe the engagement and responsibilities of the professional as well as the extent to which the taxpayer relied on the professional. The affidavit must be accompanied by a dated declaration, signed by the taxpayer, which states: "Under
penalties of perjury, I declare that, to the best of my knowledge and belief, the facts presented herein are true, correct, and complete." The individual who signs for an entity must have personal knowledge of the facts and circumstances at issue.
    (3) Affidavits and declarations from other parties. The taxpayer must submit detailed affidavits from the individuals having knowledge or information about the events that led to the failure to make a valid regulatory election and to the discovery of the failure. These individuals must include the taxpayer's income tax return preparer, any individual (including an employee of the taxpayer) who made a substantial contribution to the preparation of the return, and any accountant or attorney, knowledgeable in tax matters, who advised the taxpayer with regard to the election. An affidavit must describe the engagement and responsibilities of the individual as well as the advice that the individual provided to the taxpayer. Each affidavit must include the name, current address, and taxpayer identification number of the individual, and be accompanied by a dated declaration, signed by the individual, which states: "Under penalties of perjury, I declare that, to the best of my knowledge and belief, the facts presented herein are true, correct, and complete."
    (4) Other Information. The request for relief filed under this section must also contain the following information--
    (i) The taxpayer must state whether the taxpayer's return(s) for the tax year in which the regulatory election should have been made or any tax years that would have been affected by the election had it been timely made is being examined by a district director, or is being considered by an appeals office or a federal court. The taxpayer must notify the IRS office considering the request for relief if the IRS starts an examination of any such return while the taxpayer's request for relief is pending;
    (ii) The taxpayer must state when the applicable return, form, or statement used to make the election was required to be filed and when it was actually filed;
    (iii) The taxpayer must submit a copy of any documents that refer to the election;
    (iv) When requested, the taxpayer must submit a copy of the taxpayer's income tax return for any taxable year for which the taxpayer requests an extension and any return affected by the
election; and
    (v) When applicable, the taxpayer must submit a copy of the income tax returns of other taxpayers affected by the election.
    (5) Filing instructions. A request for relief under this section is a request for a letter ruling. Requests for relief should be submitted in accordance with the applicable procedures for requests for a letter ruling and must be accompanied by the applicable user fee.
    (f) Examples. The following examples illustrate the provisions of this section:
    Example 1. Taxpayer discovers own error. Taxpayer A prepares A's 1996 income tax return. A is unaware that a particular regulatory election is available to report a transaction in a particular manner. A files the 1996 return without making the election and reporting the transaction in a different manner. In 1998, A hires a qualified tax professional to prepare A's 1998 return. The professional discovers that A
did not make the election. A promptly files for relief in accordance with this section. Assuming paragraphs (b)(3)(i) through (iii) of this section do not apply, A is deemed to have acted reasonably and in good faith.

    Example 2. Reliance on qualified tax professional. Taxpayer B hires a qualified tax professional to advise B on preparing B's 1996 income tax return and provides the professional with all the information requested. The professional fails to advise B that a regulatory election is necessary in order for B to report income on B's 1996 return in a particular manner. Nevertheless, B reports this income in a manner that is consistent with having made the election. In 1999, during the examination of the 1996 return by the IRS, the examining agent discovers that the election has not been filed. B promptly files for relief in accordance with this section, including attaching an affidavit from B's professional stating that the professional failed to advise B that the election was necessary. Assuming paragraphs (b)(3)(i) through (iii) of this section do not apply, B is deemed to have acted reasonably and in good faith.

    Example 3. Accuracy-related penalty. Taxpayer C reports income on its 1996 income tax return in a manner that contravenes a statutory provision. C was aware of the statutory provision that prohibited the manner in which C reported this income, but did not provide adequate disclosure of the return position within the meaning of §1.6662-3(c) of this chapter. In 1999, during the examination of the 1996 return, the IRS raises an issue regarding the reporting of this income on C's return. C requests relief under this section to elect an alternative method of reporting the income. Under paragraph (b)(3)(i) of this section, C is deemed to have not acted reasonably and in good faith because C seeks to alter a return position for which an accuracy-related penalty could be imposed under section 6662.

    Example 4. Election not requiring adjustment under section 481(a). Taxpayer D prepares D's 1996 income tax return. D is unaware that a particular accounting method regulatory election is available. D files the 1996 return using another method of accounting. In 1998, D hires a qualified tax professional to prepare D's 1998 return. The professional discovers that D did not make the election. D promptly files for relief in accordance with this section. Assume the applicable regulation provides that the election does not require an adjustment under section 481(a) and the election is not subject to the procedure described
in §1.446-1(e)(3)(i) of this chapter. Further assume that if D were granted an extension of time to make the election, D would pay no less tax than if the election had been timely made. Under paragraph (c) of this section, the interests of the government are not deemed to be prejudiced.

         Example 5. Election requiring adjustment under section 481(a). The facts are the same as in Example 4 of this paragraph (f) except that the applicable regulation provides that the election requires an adjustment under section 481(a). Under paragraph (c)(2)(ii) of this section, the interests of the government are deemed to be prejudiced except in unusual or compelling circumstances.

    Example 6. Under examination. A regulation permits an automatic change from an impermissible method of accounting on a cut-off basis. Any change to this method made as part of an examination is made with a section 481(a) adjustment. Taxpayer E reports income on E's 1996 income tax return using the impermissible method of accounting. In 1999, during the examination of the 1996 return by the IRS, the examining agent questions the propriety of E's method of accounting. E requests relief under this section to make the change pursuant to the regulation for 1996. E will receive less favorable terms and conditions if the change in method of accounting is made with a section 481(a) adjustment by the examining agent than if the change is made on a cut-off basis pursuant to the regulation. Under paragraph (c)(2)(iii) of this section, the interests of the government are deemed to be prejudiced except in unusual and compelling circumstances. 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 the following entries in numerical order to the table:
602.101 OMB Control numbers
* * * * *
(c) * * *

CFR part or section where                    Current OMB
identified and described                     control number
* * * * *

301.9100-2T.................................1545-1488
301.9100-3T.................................1545-1488

§ 301.9100-1 Extensions of time to make elections:

87428342837884818742
301.9100-1(a) Introduction.
The regulations under this section and Sections 301.9100-2 and 301.9100-3 provide the standards the Commissioner will use to determine whether to grant an extension of time to make a regulatory election. The regulations under this section and Section 301.9100-2 also provides an automatic extension of time to make certain statutory elections. An extension of time is available for elections that a taxpayer is otherwise eligible to make. However, the granting to an extension of time is not a determination that the taxpayer is otherwise eligible to make the election. Section 301.9100-2 provides automatic extensions of time for making regulatory and statutory elections when the deadline for making the election is the due date of the return or the due date of the return including extensions. Section 301.9100-3 provides extensions of time for making regulatory elections that do not meet the requirements of Section 301.9100-2.
301.9100-1(b) Terms.
The following terms have the meanings provided below -
Election includes an application for relief in respect of tax; a request to adopt, change, or retain an accounting method or accounting period; but does not include an application for an extension of time for filing a return under section 6081.
Regulatory election means an election whose due date is prescribed by a regulation published in the Federal Register, or a revenue ruling, revenue procedure, notice, or announcement published in the Internal Revenue Bulletin (see Section 601.601(d)(2) of this chapter).
Statutory election means an election whose due date is prescribed by statute.
Taxpayer means any person within the meaning of section 7701(a)(1).
301.9100-1(c) General standards for relief.
The Commissioner in exercising the Commissioner's discretion may grant a reasonable extension of time under the rules set forth in Sections 301.9100-2 and 301.9100-3 to make a regulatory election, or a statutory election (but no more than 6 months except in the case of a taxpayer who is abroad), under all subtitles of the Internal Revenue Code except subtitles E, G, H, and I.
301.9100-1(d) Exceptions.
Notwithstanding the provisions of paragraph (c) of this section, an extension of time will not be granted -
301.9100-1(d)(1) For elections under section 4980A(f)(5); or
301.9100-1(d)(2) For elections that are expressly excepted from relief or where alternative relief is provided by a statute, a regulation published in the Federal Register, or a revenue ruling, revenue procedure, notice, or announcement published in the Internal Revenue Bulletin (see Section 601.601(d)(2) of this chapter).
301.9100-1(e) Effective dates.
In general, this section and Sections 301.9100-2 and 301.9100-3 apply to all requests for an extension of time submitted to the Internal Revenue Service (IRS) on or after Dec. 31, 1997. However, the automatic 12-month and 6-month extensions provided in Section 301.9100-2 apply to elections for which corrective action is taken on or after Dec. 31, 1997. For other requests for an extension of time, see Sections 301.9100-1T through 301.9100-3T in effect prior to Dec. 31, 1997, (Sections 301.9100-1T through 301.9100-3T as contained in the 26 CFR part 1 edition revised as of April 1, 1997).
[T.D. 8342, 56 FR 14024, Apr. 5, 1991, as amended by T.D. 8378, 56 FR 64982, Dec. 13, 1991; T.D. 8481, 58 FR 34886-34887, June 30, 1993; as revised by T.D. 8742, 62 FR 68167-68173, Dec. 31, 1997.]

§ 301.9100-2 Automatic extensions:

874283428378848187428680871987428742
301.9100-2(a) Automatic 12-month extension -
301.9100-2(a)(1) In general.
An automatic extension of 12 months from the due date for making a regulatory election is granted to make elections described in paragraph (a)(2) of this section provided the taxpayer takes corrective action as defined in paragraph (c) of this section within that 12-month extension period. For purposes of this paragraph (a), the due date for making a regulatory election is the extended due date of the return if the due date of the election is the due date of the return or the due date of the return including extensions and the taxpayer has obtained an extension of time to file the return. This extension is available regardless of whether the taxpayer timely filed its return for the year the election should have been made.
301.9100-2(a)(2) Elections eligible for automatic 12-month extension.
The following regulatory elections are eligible for the automatic 12-month extension described in paragraph (a)(1) of this section -
301.9100-2(a)(2)(i) The election to use other than the required taxable year under section 444;
301.9100-2(a)(2)(ii) The election to use the last-in, first-out (LIFO) inventory method under section 472;
301.9100-2(a)(2)(iii) The 15-month rule for filing an exemption application for a section 501(c)(9), 501(c)(17), or 501(c)(20) organization under section 505;
301.9100-2(a)(2)(iv) The 15-month rule for filing an exemption application for a section 501(c)(3) organization under section 508;
301.9100-2(a)(2)(v) The election to be treated as a homeowners association under section 528;
301.9100-2(a)(2)(vi) The election to adjust basis on partnership transfers and distributions under section 754;
301.9100-2(a)(2)(vii) The estate tax election to specially value qualified real property (where the Internal Revenue Service (IRS) has not yet begun an examination of the filed return) under section 2032A(d)(1);
301.9100-2(a)(2)(Viii) The chapter 14 gift tax election to treat a qualified payment right as other than a qualified payment under section 2701(c)(3)(C)(i); and
301.9100-2(a)(2)(ix) The chapter 14 gift tax election to treat any distribution right as a qualified payment under section 2701(c)(3)(C)(ii).
301.9100-2(b) Automatic 6-month extension.
An automatic extension of 6 months from the due date of a return excluding extensions is granted to make regulatory or statutory elections whose due dates are the due date of the return or the due date of the return including extensions provided the taxpayer timely filed its return for the year the election should have been made and the taxpayer takes corrective action as defined in paragraph (c) of this section within that 6-month extension period. This paragraph (b) does not apply to regulatory or statutory elections that must be made by the due date of the return excluding extensions.
301.9100-2(c) Corrective action.
For purposes of this section, corrective action means taking the steps required to file the election in accordance with the statute or the regulation published in the Federal Register, or the revenue ruling, revenue procedure, notice, or announcement published in the Internal Revenue Bulletin (see Section 601.601(d)(2) of this chapter). For those elections required to be filed with a return, corrective action includes filing an original or an amended return for the year the regulatory or statutory election should have been made and attaching the appropriate form or statement for making the election. Taxpayers who make an election under an automatic extension (and all taxpayers whose tax liability would be affected by the election) must file their return in a manner that is consistent with the election and comply with all other requirements for making the election for the year the election should have been made and for all affected years; otherwise, the IRS may invalidate the election.
301.9100-2(d) Procedural requirements.
Any return, statement of election, or other form of filing that must be made to obtain an automatic extension must provide the following statement at the top of the document: "FILED PURSUANT TO Section 301.9100-2". Any filing made to obtain an automatic extension must be sent to the same address that the filing to make the election would have been sent had the filing been timely made. No request for a letter ruling is required to obtain an automatic extension. Accordingly, user fees do not apply to taxpayers taking corrective action to obtain an automatic extension.
301.9100-2(e) Examples.
The following examples illustrate the provisions of this section:
Example 1. Automatic 12-month extension.
Taxpayer A fails to make an election described in paragraph (a)(2) of this section when filing A's 1997 income tax return on March 16, 1998, the due date of the return. This election does not affect the tax liability of any other taxpayer. The applicable regulation requires that the election be made by attaching the appropriate form to a timely filed return including extensions. In accordance with paragraphs (a) and (c) of this section. A may make the regulatory election by taking the corrective action of filing an amended return with the appropriate form by March 15, 1999 (12 months from the March 16, 1998 due date of the return). If A obtained a 6-month extension to file its 1997 income tax return, A may make the regulatory election by taking the corrective action of filing an amended return with the appropriate form by September 15, 1999 (12 months from the September 15, 1998 extended due date of the return).
Example 2. Automatic 6-month extension.
Taxpayer B fails to make an election not described in paragraph (a)(2) of this section when filing B's 1997 income tax return on March 16, 1998, the due date of the return. This election does not affect the tax liability of any other taxpayer. The applicable regulation requires that the election be made by attaching the appropriate form to a timely filed return including extensions. In accordance with paragraphs (b) and (c) of this section, B may make the regulatory election by taking the corrective action of filing an amended return with the appropriate form by September 15, 1998 (6 months from the March 16, 1998 due date of the return).
[T.D. 8742, 62 FR 68167-68173, Dec. 31, 1997.]

From STEVEN A. AND PATRICIA A. KNISH, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent December 18, 2006
Relief under sec. 301.9100-2, Proced. & Admin. Regs., is unavailable for extensions of time to file mark-to-market elections under sec. 475(f) because it does not apply to elections, like the mark-to-market election, that must be made by the due date of the return without regard to extensions. Sec. 301.9100-2(b), Proced. & Admin. Regs.; Rev. Proc. 99-17, 1999-1 C.B. 503.

§ 301.9100-3 Other extensions:

874283428378848187428680871987428742868087428742
301.9100-3(a) In general.
Requests for extensions of time for regulatory elections that do not meet the requirements of Section 301.9100-2 must be made under the rules of this section. Requests for relief subject to this section will be granted when the taxpayer provides the evidence (including affidavits described in paragraph (e) of this section) to establish to the satisfaction of the Commissioner that the taxpayer acted reasonably and in good faith, and the grant of relief will not prejudice the interests of the Government.
301.9100-3(b) Reasonable action and good faith -
301.9100-3(b)(1) In general.
Except as provided in paragraphs (b)(3)(i) through (iii) of this section, a taxpayer is deemed to have acted reasonably and in good faith if the taxpayer -
301.9100-3(b)(1)(i) Requests relief under this section before the failure to make the regulatory election is discovered by the Internal Revenue Service (IRS);
301.9100-3(b)(1)(ii) Failed to make the election because of intervening events beyond the taxpayer's control;
301.9100-3(b)(1)(iii) Failed to make the election because, after exercising reasonable diligence (taking into account the taxpayer's experience and the complexity of the return or issue), the taxpayer was unaware of the necessity for the election;
301.9100-3(b)(1)(iv) Reasonably relied on the written advice of the Internal Revenue Service (IRS); or
301.9100-3(b)(1)(v) Reasonably relied on a qualified tax professional, including a tax professional employed by the taxpayer, and the tax professional failed to make, or advise the taxpayer to make, the election.
301.9100-3(b)(2) Reasonable reliance on a qualified tax professional.
For purposes of this paragraph (b), a taxpayer will not be considered to have reasonably relied on a qualified tax professional if the taxpayer knew or should have known that the professional was not -
301.9100-3(b)(2)(i) Competent to render advice on the regulatory election; or
301.9100-3(b)(2)(ii) Aware of all relevant facts.
301.9100-3(b)(3) Taxpayer deemed to have not acted reasonably or in good faith.
For purposes of this paragraph (b), a taxpayer is deemed to have not acted reasonably and in good faith if the taxpayer -
301.9100-3(b)(3)(i) Seeks to alter a return position for which an accuracy-related penalty has been or could be imposed under section 6662 at the time the taxpayer requests relief (taking into account any qualified amended return filed within the meaning of Section 1.6664-2(c)(3) of this chapter) and the new position requires or permits a regulatory election for which relief is requested;
301.9100-3(b)(3)(ii) Was informed in all material respects of the required election and related tax consequences, but chose not to file the election; or
301.9100-3(b)(3)(iii) Uses hindsight in requesting relief. If specific facts have changed since the due date for making the election that make the election advantageous to a taxpayer, the IRS will not ordinarily grant relief. In such a case, the IRS will grant relief only when the taxpayer provides strong proof that the taxpayer's decision to seek relief did not involve hindsight.
301.9100-3(c) Prejudice to the interests of the Government -
301.9100-3(c)(1) In general.
The Commissioner will grant a reasonable extension of time to make a regulatory election only when the interests of the Government will not be prejudiced by the granting of relief. This paragraph (c) provides the standards the Commissioner will use to determine when the interests of the Government are prejudiced.
301.9100-3(c)(1)(i) Lower tax liability.
The interests of the Government are prejudiced if granting relief would result in a taxpayer having a lower tax liability in the aggregate for all taxable years affected by the election than the taxpayer would have had if the election had been timely made (taking into account the time value of money). Similarly, if the tax consequences of more than one taxpayer are affected by the election, the Government's interests are prejudiced if extending the time for making the election may result in the affected taxpayers, in the aggregate, having a lower tax liability than if the election had been timely made.
301.9100-3(c)(1)(ii) Closed years.
The interests of the Government are ordinarily prejudiced if the taxable year in which the regulatory election should have been made or any taxable years that would have been affected by the election had it been timely made are closed by the period of limitations on assessment under section 6501(a) before the taxpayer's receipt of a ruling granting relief under this section. The IRS may condition a grant of relief on the taxpayer providing the IRS with a statement from an independent auditor (other than an auditor providing an affidavit pursuant to paragraph (e)(3) of this section) certifying that the interests of the Government are not prejudiced under the standards set forth in paragraph (c)(1)(i) of this section.
301.9100-3(c)(2) Special rules for accounting method regulatory elections.
The interests of the Government are deemed to be prejudiced except in unusual and compelling circumstances if the accounting method regulatory election for which relief is requested -
301.9100-3(c)(2)(i) Is subject to the procedure described in Section 1.446-1(e)(3)(i) of this chapter (requiring the advance written consent of the Commissioner);
301.9100-3(c)(2)(ii) Requires an adjustment under section 481(a) (or would require an adjustment under section 481(a) if the taxpayer changed to the method of accounting for which relief is requested in a taxable year subsequent to the taxable year the election should have been made);
301.9100-3(c)(2)(iii) Would permit a change from an impermissible method of accounting that is an issue under consideration by examination, an appeals office, or a federal court and the change would provide a more favorable method or more favorable terms and conditions than if the change were made as part of an examination; or
301.9100-3(c)(2)(iv) Provides a more favorable method of accounting or more favorable terms and conditions if the election is made by a certain date or taxable year.
301.9100-3(c)(3) Special rules for accounting period regulatory elections.
The interests of the Government are deemed to be prejudiced except in unusual and compelling circumstances if an election is an accounting period regulatory election (other than the election to use other than the required taxable year under section 444) and the request for relief is filed more than 90 days after the due date for filing the Form 1128, Application to Adopt, Change, or Retain a Tax Year (or other required statement).
301.9100-3(d) Effect of amended returns -
301.9100-3(d)(1) Second examination under section 7605(b).
Taxpayers requesting and receiving an extension of time under this section waive any objections to a second examination under section 7605(b) for the issue(s) that is the subject of the relief request and any correlative adjustments.
301.9100-3(d)(2) Suspension of the period of limitations under section 6501(a).
A request for relief under this section does not suspend the period of limitations on assessment under section 6501(a). Thus, for relief to be granted, the IRS may require the taxpayer to consent under section 6501(c)(4) to an extension of the period of limitations on assessment for the taxable year in which the regulatory election should have been made and any taxable years that would have been affected by the election had it been timely made.
301.9100-3(e) Procedural requirements -
301.9100-3(e)(1) In general.
Requests for relief under this section must provide evidence that satisfies the requirements in paragraphs (b) and (c) of this section, and must provide additional information as required by this paragraph (e).
301.9100-3(e)(2) Affidavit and declaration from taxpayer.
The taxpayer, or the individual who acts on behalf of the taxpayer with respect to tax matters: must submit a detailed affidavit describing the events that led to the failure to make a valid regulatory election and to the discovery of the failure. When the taxpayer relied on a qualified tax professional for advice, the taxpayer's affidavit must describe the engagement and responsibilities of the professional as well as the extent to which the taxpayer relied on the professional. The affidavit must be accompanied by a dated declaration, signed by the taxpayer, which states: "Under penalties of perjury, I declare that I have examined this request, including accompanying documents, and, to the best of my knowledge and belief, the request contains all the relevant facts relating to the request, and such facts are true, correct, and complete." The individual who signs for an entity must have personal knowledge of the facts and circumstances at issue.
301.9100-3(e)(3) Affidavits and declarations from other parties.
The taxpayer must submit detailed affidavits from the individuals having knowledge or information about the events that led to the failure to make a valid regulatory election and to the discovery of the failure. These individuals must include the taxpayer's return preparer, any individual (including an employee of the taxpayer) who made a substantial contribution to the preparation of the return, and any accountant or attorney, knowledgeable in tax matters, who advised the taxpayer with regard to the election. An affidavit must describe the engagement and responsibilities of the individual as well as the advice that the individual provided to the taxpayer. Each affidavit must include the name, current address, and taxpayer identification number of the individual, and be accompanied by a dated declaration, signed by the individual, which states: "Under penalties of perjury, I declare that I have examined this request, including accompanying documents, and, to the best of my knowledge and belief, the request contains all the relevant facts relating to the request, and such facts are true, correct, and complete."
301.9100-3(e)(4) Other information.
The request for relief filed under this section must also contain the following information -
301.9100-3(e)(4)(i) The taxpayer must state whether the taxpayer's return(s) for the taxable year in which the regulatory election should have been made or any taxable years that would have been affected by the election had it been timely made is being examined by a district director, or is being considered by an appeals office or a federal court. The taxpayer must notify the IRS office considering the request for relief if the IRS starts an examination of any such return while the taxpayer's request for relief is pending;
301.9100-3(e)(4)(ii) The taxpayer must state when the applicable return, form, or statement used to make the election was required to be filed and when it was actually filed;
301.9100-3(e)(4)(iii) The taxpayer must submit a copy of any documents that refer to the election;
301.9100-3(e)(4)(iv) When requested, the taxpayer must submit a copy of the taxpayer's return for any taxable year for which the taxpayer requests an extension of time to make the election and any return affected by the election; and
301.9100-3(e)(4)(v) When applicable, the taxpayer must submit a copy of the returns of other taxpayers affected by the election.
301.9100-3(e)(5) Filing instructions.
A request for relief under this section is a request for a letter ruling. Requests for relief should be submitted in accordance with the applicable procedures for requests for a letter ruling and must be accompanied by the applicable user fee.
301.9100-3(f) Examples.
The following examples illustrate the provisions of this section:
Example 1. Taxpayer discovers own error.
Taxpayer A prepares A's 1997 income tax return. A is unaware that a particular regulatory election is available to report a transaction in a particular manner. A files the 1997 return without making the election and reporting the transaction in a different manner. In 1999, A hires a qualified tax professional to prepare A's 1999 return. The professional discovers that A did not make the election. A promptly files for relief in accordance with this section. Assume paragraphs (b)(3)(i) through (iii) of this section do not apply. Under paragraph (b)(1)(i) of this section, A is deemed to have acted reasonably and in good faith because A requested relief before the failure to make the regulatory election was discovered by the IRS.
Example 2. Reliance on qualified tax professional.
Taxpayer B hires a qualified tax professional to advise B on preparing B's 1997 income tax return. The professional was competent to render advice on the election and B provided the professional with all the relevant facts. The professional fails to advise B that a regulatory election is necessary in order for B to report income on B's 1997 return in a particular manner. Nevertheless, B reports this income in a manner that is consistent with having made the election. In 2000, during the examination of the 1997 return by the IRS, the examining agent discovers that the election has not been filed. B promptly files for relief in accordance with this section, including attaching an affidavit from B's professional stating that the professional failed to advise B that the election was necessary. Assume paragraphs (b)(3)(i) through (iii) of this section do not apply. Under paragraph (b)(1)(v) of this section, B is deemed to have acted reasonably and in good faith because B reasonably relied on a qualified tax professional and the tax professional failed to advise B to make the election.
Example 3. Accuracy-related penalty.
Taxpayer C reports income on its 1997 income tax return in a manner that is contrary to a regulatory provision. In 2000, during the examination of the 1997 return, the IRS raises an issue regarding the reporting of this income on C's return and asserts the accuracy-related penalty under section 6662. C requests relief under this section to elect an alternative method of reporting the income. Under paragraph (b)(3)(i) of this section, C is deemed to have not acted reasonably and in good faith because C seeks to alter a return position for which an accuracy-related penalty could be imposed under section 6662.
Example 4. Election not requiring adjustment under section 481(a).
Taxpayer D prepares D's 1997 income tax return. D is unaware that a particular accounting method regulatory election is available. D files D's 1997 return without making the election and uses another permissible method of accounting. The applicable regulation provides that the election is made on a cut-off basis (without an adjustment under section 481(a)). In 1998, D requests relief under this section to make the election under the regulation. If D were granted an extension of time to make the election, D would pay no less tax than if the election had been timely made. Assume that paragraphs (c)(2)(i), (iii), and (iv) of this section do not apply. Under paragraph (c)(2)(ii) of this section, the interests of the Government are not deemed to be prejudiced because the election does not require an adjustment under section 481(a).
Example 5. Election requiring adjustment under section 481(a).
The facts are the same as in Example 4 of this paragraph (f) except that the applicable regulation provides that the election requires an adjustment under section 481(a). Under paragraph (c)(2)(ii) of this section, the interests of the Government are deemed to be prejudiced except in unusual or compelling circumstances.
Example 6. Under examination by the IRS.
A regulation permits an automatic change in method of accounting for an item on a cut-off basis. Taxpayer E reports income on E's 1997 income tax return using an impermissible method of accounting for the item. In 2000, during the examination of the 1997 return by the IRS, the examining agent notifies E in writing that its method of accounting for the item is an issue under consideration. Any change from the impermissible method made as part of an examination is made with an adjustment under section 481(a). E requests relief under this section to make the change pursuant to the regulation for 1997. The change on a cut-off basis under the regulation would be more favorable than if the change were made with an adjustment under section 481(a) as part of an examination. Under paragraph (c)(2)(iii) of this section, the interests of the Government are deemed to be prejudiced except in unusual and compelling circumstances because E seeks to change from an impermissible method of accounting that is an issue under consideration in the examination on a basis that is more favorable than if the change were made as part of an examination.
[T.D. 8742, 62 FR 68167-68173, Dec. 31, 1997.]

Deadline for filing Amended Tax Return:

Chief Counsel Advice Memorandum 201052003, 12/30/2010

An amended tax return is considered timely filed if it is postmarked by the due date (the timely mailed/timely filed rule) if the amended tax return includes a claim for a refund - because, as the CCA memorandum explains, taxpayers are required under the Internal Revenue laws to file a claim in such cases.

The due date for filing an amended tax return is generally three years after the original due date of a timely filed tax return or, when applicable, three years after the extended due date.

But an amended tax return is considered timely filed only if actually received by the IRS by the due date if the amended tax return that show additional tax due because, as the CCA memorandum explains, taxpayers are not required under the Internal Revenue laws to file in these cases.

Deadline for retroactively changing Form 1040 credit elect:

Administratively, a taxpayer may contact the IRS and request his overpayment "credit elect" to be reversed, if such request is made by March 1st of the following year.

Example: taxpayer filed 2009 Form 1040 on October 15, 2010 showing an overpayment and electing to have some or all of it applied to 2010 estimated tax (applied retroactively to the later of April 15, 2010 or to the date the money was received by the IRS). Later on the taxpayer desires that the credit elect not go into 2010 as estimated tax, and wishes to have the amount of the credit elect returned to 2009. In such a case, the request needs to be made by March 1, 2011.

(per Practitioner's Hot Line on 9/29/2011)

IRS Reg. §1.6081-1 & IRM 3.11.212.1 Extension of time for filing returns (automatic and by letter request for > 6 months):

(a) In general. The Commissioner is authorized to grant a reasonable extension of time for filing any return, declaration, statement, or other document which relates to any tax imposed by subtitle A of the Code and which is required under the provisions of subtitle A or F of the Code or the regulations thereunder. However, other than in the case of taxpayers who are abroad, such extensions of time shall not be granted for more than 6 months, and the extension of time for filing the return of a DISC (as defined in section 992(a)), as specified in section 6072(b), shall not be granted. Except in the case of an extension of time pursuant to §1.6081-5, an extension of time for filing an income tax return shall not operate to extend the time for the payment of the tax unless specified to the contrary in the extension. For rules relating to extensions of time for paying tax, see §1.6161-1.

(b) Application for extension of time-(1) In general. A taxpayer desiring an extension of the time for filing a return, statement, or other document shall submit an application therefor on or before the due date of such return, statement, or other document. Except as provided in subparagraph (3) of this paragraph and, except as provided in paragraph (b) of §301.6091-1 (relating to hand-carried documents), such application shall be made to the internal revenue officer with whom such return, statement, or other document is required to be filed. Such application shall be in writing, properly signed by the taxpayer or his duly authorized agent, and shall clearly set forth (i) the particular tax return, information return, statement, or other document, including the taxable year or period thereof, with respect to which the extension of the time for filing is desired, and (ii) a full recital of the reasons for requesting the extension to aid such internal revenue officer in determining the period of extension, if any, which will be granted. In the case of a cemetery perpetual care fund trust, a distributee cemetery's failure to make timely expenditures of distributions which prevents accurate determination of the allowable deduction under section 642(i) will be considered reasonable grounds for a 6-month extension of time for filing the trust's return. See §1.642(i)-1(c)(2).

§1.6081-1 Extension of time for filing returns. (4-1-2003) (2-23-1989)

(a) In general. District directors and directors of service are authorized to grant a reasonable extension of time for filing any return, declaration, statement, or other document which relates to any tax imposed by subtitle A of the code by and which is required under the provisions of subtitle A or F of the code or the regulations thereunder. However, other than in the case of taxpayers who are abroad, such extensions of time shall not be granted for more than 6 months, and the extension of time for filing the return of a DISC (as defined in section 992(a)), as specified in section 6072(b), shall not be granted. Except in the case of an extension of time pursuant to §1.6081-2, an extension of time for filing an income tax return shall not operate to extend the time for the payment of the tax or any installment thereof unless specified to the contrary in the extension. In the case of an extension of time pursuant to §1.6081-2, an extension of time for filing an income-tax return shall operate to extend the time for the payment of the tax or any installment therefo unless specified to the contrary in the extension. For rules relating to extensions of time for paying tax, see §1.6161-1.

IRM 3.11.212.1 (01-01-2013) - Automatic Applications for Extension of Time to File

The Individual Master File (IMF) extension request forms are as follows:
- Form 4868, Application for Automatic Extension of Time to File U.S. Individual Income Tax Return
- Form 2350, Application for Extension of Time to File U.S. Income Tax Return (Austin Submission Processing Center (AUSPC) only)
The Business Master File (BMF) extension request forms covered by this IRM are:
- Form 7004, Application for Automatic Extension of Time To File Certain Business Income Tax, Information, and Other Returns
- Form 8892, Application for Automatic Extension of Time To File Form 709 and/or Payment of Gift/Generation-Skipping Transfer Tax

IRM 3.11.212.1.3 (01-01-2010) - Letter Requests

A taxpayer wanting an extension of time for filing a return may submit a letter to the submission processing center where the return is to be filed.
If the letter contains a request for gift tax only (Form 709), transship to CSPC.
If the letter request is for a Non Master File (NMF) form, forward to CSPC NMF Accounting. See IRM 3.11.212.1.4(5) for the list of NMF forms.

IRM 3.11.212.1.5 (01-01-2012) - 6 Month Extension Limit

Under normal circumstances, an extension of time to file can legally be granted for no longer than a total of 6 months from the due date of the return. Internal Revenue Code (IRC) Section 6081(a) and Treas. Reg. section 1.6081-1 (a) state that an extension of time to file generally "shall not be granted for more than 6 months" from the due date of the return required to be filed.

Exception:
The maximum extension time for Form 1041 (except Form 1041 for bankruptcy estates), Form 1065 and Form 8804 is 5 months from the due date of the return.
In some cases, however, individual taxpayers who are abroad may receive more than 6 months. Only AUSPC may grant extensions beyond 6 months for individual taxpayers. See IRM 3.11.212.4.6.2
OSPC (Ogden Submission Processing Center) may grant an extension longer than 6 months for business taxpayers. These requests must be processed through IDRS (Integrated Data Retrieval System) using Command Code (CC) REQ77. "98" must be entered in the ULC field on line 9 of the FRM77 screen. For input instructions, see IRM 2.4.19, Command Codes REQ77, FRM77 and FRM7A.

IRM 3.11.212.4.8 (01-01-2010) - Extension Request Listings - AUSPC Only

Tax preparation firms may submit a list of taxpayers with a cover letter instead of filing separate Forms 4868 to request an automatic 6 month extension of time to file. /p>
The listing must include the taxpayer's name and valid SSN or ITIN.

Office of Chief Counsel memorandum January 2, 2003, Notification Requirements for Extensions of Time to File (PDF)

Deadline for electing / revoking §179 on an Amended Tax Return:

Office of Chief Counsel No. INFO 2009-0056

26 CFR 1.179-1 - Election to expense certain depreciable assets.

26 CFR 1.179-2 - Limitations on amount subject to section 179 election.

26 CFR 1.179-3 - Carryover of disallowed deduction.

26 CFR 1.179-4 - Definitions.

26 CFR 1.179-5 - Time and manner of making election.

26 CFR 1.179-6 - Effective dates.

Revenue Ruling 2010-25 - §163 Homeowner's qualified residence interest on indebtedness up to $1,100,000:

Interest Limitations on qualified residence interest.
This ruling holds that indebtedness in excess of $1 million that a taxpayer incurs to acquire, construct, or substantially improve a qualified residence may constitute home equity indebtedness within the meaning of section 163(h)(3)(C) of the Code.

Rev. Rul. 2010-25
ISSUE
Whether indebtedness that is incurred by a taxpayer to acquire, construct, or substantially improve a qualified residence can constitute "home equity indebtedness" (within the meaning of §163(h)(3)(C) of the Internal Revenue Code) to the extent it exceeds $1 million.

FACTS
In 2009, an unmarried individual (Taxpayer) purchased a principal residence for its fair market value of $1,500,000. Taxpayer paid $300,000 and financed the remainder by borrowing $1,200,000 through a loan that is secured by the residence. In 2009, Taxpayer paid interest that accrued on the indebtedness during that year. Taxpayer has no other debt secured by the residence.

LAW
Section 163(a) allows as a deduction all interest paid or accrued within the taxable year on indebtedness. However, for individuals §163(h)(1) disallows a deduction for personal interest. Under §163(h)(2)(D), qualified residence interest is not personal interest. Section 163(h)(3)(A) defines qualified residence interest as interest paid or accrued during the taxable year on acquisition indebtedness or home equity indebtedness secured by any qualified residence of the taxpayer. Under §163(h)(4)(A), "qualified residence" means a taxpayer's principal residence, within the meaning of §121, and one other residence selected and used by the taxpayer as a residence.

Section 163(h)(3)(B)(i) provides that acquisition indebtedness is any indebtedness that is incurred in acquiring, constructing, or substantially improving a qualified residence and is secured by the residence. However, §163(h)(3)(B)(ii) limits the amount of indebtedness treated as acquisition indebtedness to $1,000,000 ($500,000 for a married individual filing separately). Accordingly, any indebtedness described in §163(h)(3)(B)(i) in excess of $1,000,000 is, by definition, not acquisition indebtedness for purposes of §163(h)(3).

Section 163(h)(3)(C)(i) provides that home equity indebtedness is any indebtedness secured by a qualified residence other than acquisition indebtedness, to the extent the fair market value of the qualified residence exceeds the amount of acquisition indebtedness on the residence. However, §163(h)(3)(C)(ii) limits the amount of indebtedness treated as home equity indebtedness to $100,000 ($50,000 for a married individual filing separately). Accordingly, any indebtedness described in §163(h)(3)(C)(i) in excess of $100,000 is, by definition, not home equity indebtedness for purposes of §163(h)(3).

In Pau v. Commissioner, T.C. Memo. 1997-43, the Tax Court limited the taxpayers' deduction for qualified residence interest to the interest paid on $1 million of the $1.33 million indebtedness incurred to purchase their residence. The court stated that §163(h) restricts home mortgage interest deductions to interest paid on $1 million of acquisition indebtedness and $100,000 of home equity indebtedness. Citing §163(h)(3)(B), the court stated that acquisition indebtedness is defined as indebtedness that is incurred in acquiring, constructing, or substantially improving any qualified residence of the taxpayer, and is secured by the residence. Citing §163(h)(3)(C), the court further stated that home equity indebtedness is defined as any indebtedness (other than acquisition indebtedness) secured by a qualified residence. The court concluded that the taxpayers failed to demonstrate that any of their debt was not incurred in acquiring, constructing, or substantially improving their residence and thus was not acquisition indebtedness. However, the court did not address the effect of the $1 million limitation in §163(h)(3)(B)(ii) on the definition of acquisition indebtedness for purposes of §163(h)(3). The Tax Court followed Pau in Catalano v. Commissioner, T.C. Memo. 2000-82.

ANALYSIS
Taxpayer may deduct, as interest on acquisition indebtedness under §163(h)(3)(B), interest paid in 2009 on $1,000,000 of the $1,200,000 indebtedness used to acquire the principal residence. The $1,200,000 indebtedness was incurred in acquiring a qualified residence of Taxpayer and was secured by the residence. Thus, indebtedness of $1,000,000 is treated as acquisition indebtedness under §163(h)(3)(B).

Taxpayer also may deduct, as interest on home equity indebtedness under §163(h)(3)(C), interest paid in 2009 on $100,000 of the remaining indebtedness of $200,000. The $200,000 is secured by the qualified residence, is not acquisition indebtedness under §163(h)(3)(B), and does not exceed the fair market value of the residence reduced by the acquisition indebtedness secured by the residence. Thus, $100,000 of the $200,000 is treated as home equity indebtedness under §163(h)(3)(C).

Under §163(h)(3)(A), the interest on both acquisition indebtedness and home equity indebtedness is qualified residence interest. Therefore, for 2009 Taxpayer may deduct interest paid on indebtedness of $1,100,000 as qualified residence interest. Any interest Taxpayer paid on the remaining indebtedness of $100,000 is nondeductible personal interest under §163(h).

The Internal Revenue Service will not follow the decisions in Pau v. Commissioner and Catalano v. Commissioner. The holding in Pau was based on the incorrect assertion that taxpayers must demonstrate that debt treated as home equity indebtedness "was not incurred in acquiring, constructing or substantially improving their residence." The definition of home equity indebtedness in §163(h)(3)(C) contains no such restrictions, and accordingly the Service will determine home equity indebtedness consistent with the provisions of this revenue ruling, notwithstanding the decisions in Pau and Catalano.

HOLDING
Indebtedness incurred by a taxpayer to acquire, construct, or substantially improve a qualified residence can constitute home equity indebtedness to the extent it exceeds $1 million (subject to the applicable dollar and fair market value limitations imposed on home equity indebtedness by §163(h)(3)(C)).

IRS Reg. §1.163-1(b) Interest Expense deduction when property or mortgage is not in the name of the taxpayer:

As the "Equitable Owner" of the property the taxpayer can take the mortgage interest deduction. See Reg Sec 1.163-1(b) and Uslu V Commissioner, T.C. Memo 1997-551 (also referred to as Usher V Commissioner, T.C. Memo 1997-551)

Interest paid by the taxpayer on a mortgage secured by real estate of which the taxpayer is the legal or equitable owner, even though the taxpayer is not directly liable upon the bond or note secured by such mortgage, may be deducted as interest on his indebtedness. Usher v. Commissioner, T.C. Memo. 1997-551 where the court held that the "equitable owner", not the person liable to the bank, was entitled to the deduction. Also see T.C. Summary Opinion 2007-16

While it is necessary that the taxpayer pay the interest to deduct it, it is NOT necessary that he be liable on the note. See Reg. 1.163-1(b).

It is also not necessary that the taxpayer be the legal owner of the property, as long as he is the equitable owner. It is, of course, necessary that the debt meet the requirements of IRC 163(h)(3) (and Reg. 1.163-10T) with respect to the taxpayer.

Where two or more persons are jointly and severally liable for a debt, each is primarily liable on the debt and each is entitled to deduct the interest that he pays (if the other requirements for a deduction have been satisfied). Arrigoni v. Commissioner, 73 T.C. 792 (1980), acq., 1980-2 C.B. 1. For example, the IRS ruled that a father was allowed to deduct the interest he paid on a note for a student loan that he co-signed with his son. Rev. Rul. 71-179, 1971-1 C.B. 58. The Tax Court held that a father was allowed to deduct mortgage interest he paid on property held in common with his daughter, even though he had recently temporarily conveyed legal title to his daughter to avoid creditor's claims. Conroy v. Commissioner, T.C. Memo. 1958-6.

Interest Expense deduction paid for Debt-Financed Acquisition of a trade or business pass-thru entity:

IRS Notice 88-37, 1988-1 C.B. 522
Individuals should report interest expense paid or incurred in connection with debt-financed acquisitions on either Schedule E or Schedule A of Form 1040.

2. Interest expense allocated to trade or business expenditures
Interest expense allocated to a trade or business expenditure (within the meaning of Section 1.163-8T(b)(7)) of a passthrough entity should be reported in Part II of Schedule E. This interest expense should be identified on a separate line in column (a) as "business interest," followed by the name of the passthrough entity to which the interest expense relates, and the amount of such interest expense should be entered in column (h). This interest expense is deductible without limitation and should not be entered on Form 8582, relating to passive activity loss limitations, or Form 4952, relating to investment interest.

IRS Notice 89-35, 1989-1 C.B. 675
Individuals should report allowable interest expense paid or incurred in connection with debt-financed acquisitions on either Schedule E or Schedule A of Form 1040.
Taxpayers other than individuals should report interest expense on debt- financed acquisitions on the line for interest expense on their returns, in accordance with section IV.B. of Notice 88-37

IRS Notice 88-20, 1988-9 I.R.B. 5
Debt proceeds and associated interest expense for debt proceeds allocated to the purchase of an interest in a passthrough entity may be allocated using any reasonable method, including pro rata allocations based on fair market value, book value, or adjusted basis of the assets of the passthrough entity.

Also modified the 15-day rule for debt proceeds deposited in an account before January 1, 1988, by granting 30 days for tracing the expenditures for purposes of the interest allocation rules of regulation section 1.163-8T(c).

Passive Activity Loss ATG - Exhibit 7.1: Investment Income And Investment Interest Expense

2011-21006 May 38, 2011 PLR-138911-10

... And Other Expenses:

Partnership tax law has historically been an amalgamation of aggregate theory and/or entity theory. The recipient may well argue that there is a reasonable basis under the aggregate theory that he was carrying on a trade or business in the form of his partnership interest and therefore sufficient nexus exists to treat the legal fess in connection with the recovery as above the line. There are several cases that stand for this proposition.

Legal fees incurred in a trade or business are allowed under Sec. 62(a)(1). The aggregate argument is that if each of the partners were engaged in a contractual relationship to share profits, then the legal fee expenses incurred in a lawsuit over those profits would clearly be deductible (on both sides).

The IRS counter is that the entity theory applies and the partners LLC interests are "investment property" and they are not otherwise engaged in the partnership's trade or business. There may be a reasonable basis for the aggregate theory providing sufficient law (based on the facts of the case) to deduct the payments above-the-line (or net them). Consequently, with disclosure no penalty under either 6662 or 6694 will be imposed on the taxpayer or the preparer.

The limitations discussed in Sec. 62(a)(20) applies to discrimination suits.

Reasonable basis with disclosure satisfies the threshold tests to avoid penalties under both 6662 and 6694 and reasonable basis in any factual situation may as low as a 15% chance of succeeding on the merits in either an administrative or judicial proceeding. One doesn't need a lot of case law to get there.

If one doesn't approach partnership issues from the aggregate theory vs. entity theory, it's difficult to solve these types of issues.

Election to treat debt as not secured by a qualified residence §163 (instead, treat as business interest):

A taxpayer can elect to treat any debt secured by a qualified residence as not secured by a qualified residence. The election is effective for the tax year when made and for all subsequent tax years.

Apparently, Congress intended that such interest would not be characterized as business interest without the election being made. The Conference Report accompanying TRA ‘86 noted, for example, that interest on a refinancing secured by the taxpayer's residence "is treated as qualified residence interest, regardless of the purpose for which the borrowed funds are used by the taxpayer." [H.R. Rep. No. 841, 99th Cong., 2d Sess. II-155 (1986)]

Temporary Regulation 1.163-8T(m)(3) provides: "... qualified residence interest (as defined in IRC Sec 163(h)(3) is not taken into account in determining the income or loss ... for purposes of (passive activities) ... or in determining the amount of investment interest ...".

This election may be advantageous when, for example, interest on the debt is otherwise deductible as investment interest. The election then preserves the taxpayer's ability to incur other debt that is secured by the qualified residence. (see IRS Letter Ruling 9335043, June 8, 1993).

Temporary Reg. §1.163-10T(o)(5) Election to treat debt as not secured by a qualified residence

(i) In general. --For purposes of this section, a taxpayer may elect to treat any debt that is secured by a qualified residence as not secured by the qualified residence. An election made under this paragraph shall be effective for the taxable year for which the election is made and for all subsequent taxable years unless revoked with the consent of the Commissioner.

(ii) Example. --T owns a principal residence with a fair market value of $75,000 and an adjusted purchase price of $40,000. In 1988, debt A, the proceeds of which were used to purchase the residence, has an average balance of $15,000. The proceeds of debt B, which is secured by a second mortgage on the property, are allocable to T's trade or business under §1.163-8T and has an average balance of $25,000. In 1988, T incurs debt C, which is also secured by T's principal residence and which has an average balance in 1988 of $5,000. In the absence of an election to treat debt B as unsecured, the applicable debt limit for debt C in 1988 under paragraph (e) of this section would be zero dollars ($40,000 - $15,000 - $25,000) and none of the interest paid on debt C would be qualified residence interest. If, however, T makes or has previously made an election pursuant to paragraph (o)(5)(i) of this section to treat debt B as not secured by the residence, the applicable debt limit for debt C would be $25,000 ($40,000 - $15,000), and all of the interest paid on debt C during the taxable year would be qualified residence interest. Since the proceeds of debt B are allocable to T's trade or business under §1.163-8T, interest on debt B may be deductible under other sections of the Internal Revenue Code.

How to elect
By deducting the interest on the appropriate lines of the tax return. Attaching a statement to the tax return is recommended, although not required. Such as: "Taxpayer hereby elects for this tax year and all subsequent years to treat the following debt as not secured by a qualified residence $XXX,XXX borrowed from ABC Bank & Trust Co."

The election under section 1.163-10T(o)(5) applies only to the whole amount of a debt and not to part. When the election is made under section 1.163-10T(o)(5), the entire debt is treated as not secured by the residence; when the election is not made, only the portion of the debt that exceeds the limitation is traced according to the use of the debt proceeds. The election must apply to the entire indebtedness, and the election is made by reporting the interest on the return as business interest or other deductible interest rather than qualified residence interest. Memorandum No. 201201017 1/6/2012

Credit card electronic payment convenience fees and Interest incurred to pay federal income tax liability:

Interest expense is generally not deductible. The typical 2.5% Credit card and Debit card convenience fee was also deemed not deductible under the same concept, pursuant to SCA 200115032 February 12, 2001 because such convenience fees do not relate to the determination of tax liability under §212(3) in the same manner as CPA fees are.

update: Office of Chief Counsel memorandum PMTA 2009-002 January 5, 2009 has reversed this position, and ruled that electronic payment fees are properly deductible as expenses paid in connection with the collection of tax under §212(3).

    Sec. 212. Expenses for production of income
       In the case of an individual, there shall be allowed as a
    deduction all the ordinary and necessary expenses paid or incurred
    during the taxable year -
        (1) for the production or collection of income;
        (2) for the management, conservation, or maintenance of
      property held for the production of income; or
        (3) in connection with the determination, collection, or refund
      of any tax.

Election to Capitalize Carrying Costs (property taxes) §266:

§1.266-1. Taxes and carrying charges chargeable to capital account and treated as capital items
§1.266-1(a)(1) In general. --In accordance with section 266, items enumerated in paragraph (b)(1) of this section may be capitalized at the election of the taxpayer. Thus, taxes and carrying charges with respect to property of the type described in this section are chargeable to capital account at the election of the taxpayer, notwithstanding that they are otherwise expressly deductible under provisions of subtitle A of the Code. No deduction is allowable for any items so treated.

§1.266-1(a)(2) See §§1.263A-8 through 1.263A-15 for rules regarding the requirement to capitalize interest, that apply prior to the application of this section. After applying §§1.263A-8 through 1.263A-15, a taxpayer may elect to capitalize interest under section 266 with respect to designated property within the meaning of §1.263A-8(b), provided a computation under any provision of the Internal Revenue Code is not thereby materially distorted, including computations relating to the source of deductions.

§1.266-1(b) Taxes and carrying charges

§1.266-1(b)(1) The taxpayer may elect, as provided in paragraph (c) of this section, to treat the items enumerated in this subparagraph which are otherwise expressly deductible under the provisions of subtitle A of the Code as chargeable to capital account either as a component of original cost or other basis, for the purposes of section 1012, or as an adjustment to basis, for the purpose of section 1016(a)(1). The items thus chargeable to capital account are --

§1.266-1(b)(i) In the case of unimproved and unproductive real property:

Annual taxes, interest on a mortgage, and other carrying charges. /font>

§1.266-1(b)(ii) In the case of real property, whether improved or unimproved and whether productive or unproductive:

(a) Interest on a loan (but not theoretical interest of a taxpayer using his own funds),

(b) Taxes of the owner of such real property measured by compensation paid to his employees,

(c) Taxes of such owner imposed on the purchase of materials, or on the storage, use, or other consumption of materials, and

(d) Other necessary expenditures,

paid or incurred for the development of the real property or for the construction of an improvement or additional improvement to such real property, up to the time the development or construction work has been completed. The development or construction work with respect to which such items are incurred may relate to unimproved and unproductive real estate whether the construction work will make the property productive of income subject to tax (as in the case of a factory) or not (as in the case of a personal residence), or may relate to property already improved or productive (as in the case of a plant addition or improvement, such as the construction of another floor on a factory or the installation of insulation therein).

§1.266-1(b)(iii) In the case of personal property:

(a) Taxes of an employer measured by compensation for services rendered in transporting machinery or other fixed assets to the plant or installing them therein,

(b) Interest on a loan to purchase such property or to pay for transporting or installing the same, and

(c) Taxes of the owner thereof imposed on the purchase of such property or on the storage, use, or other consumption of such property, paid or incurred up to the date of installation or the date when such property is first put into use by the taxpayer, whichever date is later.

§1.266-1(b)(iv) Any other taxes and carrying charges with respect to property, otherwise deductible, which in the opinion of the Commissioner are, under sound accounting principles, chargeable to capital account.

§1.266-1(2) The sole effect of section 266 is to permit the items enumerated in subparagraph (1) of this paragraph to be chargeable to capital account notwithstanding that such items are otherwise expressly deductible under the provisions of subtitle A of the Code. An item not otherwise deductible may not be capitalized under section 266.

(3) In the absence of a provision in this section for treating a given item as a capital item, this section has no effect on the treatment otherwise accorded such item. Thus, items which are otherwise deductible are deductible notwithstanding the provisions of this section, and items which are otherwise treated as capital items are to be so treated. Similarly, an item not otherwise deductible is not made deductible by this section. Nor is the absence of a provision in this section for treating a given item as a capital item to be construed as withdrawing or modifying the right now given to the taxpayer under any other provisions of subtitle A of the Code, or of the regulations thereunder, to elect to capitalize or to deduct a given item.

§1.266-1(c) Election to charge taxes and carrying charges to capital account

§1.266-1(c)(1) If for any taxable year there are two or more items of the type described in paragraph (b)(1) of this section, which relate to the same project to which the election is applicable, the taxpayer may elect to capitalize any one or more of such items even though he does not elect to capitalize the remaining items or to capitalize items of the same type relating to other projects. However, if expenditures for several items of the same type are incurred with respect to a single project, the election to capitalize must, if exercised, be exercised as to all items of that type. For purposes of this section, a "project" means, in the case of items described in paragraph (b)(1)(ii) of this section, a particular development of, or construction of an improvement to, real property, and in the case of items described in paragraph (b)(1)(iii) of this section, the transportation and installation of machinery or other fixed assets.

§1.266-1(c)(2)(i) An election with respect to an item described in paragraph (b)(1)(i) of this section is effective only for the year for which it is made.

§1.266-1(c)(2)(ii) An election with respect to an item described in --

(a) Paragraph (b)(1)(ii) of this section is effective until the development or construction work described in that subdivision has been completed;

(b) Paragraph (b)(1)(iii) of this section is effective until the later of either the date of installation of the property described in that subdivision, or the date when such property is first put into use by the taxpayer;

(c) Paragraph (b)(1)(iv) of this section is effective as determined by the Commissioner.

Thus, an item chargeable to capital account under this section must continue to be capitalized for the entire period described in this subdivision applicable to such election although such period may consist of more than one taxable year.

§1.266-1(c)(3) If the taxpayer elects to capitalize an item or items under this section, such election shall be exercised by filing with the original return for the year for which the election is made a statement indicating the item or items (whether with respect to the same project or to different projects) which the taxpayer elects to treat as chargeable to capital account. Elections filed for taxable years beginning before January 1, 1954, and for taxable years ending before August 17, 1954, under section 24(a)(7) of the Internal Revenue Code of 1939, and the regulations thereunder, shall have the same effect as if they were filed under this section. See section 7807(b)(2).

Deadline as late as three years under §301.9100-1(c)
PLR 200629024 allowed retroactive election to capitalize property taxes not otherwise deductible due to the AMT. Extension of time to elect granted under §§301.9100-1 and 301.9100-3.

Election to Ratably Accrue Real Estate Property Taxes §461(c):

An accrual basis taxpayer may elect to ratably accrue real estate property taxes over the period to which they relate rather than per the general rule of §461(h)

For example, if the property tax year is October 1, 2011 through September 30, 2012 and billed to taxpayers on June 30, 2013, a calendar year taxpayer accrues and deducts on its 2011tax return 75% of the amount of property tax for tax year ending September 2011 and 25% of the amount of property tax for tax year ending September 2012 - even though the tax bills for those two tax years have not even been issued yet.

This election overrides the general rule and allows real property taxes to be accrued ratably over the period to which they relate.

"Pursuant to IRC Sec 461(c), the taxpayer herby elects to ratably accrue real estate property taxes."

461(c) Accrual Of Real Property Taxes
461(c)(1) In General
If the taxable income is computed under an accrual method of accounting, then, at the election of the taxpayer, any real property tax which is related to a definite period of time shall be accrued ratably over that period.
461(c)(2) When Election May Be Made
461(c)(2)(A) Without Consent
A taxpayer may, without the consent of the Secretary, make an election under this subsection for his first taxable year in which he incurs real property taxes. Such an election shall be made not later than the time prescribed by law for filing the return for such year (including extensions thereof).
461(c)(2)(B) With Consent
A taxpayer may, with the consent of the Secretary, make an election under this subsection at any time.

461(h) Certain Liabilities Not Incurred Before Economic Performance
461(h)(1) In General
For purposes of this title, in determining whether an amount has been incurred with respect to any item during any taxable year, the all events test shall not be treated as met any earlier than when economic performance with respect to such item occurs.

461(h)(2) Time When Economic Performance Occurs
Except as provided in regulations prescribed by the Secretary, the time when economic performance occurs shall be determined under the following principles:
461(h)(2)(A) Services And Property Provided To The Taxpayer
If the liability of the taxpayer arises out of--
461(h)(2)(A)(i) the providing of services to the taxpayer by another person, economic performance occurs as such person provides such services,
461(h)(2)(A)(ii) the providing of property to the taxpayer by another person, economic performance occurs as the person provides such property, or
461(h)(2)(A)(iii) the use of property by the taxpayer, economic performance occurs as the taxpayer uses such property.
461(h)(2)(B) Services And Property Provided By The Taxpayer
If the liability of the taxpayer requires the taxpayer to provide property or services, economic performance occurs as the taxpayer provides such property or services.
461(h)(2)(C) Workers Compensation And Tort Liabilities Of The Taxpayer
If the liability of the taxpayer requires a payment to another person and--
461(h)(2)(C)(i) arises under any workers compensation act, or
461(h)(2)(C)(ii) arises out of any tort, economic performance occurs as the payments to such person are made. Subparagraphs (A) and (B) shall not apply to any liability described in the preceding sentence.
461(h)(2)(D) Other Items
In the case of any other liability of the taxpayer, economic performance occurs at the time determined under regulations prescribed by the Secretary.

461(h)(3) Exception For Certain Recurring Items
461(h)(3)(A) In General
Notwithstanding paragraph (1) an item shall be treated as incurred during any taxable year if--
461(h)(3)(A)(i) the all events test with respect to such item is met during such taxable year (determined without regard to paragraph (1)),
461(h)(3)(A)(ii) economic performance with respect to such item occurs within the shorter of--
461(h)(3)(A)(ii)(I) a reasonable period after the close of such taxable year, or
461(h)(3)(A)(ii)(II) 8-1/2 months after the close of such taxable year,
461(h)(3)(A)(iii) such item is recurring in nature and the taxpayer consistently treats items of such kind as incurred in the taxable year in which the requirements of clause (i) are met, and
461(h)(3)(A)(iv) either--
461(h)(3)(A)(iv)(I) such item is not a material item, or
461(h)(3)(A)(iv)(II) the accrual of such item in the taxable year in which the requirements of clause (i) are met results in a more proper match against income than accruing such item in the taxable year in which economic performance occurs.
461(h)(3)(B) Financial Statements Considered Under Subparagraph (A)(iv)
In making a determination under subparagraph (A)(iv), the treatment of such item on financial statements shall be taken into account.
461(h)(3)(C) Paragraph Not To Apply To Workers Compensation And Tort Liabilities
This paragraph shall not apply to any item described in subparagraph (C) of paragraph (2).

461(h)(4) All Events Test
For purposes of this subsection, the all events test is met with respect to any item if all events have occurred which determine the fact of liability and the amount of such liability can be determined with reasonable accuracy.

461(h)(5) Subsection Not To Apply To Certain Items
This subsection shall not apply to any item for which a deduction is allowable under a provision of this title which specifically provides for a deduction for a reserve for estimated expenses.

Extension for forgotten rental election:

IRS Issues Private Letter Ruling extension time to make election to treat multiple rental properties and a single entity

To avoid the passive-loss rules landlords must send over half their working time and at least 750 hours a year being materially involved with the property. Unless the election to treat multiple rental properties as a single entity is made few taxpayers would meet the time tests. (Kiplinger Tax Letter Vol. 82 #15 7/27/2007)

Trick to catch-up for forgotten depreciation after the asset was sold (using Form 3115 to correct for an impermissible method):

General comments:
Often, not taking depreciation is not an "error," but rather it is the use of an impermissible accounting method, which means that it can only be fixed currently pursuant to the timely filing requirement in the method change rules. This often is a better result than treating it as an error, which could mean losing the unclaimed depreciation from the older, closed years.

The correction can be done even before the year of sale of the property. The correction can be done for the year that it was uncovered. All the forgotten prior-year depreciation is then deducted at once in that year.

Depreciation "Allowed or Allowable" overview: http://www.hoven.com/articles/pdf/allowedorallowable.pdf archive copy

IRS Publication 946 - How Do You Correct Depreciation Deductions?

Terms you may need to know (see Glossary):

Basis
If you deducted an incorrect amount of depreciation in any year, you may be able to make a correction by filing an amended return for that year. See Filing an Amended Return, next. If you are not allowed to make the correction on an amended return, you may be able to change your accounting method to claim the correct amount of depreciation. See Changing Your Accounting Method, later.

Filing an Amended Return
You can file an amended return to correct the amount of depreciation claimed for any property in any of the following situations.

You claimed the incorrect amount because of a mathematical error made in any year.
You claimed the incorrect amount because of a posting error made in any year.
You have not adopted a method of accounting for property placed in service by you in tax years ending after December 29, 2003.
You claimed the incorrect amount on property placed in service by you in tax years ending before December 30, 2003.

Adoption of accounting method defined. Generally, you adopt a method of accounting for depreciation by using a permissible method of determining depreciation when you file your first tax return, or by using the same impermissible method of determining depreciation in two or more consecutively filed tax returns. For an exception to this 2-year rule, see Revenue Procedure 2002-9 on page 327 of Internal Revenue Bulletin 2002-3, available at www.irs.gov/pub/irs-irbs/irb02-03.pdf as modified by Revenue Procedure 2004-11 on page 311 of Internal Revenue Bulletin 2004-3, available at www.irs.gov/pub/irs-irbs/irb04-03.pdf.

When to file. If an amended return is allowed, you must file it by the later of the following.

3 years from the date you filed your original return for the year in which you did not deduct the correct amount. A return filed before an unextended due date is considered filed on that due date.
2 years from the time you paid your tax for that year.

Changing Your Accounting Method
Generally, you must get IRS approval to change your method of accounting. You generally must file Form 3115, Application for Change in Accounting Method, to request a change in your method of accounting for depreciation.

The following are examples of a change in method of accounting for depreciation.

A change in the treatment of an asset from nondepreciable to depreciable or vice versa.
A change in the depreciation method, period of recovery, or convention of a depreciable asset.
A change from not claiming to claiming the special depreciation allowance if you did not make the election to not claim any special allowance.
A change from claiming a 50% special depreciation allowance to claiming a 30% special depreciation allowance for qualified property (including property that is included in a class of property for which you elected a 30% special allowance instead of a 50%special allowance).

Changes in depreciation that are not a change in method of accounting (and may only be made on an amended return) include the following.

An adjustment in the useful life of a depreciable asset for which depreciation is determined under section 167.
A change in use of an asset in the hands of the same taxpayer.
Making a late depreciation election or revoking a timely valid depreciation election (including the election not to deduct the special depreciation allowance). If you elected not to claim any special allowance, a change from not claiming to claiming the special allowance is a revocation of the election and is not an accounting method change. Also, if the property is qualified property, a change from not claiming to claiming any special allowance is a late election and is not an accounting method change.
Any change in the placed-in-service date of a depreciable asset.

See section 1.446-1T(e)(2)(ii)(d) of the regulations for more information and examples.

IRS approval. In some instances, you may be able to get approval from the IRS to change your method of accounting for depreciation under the automatic change request procedures generally covered in Revenue Procedure 2002-9. If you do not qualify to use the automatic procedures to get approval, you must use the advance consent request procedures generally covered in Revenue Procedure 97-27, 1997-1 C.B. 680. Also see the Instructions for Form 3115 for more information on getting approval, including lists of scope limitations and automatic accounting method changes.

Additional guidance. For additional guidance and special procedures for changing your accounting method, automatic change procedures, amending your return, and filing Form 3115, see Revenue Procedure 2004-11, Revenue Procedure 2005-43 on page 107 of Internal Revenue Bulletin 2005-29, available at www.irs.gov/pub/irs-irbs/irb05-29.pdf, and Revenue Procedure 2006-12 on page 310 of Internal Revenue Bulletin 2006-3, available at www.irs.gov/pub/irs-irbs/irb06-03.pdf

Section 481(a) adjustment. If you file Form 3115 and change from an impermissible method to a permissible method of accounting for depreciation, you can make a section 481(a) adjustment for any unclaimed or excess amount of allowable depreciation. The adjustment is the difference between the total depreciation actually deducted for the property and the total amount allowable prior to the year of change. If no depreciation was deducted, the adjustment is the total depreciation allowable prior to the year of change. A negative section 481(a) adjustment results in a decrease in taxable income. It is taken into account in the year of change and is reported on your business tax returns as "other expenses." A positive section 481(a) adjustment results in an increase in taxable income. It is generally taken into account over 4 tax years and is reported on your business tax returns as "other income." However, you can elect to use a one-year adjustment period and report the adjustment in the year of change if the total adjustment is less than $25,000. Make the election by completing the appropriate line on Form 3115.

If you file a Form 3115 and change from one permissible method to another permissible method, the section 481(a) adjustment is zero.

Rev. Proc. 2004-11, 2004-3 I.R.B. 311 (1/20/2004)
Change in Method of Accounting For Depreciable or Amortizable Property After Disposition by Taxpayer

Part III

Administrative, Procedural, and Miscellaneous

26 CFR 601.204: Changes in accounting periods and in methods of accounting. (Also Part I, Sections 446, 1016; 1.446-1T, 1.1016-3T.)

Rev. Proc. 2004-11

SECTION 1. PURPOSE

This revenue procedure provides an automatic consent procedure allowing a taxpayer to make a change in method of accounting under section 446(e) of the Internal Revenue Code for depreciable or amortizable property after its disposition. This revenue procedure also waives the application of the two-year rule set forth in Rev. Rul. 90-38, 1990-1 C.B. 57, for certain changes in depreciation or amortization. Finally, this revenue procedure modifies Rev. Proc. 2002-9, 2002-1 C.B. 327 (as modified by Rev. Proc. 2002-54, 2002-2 C.B. 432, Rev. Proc. 2002-19, 2002-1 C.B. 696, Rev. Proc. 2002-33, 2002-1 C.B. 963, and as modified and clarified by Announcement 2002-17, 2002-1 C.B. 561), and other revenue procedures to conform with section 1.446-1T(e)(2)(ii)(d) of the temporary Income Tax Regulations.

SECTION 2. BACKGROUND

.01 Section 446(e) and section 1.446-1T(e) provide that, except as otherwise provided, a taxpayer must secure the consent of the Commissioner of Internal Revenue before changing a method of accounting for federal income tax purposes. Section 1.446-1T(e)(3)(ii) authorizes the Commissioner to prescribe administrative procedures setting forth the limitations, terms, and conditions deemed necessary to permit a taxpayer to obtain consent to change a method of accounting.

.02 Concurrently with the issuance of this revenue procedure, sections 1.446-1T(e)(2)(ii)(d) and 1.1016-3T(h) have been promulgated. Section 1.446-1T(e)(2)(ii)(d) provides the changes in depreciation or amortization (hereinafter, both are referred to as "depreciation") that are (and are not) changes in method of accounting under section 446(e). Section 1.1016-3T(h) provides that the "allowed or allowable" rule under section 1016(a)(2) does not permanently affect a taxpayer's lifetime income for purposes of determining whether a change in depreciation or amortization is a change in method of accounting under section 446(e).

.03 If a taxpayer uses an impermissible method of determining depreciation for a depreciable or amortizable property, the taxpayer adopts that method of accounting for the property when the taxpayer treats the property in the same way in determining gross income or deductions in two or more consecutively filed federal tax returns. See Rev. Rul. 90-38. The Internal Revenue Service and Treasury Department recognize that this two-year rule increases administrative and compliance costs associated with changes in depreciation because many taxpayers changing from an impermissible to permissible method of accounting for depreciation used the impermissible method for depreciable or amortizable properties placed in service in two or more taxable years before the year of change as well as for depreciable and amortizable properties placed in service in the taxable year immediately preceding the year of change. Accordingly, in the interest of sound tax administration, the Service and Treasury Department have decided to waive the two-year rule in Rev. Rul. 90-38 for a change in depreciation to which section 1.446-1T(e)(2)(ii)(d) applies.

.04 If a depreciable or amortizable property is transferred in a transaction in which the transferee is treated as the transferor for purposes of computing the depreciation allowance for the property with respect to so much of the basis in the hands of the transferee as does not exceed the adjusted depreciable basis in the hands of the transferor (for example, in transactions subject to section 168(i)(7) or section 381(c)(6)), the transferee may file a Form 3115, Application for Change in Accounting Method, to change from an impermissible method of accounting adopted by the transferor for that portion of the basis of the property to a permissible method of accounting for depreciation for the same portion of the basis of the property, provided the impermissible method of accounting for that portion of the basis of the property has not been changed by the transferor (through filing, for example, a Form 3115 or an amended return) or by the Internal Revenue Service upon examination of the transferor's tax returns. In this case, the section 481 adjustment will include any necessary adjustments since the property's placed-in-service date by the transferor.

SECTION 3. METHOD CHANGE PROCEDURE FOR DISPOSED DEPRECIABLE OR AMORTIZABLE PROPERTY

.01 Scope.

(1) Applicability. Except as provided in section 3.01(2) of this revenue procedure, section 3 of this revenue procedure applies to a taxpayer that is changing from an impermissible method of accounting for depreciation to a permissible method of accounting for depreciation for any item of depreciable or amortizable property subject to section 1.446-1T(e)(2)(ii)(d):

(a) that has been disposed of by the taxpayer during the year of change (as defined in section 3.02(2)(b) of this revenue procedure); and

(b) for which the taxpayer did not take into account any depreciation allowance, or did take into account some depreciation but less than the depreciation allowable (hereinafter, both are referred to as "claimed less than the depreciation allowable"), in the year of change (as defined in section 3.02(2)(b) of this revenue procedure) or any prior taxable year.

(2) Inapplicability. Section 3 of this revenue procedure does not apply to:

(a) any property to which section 1016(a)(3) (regarding property held by a tax-exempt organization) applies;

(b) any property for which a taxpayer is revoking a timely valid depreciation election, or making a late depreciation election, under the Code or regulations thereunder, or under other guidance published in the Internal Revenue Bulletin (including under section 13261(g)(2) or (3) of the Revenue Reconciliation Act of 1993, 1993-3 C.B. 1, 128 (relating to amortizable section 197 intangibles));

(d) any property disposed of by the taxpayer in a transaction to which a nonrecognition section of the Code applies (for example, section 1031, transactions subject to section 168(i)(7)(B)(i)). However, this section 3.01(2)(d) does not apply to property disposed of by the taxpayer in a section 1031 or section 1033 transaction if the taxpayer elects to treat the entire basis (that is, both the carryover and excess basis) of the acquired MACRS property as property placed in service by the taxpayer at the time of replacement and treat the adjusted depreciable basis of the exchanged or involuntarily converted MACRS property as being disposed of by the taxpayer at the time of disposition.

.02 Change in method of accounting.

(1) In general. A taxpayer within the scope of section 3 of this revenue procedure may change from an impermissible method of accounting for depreciation to a permissible method of accounting for depreciation for any item of depreciable or amortizable property within the scope of section 3 of this revenue procedure, provided:

(a) the taxpayer files the original Form 3115 in accordance with section 3.02(2)(c) of this revenue procedure, prior to the expiration of the period of limitation for assessment under section 6501(a) for the taxable year in which the item of depreciable or amortizable property was disposed of by the taxpayer; and

(b) the taxpayer files an amended federal tax return for the year of change (as defined in section 3.02(2)(b) of this revenue procedure) that includes the adjustments to taxable income and any collateral adjustments to taxable income or tax liability (for example, adjustments to the amount or character of the gain or loss of the disposed depreciable or amortizable property) resulting from the change in method of accounting for depreciation made by the taxpayer under this section 3.

(2) Application Procedures. A taxpayer making a change in method of accounting under section 3 of this revenue procedure must follow the automatic change in method of accounting provisions in Rev. Proc. 2002-9 (or its successor), with the following modifications:

(a) The scope limitations in section 4.02 of Rev. Proc. 2002-9 do not apply. If the taxpayer is under examination, before an appeals office, or before a federal court at the time that a copy of the Form 3115 is filed with the national office, the taxpayer must provide a copy of the Form 3115 to the examining agent, appeals officer, or counsel for the government, as appropriate, at the time the copy of the Form 3115 is filed with the national office. The Form 3115 must contain the name(s) and telephone number(s) of the examining agent, appeals officer, or counsel for the government, as appropriate.

(b) The year of change is the taxable year in which the item of depreciable or amortizable property was disposed of by the taxpayer.

(c) Section 6.02(3)(a) of Rev. Proc. 2002-9 is modified to require the original of the Form 3115 to be attached to the taxpayer's timely filed amended federal tax return for the year of change and a copy (with signature) of the Form 3115 to be filed with the national office no later than when the original Form 3115 is filed with the amended federal tax return for the year of change.

(d) For purposes of section 6.02(4)(a) of Rev. Proc. 2002-9, the taxpayer should include on line 1a of the Form 3115 (revised December 2003) the designated automatic accounting method change number for the change in method of accounting for depreciation made under this section 3. This number for this method change is "9."

SECTION 4. WAIVER OF TWO-YEAR RULE IN REV. RUL. 90-38

.01 In general. Notwithstanding Rev. Rul. 90-38, a taxpayer may file a Form 3115 under Rev. Proc. 97-27, 1997-1 C.B. 680 (or its successor), or Rev. Proc. 2002-9, as applicable, to change from an impermissible method of accounting for depreciation to a permissible method of accounting for depreciation under section 1.446-1T(e)(2)(ii)(d) for any depreciable or amortizable property subject to section 1.446-1T(e)(2)(ii)(d) and placed in service by the taxpayer in the taxable year immediately preceding the year of change (as defined in section 5.02(2) of Rev. Proc. 97-27 or section 5.02 of Rev. Proc. 2002-9, as applicable) (hereinafter, this property is referred to as "1-year depreciable property"), provided the additional term and condition in section 4.02 of this revenue procedure is satisfied. Alternatively, the taxpayer may make the change from the impermissible depreciation method to the permissible depreciation method for the 1-year depreciable property by filing an amended federal tax return for the placed-in-service year prior to the date the taxpayer files its federal tax return for the taxable year succeeding the placed-in-service year.

.02 Additional term and condition for filing a Form 3115. In addition to the terms and conditions provided in Rev. Proc. 97-27 or Rev. Proc. 2002-9, as applicable, the section 481 adjustment reported on a Form 3115 that is filed by a taxpayer in accordance with section 4.01 of this revenue procedure to make a change in method of accounting for depreciation under section 1.446-1T(e)(2)(ii)(d) for any 1-year depreciable property, must include the amount of any adjustment attributable to all property (including the 1-year depreciable property) subject to the Form 3115.

SECTION 5. EFFECT ON OTHER DOCUMENTS

.01 Rev. Proc. 2002-9 is modified and amplified to include the accounting method change provided under section 3 of this revenue procedure in section 2.05 of the APPENDIX. See section 4 of the APPENDIX of this revenue procedure for the text of section 2.05 of the APPENDIX of Rev. Proc. 2002-9.

.02 The heading for section 2 of the APPENDIX of Rev. Proc. 2002-9 is modified to read as follows: "SECTION 2. DEPRECIATION OR AMORTIZATION (section 56(a)(1), 56(g)(4)(A), 167, 168, 197, 1400I, OR 1400L, OR FORMER SECTION 168)".

.03 Rev. Proc. 2002-9 (as modified by Rev. Proc. 2002-33) is modified by deleting sections 2.01, 2.02, and 2B of the APPENDIX and replacing them with the text in, respectively, sections 1, 2, and 3 of the APPENDIX of this revenue procedure.

.04 Section 6.03 of Rev. Proc. 2000-38, 2000-2 C.B. 310, 313, is modified by deleting "See section 1.446-1(e)(2)(ii)(b)." and replacing it with "See section 1.446-1T(e)(2)(ii)(d)(3)(i)."

.05 Section 8.01 of Rev. Proc. 2000-50, 2000-2 C.B. 601, is modified to read as follows: "A change in a taxpayer's treatment of costs paid or incurred to develop, purchase, lease, or license computer software to a method described in section 5, 6, or 7 of this revenue procedure is a change in method of accounting to which §§446 and 481 apply. Further, a change in useful life under the method described in section 5.01(2) or 6.01(2) of this revenue procedure is a change in method of accounting. See section 1.446-1T(e)(2)(ii)(d)(3)(i) and, for the effective date, see section 1.446-1T(e)(4)(ii)(A)."

SECTION 6. EFFECTIVE DATE

.01 In general. Except as provided in section 6.02 of this revenue procedure, this revenue procedure is effective for a Form 3115 filed for taxable years ending on or after December 30, 2003.

.02 Transition rule for previously filed Forms 3115 for automatic consent.

(1) For a taxable year ending on or after December 30, 2003, a taxpayer may make a change in method of accounting previously authorized in section 2.01, 2.02, or 2B of the APPENDIX of Rev. Proc. 2002-9 before any amendments were made to those sections by this revenue procedure if:

(a) before December 30, 2003, the taxpayer filed a completed Form 3115 with the national office to make that change in method of accounting; and

(b) the taxpayer makes that change in method of accounting in compliance with all the applicable provisions of Rev. Proc. 2002-9 for the requested year of change (as defined in section 5.02 of Rev. Proc. 2002-9) on that Form 3115.

(2) If a taxpayer filed a Form 3115 with the national office to make a change in method of accounting previously authorized in section 2.01, 2.02, or 2B of the APPENDIX of Rev. Proc. 2002-9 before any amendments were made to those sections by this revenue procedure for a year of change for which this revenue procedure is effective (see section 6.01 of this revenue procedure) and the taxpayer's original federal tax return for that year of change was not filed before December 30, 2003, the taxpayer may make the change in method of accounting authorized under section 2.01, 2.02, or 2B, as applicable, of the APPENDIX of Rev. Proc. 2002-9 as revised by this revenue procedure. However, the Service will process the Form 3115 in accordance with the section of the APPENDIX of Rev. Proc. 2002-9 in effect on the date on which the Form 3115 was filed with the national office by the taxpayer unless on or before the due date (including extensions) of the taxpayer's federal tax return for the requested year of change (as defined in section 5.02 of Rev. Proc. 2002-9) on that Form 3115, the taxpayer completes a new Form 3115 to make the change under section 2.01, 2.02, or 2B, as applicable, of the APPENDIX of Rev. Proc. 2002-9 as revised by this revenue procedure and files this newly completed Form 3115 in duplicate in accordance with section 6.02(3)(a) of Rev. Proc. 2002-9. Additionally, the newly completed Form 3115 must include the statement: "Section [insert, as appropriate: 2.01, 2.02, or 2B] of the APPENDIX of Rev. Proc. 2002-9 as revised by Rev. Proc. 2004-11." This statement must be legibly printed or typed on the appropriate line on, or at the top of page 1 of, the Form 3115.

SECTION 7. DRAFTING INFORMATION

The principal author of this revenue procedure is Sara Logan of the Office of Associate Chief Counsel (Passthroughs and Special Industries). For further information regarding this revenue procedure, contact Ms. Logan or Douglas Kim at (202) 622-3110 (not a toll free call).

APPENDIX

SECTION 1. Section 2.01 of the APPENDIX of Rev. Proc 2002-9 is deleted and replaced with the following:

".01 Impermissible to permissible method of accounting for depreciation or amortization.

(1) Description of change and scope.

(a) Applicability. This change applies to a taxpayer that wants to change from an impermissible to a permissible method of accounting for depreciation or amortization (depreciation) for any item of depreciable or amortizable property:

(i) for which the taxpayer used the impermissible method of accounting in at least the two taxable years immediately preceding the year of change (but see section 2.01(1)(b) of this APPENDIX for property placed in service in the taxable year immediately preceding the year of change);

(ii) for which the taxpayer is making a change in method of accounting under section 1.446-1T(e)(2)(ii)(d);

(iii) for which depreciation is determined under section 56(a)(1), section 56(g)(4)(A), section 167, section 168, section 197, section 1400I, section 1400L(b), or section 1400L(c), or under section 168 prior to its amendment in 1986 (former section 168); and

(iv) that is owned by the taxpayer at the beginning of the year of change (but see section 2.05 of this APPENDIX for property disposed of before the year of change).

(b) Taxpayer has not adopted a method of accounting for the item of property. If a taxpayer does not satisfy section 2.01(1)(a)(i) of this APPENDIX for an item of depreciable or amortizable property because this item of property is placed in service by the taxpayer in the taxable year immediately preceding the year of change ("1-year depreciable property"), the taxpayer may change from the impermissible depreciation method to the permissible depreciation method for the 1-year depreciable property by filing a Form 3115 for this change, provided the section 481 adjustment reported on the Form 3115 includes the amount of any adjustment that is attributable to all property (including the 1-year depreciable property) subject to the Form 3115. Alternatively, the taxpayer may change from the impermissible depreciation method to the permissible depreciation method for a 1-year depreciable property by filing an amended federal tax return for the property's placed-in-service year prior to the date the taxpayer files its federal tax return for the taxable year succeeding the placed-in-service year.

(c) Certain scope limitations inapplicable. The scope limitations in sections 4.02(7) and 4.02(8) of this revenue procedure are not applicable to this change.

(d) Inapplicability. This change does not apply to:

(i) any property to which section 1016(a)(3) (regarding property held by a tax-exempt organization) applies;

(ii) any taxpayer that is subject to section 263A and that is required to capitalize the costs with respect to which the taxpayer wants to change its method of accounting under section 2.01 of this APPENDIX, if the taxpayer is not capitalizing the costs as required;

(iii) any property for which a taxpayer is making a change in depreciation under section 1.446-1T(e)(2)(ii)(d)(2)(vi) or (vii);

(iv) any property subject to section 167(g) (regarding property depreciated under the income forecast method);

(v) any section 1250 property that a taxpayer is reclassifying to an asset class of Rev. Proc. 87-56, 1987-2 C.B. 674, or Rev. Proc. 83-35, 1983-1 C.B. 745, as appropriate, that does not explicitly include section 1250 property (for example, asset class 57.0, Distributive Trades and Services);

(vi) any property for which a taxpayer is revoking a timely valid election, or making a late election, under section 167, section 168, section 1400I, section 1400L, former section 168, or section 13261(g)(2) or (3) of the Revenue Reconciliation Act of 1993 (1993 Act), 1993-3 C.B. 1, 128 (relating to amortizable section 197 intangibles). A taxpayer may request consent to revoke or make the election by submitting a request for a letter ruling under Rev. Proc. 2003-1, 2003-1 I.R.B. 1 (or any successor). See section 1.446-1T(e)(2)(ii)(d)(3)(iii);

(vii) any property for which depreciation is determined under section 56(g)(4)(A) or section 167 (other than under section 168, section 1400I, section 1400L, or former section 168) and a taxpayer is changing the useful life of the property. A change in the useful life of property is corrected by adjustments in the applicable taxable year provided under section 1.446-1T(e)(2)(ii)(d)(3)(i). However, this section 2.01(1)(d)(vii) of this APPENDIX does not apply if the taxpayer is changing to or from a useful life, recovery period, or amortization period that is specifically assigned by the Internal Revenue Code (for example, section 167(f)(1), section 168(c)), the regulations thereunder, or other guidance published in the Internal Revenue Bulletin and, therefore, this change is a change in method of accounting (unless section 2.01(1)(d)(xv) of this APPENDIX applies). See section 1.446-1T(e)(2)(ii)(d)(3)(i);

(viii) any depreciable property for which the use changes in the hands of the same taxpayer. See section 1.446-1T(e)(2)(ii)(d)(3)(ii);

(ix) any property for which depreciation is determined in accordance with section 1.167(a)-11 (regarding the Class Life Asset Depreciation Range System (ADR));

(x) any change in method of accounting involving a change from deducting the cost or other basis of any property as an expense to capitalizing and depreciating the cost or other basis;

(xi) any change in method of accounting involving a change from one permissible method of accounting for the property to another permissible method of accounting for the property. For example:

(A) a change from the straight-line method of depreciation to the income forecast method of depreciating for videocassettes. See Rev. Rul. 89-62, 1989-1 C.B. 78; or

(B) a change from charging the depreciation reserve with costs of removal and crediting the depreciation reserve with salvage proceeds to deducting costs of removal as an expense (provided the costs of removal are not required to be capitalized under any provision of the Code, such as, section 263(a)) and including salvage proceeds in taxable income (see section 2.02 of this APPENDIX for making this change for property for which depreciation is determined under section 167);

(xii) any change in method of accounting involving both a change from treating the cost or other basis of the property as nondepreciable or nonamortizable property to treating the cost or other basis of the property as depreciable or amortizable property and the adoption of a method of accounting for depreciation requiring an election under section 167, section 168, section 1400I, section 1400L(b), former section 168, or section 13261(g)(2) or (3) of the 1993 Act (for example, a change in the treatment of the space consumed in landfills placed in service in 1990 from nondepreciable to depreciable property (assuming section 2.01(1)(d)(xiii) of the APPENDIX does not apply) and the making of an election under section 168(f)(1) to depreciate this property under the unit of production method of depreciation under section 167);

(xiii) any change in method of accounting for any item of income or deduction other than depreciation, even if the change results in a change in computing depreciation under section 1.446-1T(e)(2)(ii)(d)(2)(i), (ii), (iii), (iv), (v), (vi), (vii), or (viii). For example, a change in method of accounting involving:

(A) a change in inventory costs (for example, when property is reclassified from inventory property to depreciable property, or vice versa) (but see section 3.02 of this APPENDIX for making a change from inventory property to depreciable property for unrecoverable line pack gas or unrecoverable cushion gas); or

(B) a change in the character of a transaction from sale to lease, or vice versa (but see section 2.03 of this APPENDIX for making this change);

(xiv) a change from determining depreciation under section 168 to determining depreciation under former section 168 for any property subject to the transition rules in section 203(b) or 204(a) of the Tax Reform Act of 1986, 1986-3 (Vol. 1) C.B. 1, 60-80; or

(xv) any change in the placed-in-service date of a depreciable or amortizable property. This change is corrected by adjustments in the applicable taxable year provided under section 1.446-1T(e)(2)(ii)(d)(3)(v).

(2) Additional requirements. A taxpayer also must comply with the following:

(a) Permissible method of accounting for depreciation. A taxpayer must change to a permissible method of accounting for depreciation for the item of depreciable or amortizable property. The permissible method of accounting is the same method that determines the depreciation allowable for the item of property (as provided in section 2.01(5) of this APPENDIX).

(b) Statements required. A taxpayer must provide the following statements, if applicable, and attach them to the completed application:

(i) a detailed description of the former and new methods of accounting. A general description of these methods of accounting is unacceptable (for example, MACRS to MACRS, erroneous method to proper method, claiming less than the depreciation allowable to claiming the depreciation allowable);

(ii) to the extent not provided elsewhere on the application, a statement describing the taxpayer's business or income-producing activities. Also, if the taxpayer has more than one business or income-producing activity, a statement describing the taxpayer's business or income-producing activity in which the item of property at issue is primarily used by the taxpayer;

(iii) to the extent not provided elsewhere on the application, a statement of the facts and law supporting the new method of accounting, new classification of the item of property, and new asset class in, as appropriate, Rev. Proc. 87-56 or Rev. Proc. 83-35. If the taxpayer is the owner and lessor of the item of property at issue, the statement of the facts and law supporting the new asset class also must describe the business or income-producing activity in which that item of property is primarily used by the lessee;

(iv) to the extent not provided elsewhere on the application, a statement identifying the year in which the item of property was placed in service;

(v) if the item of property is depreciated under former section 168, a statement identifying the asset class in Rev. Proc. 83-35 that applies under the taxpayer's former and new methods of accounting (if none, state and explain);

(vi) if any item of property is public utility property within the meaning of section 168(i)(10) or former section 167(l)(3)(A), as applicable, a statement providing that the taxpayer agrees to the following additional terms and conditions:

(A) a normalization method of accounting (within the meaning of former section 167(l)(3)(G), former section 168(e)(3)(B), or section 168(i)(9), as applicable) will be used for the public utility property subject to the application;

(B) as of the beginning of the year of change, the taxpayer will adjust its deferred tax reserve account or similar reserve account in the taxpayer's regulatory books of account by the amount of the deferral of federal income tax liability associated with the section 481(a) adjustment applicable to the public utility property subject to the application; and

(C) within 30 calendar days of filing the federal income tax return for the year of change, the taxpayer will provide a copy of the completed application to any regulatory body having jurisdiction over the public utility property subject to the application;

(vii) if the taxpayer is changing the classification of an item of section 1250 property placed in service after August 19, 1996, to a retail motor fuels outlet under section 168(e)(3)(E)(iii), a statement containing the following representation: "For purposes of section 168(e)(3)(E)(iii) of the Internal Revenue Code, the taxpayer represents that (A) 50 percent or more of the gross revenue generated from the item of section 1250 property is from the sale of petroleum products (not including gross revenue from related services, such as the labor cost of oil changes and gross revenue from the sale of nonpetroleum products such as tires and oil filters), (B) 50 percent or more of the floor space in the item of property is devoted to the sale of petroleum products (not including floor space devoted to related services, such as oil changes and floor space devoted to nonpetroleum products such as tires and oil filters), or (C) the time of section 1250 property is 1,400 square feet or less."; and

(viii) if the taxpayer is changing the classification of an item of property from section 1250 property to section 1245 property under section 168 or former section 168, a statement of the facts and law supporting the new section 1245 property classification, and a statement containing the following representation: "Each item of depreciable property that is the subject of the application filed under section 2.01 of the APPENDIX of Rev. Proc. 2002-9 for the year of change beginning [Insert the date], and that is reclassified from [Insert, as appropriate: nonresidential real property, residential rental property, 19-year real property, 18-year real property, or 15-year real property] to an asset class of [Insert, as appropriate, either: Rev. Proc. 87-56, 1987-2 C.B. 674, or Rev. Proc. 83-35, 1983-1 C.B. 745] that does not explicitly include section 1250 property, is section 1245 property for depreciation purposes."

(3) Section 481(a) adjustment. Because the adjusted basis of the property is changed as a result of a method change made under section 2.01 of this APPENDIX (see section 2.01(4) of this APPENDIX), items are duplicated or omitted. Accordingly, this change is made with a section 481(a) adjustment. This adjustment may result in either a negative section 481(a) adjustment (a decrease in taxable income) or a positive section 481(a) adjustment (an increase in taxable income) and may be a different amount for regular tax, alternative minimum tax, and adjusted current earnings purposes. This section 481(a) adjustment equals the difference between the total amount of depreciation taken into account in computing taxable income for the property under the taxpayer's former method of accounting (including the amount attributable to any property described in section 2.01(1)(b) of this APPENDIX that is included in the taxpayer's Form 3115), and the total amount of depreciation allowable for the property under the taxpayer's new method of accounting (as determined under section 2.01(5) of this APPENDIX, and including the amount attributable to any property described in section 2.01(1)(b) of this APPENDIX that is included in the taxpayer's Form 3115), for open and closed years prior to the year of change. However, the amount of the section 481(a) adjustment must be adjusted to account for the proper amount of the depreciation allowable that is required to be capitalized under any provision of the Code (for example, section 263A) at the beginning of the year of change.

(4) Basis adjustment. As of the beginning of the year of change, the basis of depreciable property to which section 2.01 of this APPENDIX applies must reflect the reductions required by section 1016(a)(2) for the depreciation allowable for the property (as determined under section 2.01(5) of this APPENDIX).

(5) Meaning of depreciation allowable.

(a) In general. Section 2.01(5) of this APPENDIX provides the amount of the depreciation allowable determined under section 56(a)(1), section 56(g)(4)(A), section 167, section 168, section 197, section 1400I, or section 1400L(c), or former section 168. This amount, however, may be limited by other provisions of the Code (for example, section 280F).

(b) Section 56(a)(1) property. The depreciation allowable for any taxable year for property for which depreciation is determined under section 56(a)(1) is determined by using the depreciation method, recovery period, and convention provided for under section 56(a)(1) that applies for the property's placed-in-service date.

(c) Section 56(g)(4)(A) property. The depreciation allowable for any taxable year for property for which depreciation is determined under section 56(g)(4)(A) is determined by using the depreciation method, recovery period or useful life, as applicable, and convention provided for under section 56(g)(4)(A) that applies for the property's placed-in-service date.

(d) Section 167 property. Generally, for any taxable year, the depreciation allowable for property for which depreciation is determined under section 167, is determined either:

(i) under the depreciation method adopted by a taxpayer for the property; or

(ii) if that depreciation method does not result in a reasonable allowance for depreciation or a taxpayer has not adopted a depreciation method for the property, under the straight-line depreciation method.

For determining the estimated useful life and salvage value of the property, see section 1.167(a)-1(b) and (c), respectively.

The depreciation allowable for any taxable year for property subject to section 167(f) (regarding certain property ex csuded from section 197) is determined by using the depreciation method and useful life prescribed in section 167(f). If computer software is depreciated under section 167(f)(1) and is qualified property (as defined in §168(k)(2) and section 1.168(k)-1T of the temporary Income Tax Regulations), 50-percent bonus depreciation property (as defined in §168(k)(4) and section 1.168(k)-1T), or qualified New York Liberty Zone (Liberty Zone) property (as defined in section 1400L(b)(2) and section 1.1400L(b)-1T), the depreciation allowable for that computer software under section 167(f)(1) is also determined by taking into account the additional first year depreciation deduction provided by section 168(k) or section 1400L(b), as applicable, unless the taxpayer made a timely valid election not to deduct any additional first year depreciation for the computer software.

(e) Section 168 property. The depreciation allowable for any taxable year for property for which depreciation is determined under section 168, is determined as follows:

(i) by using either:

(A) the general depreciation system in section 168(a); or

(B) the alternative depreciation system in section 168(g) if the property is required to be depreciated under the alternative depreciation system pursuant to section 168(g)(1) or other provisions of the Code (for example, property described in section 263A(e)(2)(A) or section 280F(b)(1)). Property required to be depreciated under the alternative depreciation system pursuant to section 168(g)(1) includes property in a class (as set out in section 168(e)) for which the taxpayer made a timely valid election under section 168(g)(7); and

(ii) if the property is qualified property, 50-percent bonus depreciation property, or Liberty Zone property, by taking into account the additional first year depreciation deduction provided by section 168(k) or section 1400L(b), as applicable, unless the taxpayer made a timely valid election not to deduct the additional first year depreciation (or made a deemed election not to deduct the additional first year depreciation; for further guidance, see Rev. Proc. 2002-33, 2002-1 C.B. 963, or Rev. Proc. 2003-50, 2003-29 I.R.B. 119) for the class of property (as defined in section 1.168(k)-1T(e)(2) or section 1.1400L(b)-1T(e)(2), as applicable) in which that property is included.

(f) Section 197 property. The depreciation allowable for any taxable year for an amortizable section 197 intangible (including any property for which a timely election under section 13261(g)(2) of the 1993 Act was made) is determined in accordance with section 1.197-2(f).

(g) Former section 168 property. The depreciation allowable for any taxable year for property subject to former section 168 is determined by using either:

(i) the accelerated method of cost recovery applicable to the property (for example, for 5-year property, the recovery method under former section 168(b)(1)); or

(ii) the straight-line method applicable to the property if the property is required to be depreciated under the straight-line method (for example, property described in former section 168(f)(12) or former section 280F(b)(2)) or if the taxpayer elected to determine the depreciation allowance under the optional straight-line percentage (for example, the straight-line method in former section 168(b)(3)).

(h) Qualified revitalization building. The depreciation allowable for any taxable year for any qualified revitalization building (as defined in section 1400I(b)(1)) for which the taxpayer has made a timely valid election under section 1400I(a) is determined as follows:

(i) if the taxpayer elected to deduct one-half of any qualified revitalization expenditures (as defined in section 1400I(b)(2)) chargeable to a capital account with respect to the qualified revitalization building for the taxable year in which the building is placed in service by the taxpayer, the depreciation allowable for the property's placed-in-service year is equal to one-half of the qualified revitalization expenditures for the property and the depreciation allowable for the remaining recovery period of the property is determined using the general depreciation system of section 168(a) or the alternative depreciation system of section 168(g), as applicable; or

(ii) if the taxpayer elected to amortize all of the qualified revitalization expenditures chargeable to a capital account with respect to the qualified revitalization building ratably over the 120-month period beginning with the month in which the building is placed in service, the depreciation allowable is determined in accordance with this election.

(i) Qualified New York Liberty Zone leasehold improvement property. The depreciation allowable for any taxable year for qualified New York Liberty Zone leasehold improvement property (as defined in section 1400L(c)(2)) is determined by using the depreciation method and recovery period prescribed in section 1400L(c)."

SECTION 2. Section 2.02 of the APPENDIX of Rev. Proc. 2002-9 is deleted and replaced with the following:

".02 Permissible to permissible method of accounting for depreciation.

(1) Description of change. This change applies to a taxpayer that wants to change from a permissible method of accounting for depreciation under section 56(g)(4)(A)(iv) or section 167 to another permissible method of accounting for depreciation under section 56(g)(4)(A)(iv) or section 167. Pursuant to section 1.167(a)-7(a) and (c), a taxpayer may account for depreciable property either by treating each individual asset as an account or by combining two or more assets in a single account and, for each account, depreciation allowances are computed separately.

(2) Scope.

(a) Applicability. This change applies to any taxpayer wanting to make a change in method of accounting for depreciation specified in section 2.02(3) of this APPENDIX for the property in an account:

(i) for which the present and proposed methods of accounting for depreciation specified in section 2.02(3) of this APPENDIX are permissible methods for the property under section 56(g)(4)(A)(iv) or section 167; and

(ii) that is owned by the taxpayer at the beginning of the year of change.

(b) Certain scope limitations inapplicable. The scope limitations in sections 4.02(7) and 4.02(8) of this revenue procedure are not applicable to this change.

(i) any taxpayer that is subject to section 263A and that is required to capitalize the costs with respect to which the taxpayer wants to change its method of accounting under section 2.02 of this APPENDIX, if the taxpayer is not capitalizing the costs as required;

(ii) any property to which section 1016(a)(3) (regarding property held by a tax-exempt organization) applies;

(iii) any property described in section 167(f) (regarding certain property excluded from section 197);

(iv) any property subject to section 167(g) (regarding property depreciated under the income forecast method);

(v) any property for which depreciation is determined under section 56(a)(1), section 56(g)(4)(A)(i), (ii), (iii), or (v), section 168, section 1400I, section 1400L(b), or section 1400L(c), or section 168 prior to its amendment in 1986 (former section 168);

(vi) any property that the taxpayer elected under section 168(f)(1) or former section 168(e)(2) to exclude from the application of, respectively, section 168 or former section 168;

(vii) any property for which depreciation is determined in accordance with section 1.167(a)-11 (regarding the Class Life Asset Depreciation Range System (ADR));

(viii) any depreciable property for which the taxpayer is changing the depreciation method pursuant to section 1.167(e)-1T(b) of the temporary Income Tax Regulations (change from declining-balance method to straight-line method), section 1.167(e)-1T(c) (certain changes for section 1245 property), or section 1.167(e)-1T(d) (certain changes for section 1250 property). These changes must be made prospectively and are not permitted under the cited regulations for property for which the depreciation is determined under section 168, section 1400I, section 1400L, or former section 168; or

(ix) any distributor commissions (as defined by section 2 of Rev. Proc. 2000-38, 2000-2 C.B. 310) for which the taxpayer is changing the useful life under the distribution fee period method or the useful life method (both described in Rev. Proc. 2000-38). A change in this useful life is corrected by adjustments in the applicable taxable year provided under section 1.446-1T(e)(2)(ii)(d)(3)(i).

(3) Changes covered. Section 2.02 of this APPENDIX only applies to the following changes in methods of accounting for depreciation:

(a) a change from the straight-line method to the sum-of-the-years-digits method, the sinking fund method, the unit-of-production method, or the declining-balance method using any proper percentage of the straight-line rate;

(b) a change from the declining-balance method using any percentage of the straight-line rate to the sum-of-the-years-digits method, the sinking fund method, or the declining-balance method using a different proper percentage of the straight-line rate;

(c) a change from the sum-of-the-years-digits method to the sinking fund method, the declining-balance method using any proper percentage of the straight-line rate, or the straight-line method;

(d) a change from the unit-of-production method to the straight-line method;

(e) a change from the sinking fund method to the straight-line method, the unit-of-production method, the sum-of-the-years-digits method, or the declining-balance method using any proper percentage of the straight-line rate;

(f) a change in the interest factor used in connection with a compound interest method or sinking fund method;

(g) a change in averaging convention as set forth in section 1.167(a)-10(b). However, as specifically provided in section 1.167(a)-10(b), in any taxable year in which an averaging convention substantially distorts the depreciation allowance for the taxable year, it may not be used (see Rev. Rul. 73-202, 1973-1 C.B. 81);

(h) a change from charging the depreciation reserve with costs of removal and crediting the depreciation reserve with salvage proceeds to deducting costs of removal as an expense and including salvage proceeds in taxable income as set forth in section 1.167(a)-8(e)(2). See Rev. Rul. 74-455, 1974-2 C.B. 63. This change, however, may be made under this revenue procedure only if:

(i) the change is applied to all items in the account for which the change is being made; and

(ii) the removal costs are not required to be capitalized under any provision of the Code (for example, section 263(a), 263A, or 280B);

(i) a change from crediting the depreciation reserve with the salvage proceeds realized on normal retirement sales to computing and recognizing gains and losses on the sales (see Rev. Rul. 70-165, 1970-1 C.B. 43);

(j) a change from crediting ordinary income (including the combination method of crediting the lesser of estimated salvage value or actual salvage proceeds to the depreciation reserve, with any excess of salvage proceeds over estimated salvage value credited to ordinary income) with the salvage proceeds realized on normal retirement sales, to computing and recognizing gains and losses on the sales (see Rev. Rul. 70-166, 1970-1 C.B. 44);

(k) a change from item accounting for specific assets to multiple asset accounting for the same assets, or vice versa;

(l) a change from one type of multiple asset accounting (pooling) for specific assets to a different type of multiple asset accounting (pooling) for the same assets;

(m) a change from one method described in Rev. Proc. 2000-38 for amortizing distributor commissions (as defined by section 2 of Rev. Proc. 2000-38, 2000-2 C.B. 310) to another method described in Rev. Proc. 2000-38 for amortizing distributor commissions; or

(n) a change from pooling to a single asset, or vice versa, for distributor commissions (as defined by section 2 of Rev. Proc. 2000-38, 2000-2 C.B. 310) for which the taxpayer is using the distribution fee period method or the useful life method (both described in Rev. Proc. 2000-38).

(4) Additional requirements. A taxpayer also must comply with the following:

(a) Basis for depreciation. At the beginning of the year of change, the basis for depreciation of property to which this change applies is the adjusted basis of the property as provided in section 1011 at the end of the taxable year immediately preceding the year of change (determined under the taxpayer's present method of accounting for depreciation). If applicable under the taxpayer's proposed method of accounting for depreciation, this adjusted basis is reduced by the estimated salvage value of the property (for example, a change to the straight-line method).

(b) Rate of depreciation. The rate of depreciation for property changed to:

(i) the straight-line or the sum-of-the-years-digits method of depreciation must be based on the remaining useful life of the property as of the beginning of the year of change; or

(ii) the declining-balance method of depreciation must be based on the useful life of the property measured from the placed-in-service date, and not the expected remaining life from the date the change becomes effective.

(c) Regulatory requirements. For changes in method of depreciation to the sum-of-the-years-digits or declining-balance method, the property must meet the requirements of section 1.167(b)-0 or 1.167(c)-1, as appropriate.

(d) Public utility property. If any item of property is public utility property within the meaning of former section 167(l)(3)(A), the taxpayer must attach to the application a statement providing that the taxpayer agrees to the following additional terms and conditions:

(i) a normalization method of accounting within the meaning of former section 167(l)(3)(G) will be used for the public utility property subject to the application; and

(ii) within 30 calendar days of filing the federal income tax return for the year of change, the taxpayer will provide a copy of the completed application to any regulatory body having jurisdiction over the public utility property subject to the application.

(5) Section 481(a) adjustment. Because the adjusted basis of the property is not changed as a result of a method change made under section 2.02 of this APPENDIX, no items are being duplicated or omitted. Accordingly, no section 481(a) adjustment is required or necessary."

SECTION 3. Section 2B of the APPENDIX of Rev. Proc. 2002-9 is deleted and replaced with the following:

"SECTION 2B. COMPUTER SOFTWARE EXPENDITURES (SECTIONS 162, 167, AND 197)

.01 Description of change. This change applies to a taxpayer that wants to change its method of accounting for the costs of computer software to a method described in Rev. Proc. 2000-50, 2000-2 C.B. 601. Section 5 of Rev. Proc. 2000-50 describes the methods applicable to the costs of developing computer software. Section 6 of Rev. Proc. 2000-50 describes the method applicable to the costs of acquired computer software. Section 7 of Rev. Proc. 2000-50 describes the method applicable to leased or licensed computer software. If a taxpayer treats the costs of computer software in accordance with the applicable method described in Rev. Proc. 2000-50, the Service will not disturb the taxpayer's treatment of its costs of computer software.

.02 Scope. This change applies to all costs of computer software as defined in section 2 of Rev. Proc. 2000-50. However, this change does not apply to any computer software that is subject to amortization as an "amortizable section 197 intangible" as defined in section 197(c) and the regulations thereunder, or to costs that a taxpayer has treated as research and experimentation expenditures under section 174.

.03 Statement required. If a taxpayer is changing to the method described in section 5.01(2) of Rev. Proc. 2000-50, the taxpayer must attach to the application a statement providing the information required in section 8.02(2) of Rev. Proc. 2000-50."

SECTION 4. Section 2.05 of the APPENDIX of Rev. Proc. 2002-9 is added to read as follows:

".05 Impermissible to permissible method of accounting for depreciation or amortization for disposed depreciable or amortizable property.

(1) Description of change. This change applies to a taxpayer that wants to make the change in method of accounting for depreciation or amortization (depreciation) provided under section 3 of Rev. Proc. 2004-11, 2004-3 I.R.B. 311, for an item of depreciable or amortizable property that has been disposed of by the taxpayer. Section 3 of Rev. Proc. 2004-11 allows a taxpayer to make a change in method of accounting for depreciation for the disposed property if the taxpayer used an impermissible method of accounting for depreciation for the property under which the taxpayer did not take into account any depreciation allowance, or did take into account some depreciation but less than the depreciation allowable, in the year of change (as defined in section 2.05(3) of this APPENDIX) or any prior taxable year.

(2) Scope. This change applies to a taxpayer and an item of depreciable or amortizable property that are within the scope of section 3.01 of Rev. Proc. 2004-11, provided:

(a) the taxpayer files the original Form 3115 with the taxpayer's amended federal tax return for the year of change (as defined in section 2.05(3) of this APPENDIX) prior to the expiration of the period of limitation for assessment under section 6501(a) for the taxable year in which the item of depreciable or amortizable property was disposed of by the taxpayer; and

(b) the taxpayer's amended federal tax return for the year of change (as defined in section 2.05(3) of this APPENDIX) includes the adjustments to taxable income and any collateral adjustments to taxable income or tax liability (for example, adjustments to the amount or character of the gain or loss of the disposed depreciable or amortizable property) resulting from the change in method of accounting for depreciation made by the taxpayer under section 2.05 of this APPENDIX.

(3) Year of change. The year of change for this change is the taxable year in which the item of depreciable or amortizable property was disposed of by the taxpayer.

(4) Scope limitations inapplicable. The scope limitations in section 4.02 of this revenue procedure do not apply. If the taxpayer is under examination, before an appeals office, or before a federal court at the time that a copy of the Form 3115 is filed with the national office, the taxpayer must provide a copy of the Form 3115 to the examining agent, appeals officer, or counsel for the government, as appropriate, at the time the copy of the Form 3115 is filed with the national office. The Form 3115 must contain the name(s) and telephone number(s) of the examining agent, appeals officer, or counsel for the government, as appropriate.

(5) Filing requirements. Notwithstanding section 6.02(3)(a) of this revenue procedure, a taxpayer making this change must attach the original Form 3115 to the taxpayer's timely filed amended federal tax return for the year of change and must file the required copy (with signature) of the Form 3115 with the national office no later than when the original Form 3115 is filed with the amended federal tax return for the year of change.

(6) Section 481(a) adjustment period. A taxpayer must take the section 481(a) adjustment into account in the year of change."

Fast depreciation under the "Whiteco test"

In JFM, Inc. & Subs., TC Memo 1994-239 , the Tax Court used a six factor test it articulated in Whiteco Industries, Inc (1975) 65 TC No. 664 (Whiteco test) to distinguish between land improvements in asset class 57.1 and asset class 57.0 property. The Whiteco test, aimed at determining whether property is "inherently permanent," is as follows:

Is the property capable of being moved, and has it in fact been moved?
Is the property designed or constructed to remain permanently in place?
Are there circumstances which tend to show the expected or intended length of affixation (i.e., are there circumstances which show that the property may or will have to be moved)?
How substantial a job is removal of the property and how time-consuming is it?
How much damage will the property sustain upon its removal?
What is the manner of affixation of the property to the land?

1. Is the property capable of being moved and has it in fact been moved?

To facilitate off-site construction, modular construction requires the manufacture and transport of sectional units from the factory to another site where they will be connected together. The practice of assembly and disassembly of modular units is an everyday industry occurrence. The modular units are designed to be legally transported form the factory over the public highway before use, therefore, reuse after disassembly is commonplace in practice and intended. Further, under contractual obligation, typically the structure must be removed at the termination of the contract of when needed. This most likely will not be the case for on-site constructed facilities.

2. Is the property designed or constructed to remain permanently in place?

Non-residential modular construction typically is designed and manufactured to be readily relocatable. Foundation systems that are used by modular structures are a function of compliance with locally prescribed model construction codes to support the structure. Depending on the prevailing local construction codes, foundation systems, not the structure, may or may not be sedentary or appear to be permanent.

For buildings leased, the term of the average original operating lease contract is, typically less than five years. At the termination of the lease, the structure must be removed from the site, relocated, and then would be utilized at another site.

Since the structure's modular units are initially intrinsically designed to be transported for highway movement from the factory to the first site, these structural units maintain their transportability for secondary, and subsequent moves. For these secondary moves, the act of disassembly typically does not substantially damage these sectional modular units. Additionally, it is common that once the modular units are removed, many of these units may be inventoried, re-configured, and reused at other sites.

3. Are there circumstances that show that the property may or will be moved?

The term of the lease or the use of the structure dictates the removal of the modular sections. At the termination of the lease or use, lessor or user is required to disassemble and transport each of the modular section to another site or return to inventory for re-use at a later time.

Since these structure are initially constructed in a remote factory, this design allows an industry-wide marketing application of short use of the structure in one location and the ready relocation to another site. This practice is prevalent in the educational, office, airport, institutional, restaurant, correctional, and medical facilities' markets to name but a few.

Since these structures have been transported over public highways at least once, the ability exists universally to disassemble and re-transport sectional units with minimal costs for permits and transit. The fees to obtain local disassembly permits are nominal in cost as well.

4. How substantial a job is removal of the property, and how time consuming?

The job of removing the modular sections of the structures is facilitated by the very initial design and manufacture of the sectional units. Because of the inherent sectional design, disassembly time is minimal. Typical of costs, including time consumed and materials for disassembly and removal, are less the 20% of the replacement costs of the total structure.

Typical disassembly time is less than the time spent in the initial assembly.

Typical removal includes disassembly and transportation to another site or to storage. Once in storage, the sectional units may again be transported and reassembled or reconfigured to suit the needs of the next lessee or owner. It is common industry practice to inventory sectional units, and re-configure on a site, as directed by the lessee of owner.

The question of cost, time and intrinsic design provide the contrast between readily relocatable and improbability and costly relocation of a structure.

5. How much damage will the property sustain upon removal?

Since these sectional units are inherently designed, manufactured, and transported in sectional format for site coupling, these units suffer minimal damage during disassembly. Typically disassembly and removal damage is less the 10% percent of replacement costs to the property. Once disassembled and transported, each sectional unit is capable of being readily re-used in another application or site.

Site restoration costs are minimal after removal, and is usually addressed in contract language, therefore the intent to remove the structure is an integral part of the design and application. Contract leases typically specify that the structure is personal property in finite land and structure leases.

6. What is the manner of affixation to the property to the land?

For the non-residential modular industry, the manner of affixation to the property is typically determined by local prevailing model construction codes. The manner of affixation to the site is not an indication of intent of permanence, rather it is a commonplace, as most states have a preemptive state-wide construction code for the structure, and local agencies determine appropriate foundation, utility, and land use issues.

The affixation between the structure and the foundation system can be varied. With pier and pad systems, it is gravity or bolted systems or tack-welded systems. The attachment to the foundation is determined by structural requirements and not by intention of permanence.

Typical foundation systems used in conjunction with modular units allow for ready return to pre-installation status with little or minor site reconstruction costs. Foundation selection factors include wind, seismic, support, use, and access requirements in determination of appropriate systems. Typically, the termination of real or personal property is not one of the factors in the selection of foundation systems.

Conclusion:

Any structure can be relocated with enough time and money. The factors of intrinsic design and the reality that every modular section has already moved over public highways proves their relocatability. Designs that are constructed on site, which might be relocated, rarely take into consideration these costly relocation factors:

The tremendous structural stress of relocation and transportation. This stresses multiples of typical earthquake stress loads. Is the site constructed building specifically designed for this stress and does it have the means to be lifted and transported by truck?

The ability to move over public highways without significant permit costs and efforts.

The destruction of the structural integrity of the building, the high cost of material loss due to disassembly, and the high costs of re-assembly.

Relocation of site constructed structures regularly requires an entirely new review process of structural and systems approval, since the design of the structure did not initially consider, and was not approved as, a relocatable structure. This frequently adds significant additional agency review time, engineering, material, and labor costs to the relocation process.

Does a principal residence converted to residential rental property still qualify for tax-free treatment?

Q. I lived in a home as my principal residence for the first 2 of the last 5 years. For the last 3 years, the home was a rental property before selling it. Can I still avoid the capital gains tax and, if so, how should I deal with the depreciation I took while it was rented out?

Ans. If, during the 5-year period ending on the date of sale, you owned the home for at least 2 years and lived in it as your main home for at least 2 years, you can exclude up to the maximum dollar limit. However, you cannot exclude the portion of the gain equal to depreciation allowed or allowable for periods after May 6, 1997. This gain is reported on Form 4797 (PDF),Sale of Business Property. Refer to Publication 523, Selling Your Home, and Form 4797 (PDF), Sale of Business Property, for specifics on calculating and reporting the amount of gain.

References:

Publication 523, Selling Your Home
Publication 527, Residential Rental Property
Form 4797 (PDF), Sale of Business Property

Q. Is the loss on the sale of your home deductible?

Ans. The loss on the sale of a personal residence is a nondeductible personal loss.

References:

Publication 523, Selling Your Home
Tax Topic 409, Capital gains and losses

http://www.irs.gov/faqs/faq-kw140.html

Conclusion:
If the principal residence was converted to residential rental property on a date that its market value was greater than the cost basis (i.e. you'd have a gain upon sale) and then if the property appreciates even more while rental property, then all of the gain including all of the depreciation will be taxable upon sale if it was rental property for more than three years.

Conversely - If the principal residence was converted to residential rental property on a date that its market value was greater than the cost basis (i.e. you'd have a gain upon sale) and then if the property declines in value below your cost basis while rental property, then all of the loss net of all of the depreciation, to an extent, will be tax deductible upon sale if it was rental property for more than three years.

If the rental lasts less than three years (meaning that during fully two of the last five years it was your principal residence) then up to $500,000 of any gain would not be recognized for federal income tax purposes. Similarly all of the loss would not be recognized for federal income tax purposes.

IRS Reg. §1.469-2(f)(6) Self-Rental Rule

Connor v. Comr. (78th Cir. 7/5/2000) Rental income generated by the lease of wife's office building to husband's personal services C corporation during 1993-1994 was not passive activity income and may not offset passive losses from rental of taxpayer's other property.

Income from rental real estate, equipment or other property leased to a business where the taxpayer works - is non-passive.

A taxpayer may lease property to a trade or business in which the taxpayer materially participates and have the income from that lease recharacterized as nonpassive income. For example, an individual can lease equipment to a partnership that owns a restaurant in which the individual materially participates and the net rental income may be recharacterized as nonpassive income, but any loss remains passive.

A taxpayer may avoid a "self-rental trap" by combining rental activity with the operations activity by making a special election to aggregate the activities. This election can only be made in the initial year the taxpayer reports the activities. This election requires the attachment of a formal statement to the tax return.

http://www.irs.gov/businesses/small/article/0,,id=146330,00.html

http://www.cpa2biz.com/Content/media/PRODUCER_CONTENT/Newsletters/Articles_2008/CorpTax/rentaltrap.jsp

Taxation of Israel Mozel Tov Bonds:

The total amount of OID on any OID Bond will equal the excess of the bond’s "stated redemption price at maturity" over its "issue price." The stated redemption price at maturity equals the sum of all payments due under the OID Bond, other than any payments of qualified stated interest. The issue price will generally equal the initial public offering price at which a substantial number of bonds are issued in a given offering.

The amount of OID on an OID Bond that a United States Bondholder must include in income during a taxable year is the sum of the "daily portions" of OID for that bond. The daily portions are determined by allocating to each day in an "accrual period" (generally the period between compounding dates) a pro rata portion of the OID attributable to that accrual period. The amount of OID attributable to an accrual period is the product of the "adjusted issue price" of the bond at the beginning of the accrual period and its yield to maturity. The adjusted issue price of a bond is generally equal to the sum of its issue price and all prior accruals of OID. Cash payments on an OID Bond are allocated first to any stated interest then due, then to previously accrued OID (in the order of accrual) to which cash payments have not yet been allocated, and then to principal.

A United States Bondholder generally may make an irrevocable election to include in its income its entire return on an OID Bond (including payments of qualified stated interest) under the constant yield method (also called the effective or scientific method of amortization) applicable to OID.

Any OID included in a United States Bondholder’s income will constitute foreign source income, and generally will be "passive category income" (or in certain cases, as "general category income") for United States foreign tax credit purposes.

Disposition of the Bonds. A United States Bondholder generally will recognize gain or loss on the sale or retirement of a bond equal to the difference between the amount realized on the sale or retirement and the tax basis of the bond. A United States Bondholder’s tax basis in a bond generally will be the purchase price of the bond, increased by any OID previously included in the United States Bondholder’s income and decreased (but not below zero) by any early principal payments. Except to the extent attributable to accrued but unpaid interest or OID, gain or loss recognized on the sale or retirement of a bond will be capital gain or loss, and will be long-term capital gain or loss if the bond was held for more than one year.

Under current law, net capital gains of individuals may be taxed at lower rates than most items of ordinary income. Limitations apply to the ability of United States Bondholders to offset capital losses against ordinary income. Any gain or loss recognized by a United States Bondholder on the sale or retirement of a bond generally will constitute income from, or loss allocable to, sources within the United States for United States federal income tax purposes.

Gallenstein Decision of 1992:

Joint tenancy with right of survivorship is a popular form of property ownership between husband and wife. Possession of an interest in a joint tenancy at death has major estate and income tax implications. The value of the interest is includable in the decedent's estate, and results in an adjustment to the tax cost basis for capital gains tax purposes of the asset held by the surviving joint tenant.

Determining the amount included in the estate and the related basis adjustment depends upon the application of Internal Revenue Code Section 2040 a provision that has undergone considerable change over the years. In a case of first impression in 1992 (975 F.2d 286 (6th Cir. 1992)), the Sixth Circuit in Gallenstein v. United States of America, addressed the issue of valuing certain spousal joint interests created prior to 1977.

Statutory Backdrop

As originally enacted, Section 2040 prescribed that the entire value of jointly held property was included in the estate of the decedent/joint tenant except to the extent that the survivor could show that he or she had acquired an interest for full and adequate consideration.

The Tax Reform Act of 1976 amended Section 2040 to provide that, in the case of a spousal joint tenancy, 50% of the value of the jointly held property would be included in the estate of the first spouse to die, regardless of the actual amount contributed by either joint tenant/spouse. Hence, only 50% of the value of the property would receive a step-up in basis for income tax purposes.

There were a number of subsequent amendments to Section 2040, some of which left open some uncertainty concerning whether to use the so-called "contribution" test or the 50% rule when valuing spousal joint tenancies created prior to 1977 for estates of decedents dying after 1981.

Facts of Gallenstein

In Gallenstein, the taxpayer and her husband purchased real property in Kentucky in 1955. The entire purchase price of $38,500 was derived from the husband's earnings. The couple held the farm property as joint tenants with right of survivorship until the husband died on 12/12/87. In July 1988, the taxpayer sold some of the farm property for approximately $3.6 million. After an amended estate tax return included the entire property in her husband's estate, the taxpayer/wife claimed that $3.6 million was her basis in the property. The Internal Revenue Service, however, took the position that the basis of the property sold should reflect only the step-up in basis for one-half of the property to the fair market value at the date of death, as shown on the original estate tax return.

Holdings of the Courts

In upholding the taxpayer's position, the District Court examined the history of Section 2040. Originally, Section 2040 required a contribution test to determine whether and to what extent the value of jointly held property would be included in the estate of a decedent/joint tenant.

The Service in Gallenstein argued that the legislative history indicated that Congress intended to adopt an easily administered rule for spousal joint interests that would eliminate the burdensome tracing requirements under Section 2040(a).

In rejecting the Service's argument, the District Court first noted that, in general, the doctrine of implied repeal is inappropriate where the plain language of the statutes at issue is not in conflict. The court reasoned that when the language of two statutory provisions is unambiguous, resorting to the legislative history to interpret that language would be unnecessary and improper. In addition, a strong judicial policy disfavors the implied repeal of statutes.

Sixth Circuit's Analysis.

On appeal, the Sixth Circuit affirmed the District Court's holding. Before the appellate court, the Service argued theories of express and implied repeal. The Service contended that by changing the definition of qualified joint interest in Section 2040(b)(2), Congress expressly changed the effective date of Section 2040(b)(1). In rejecting this argument, the Sixth Circuit noted that when Congress wanted to repeal a particular section of the estate tax code (such as subsections (c)-(e) of Section 2040), it did so expressly. Thus, the Court declined to provide by judicial interpretation what Congress did not expressly enact.

Many sophisticated tax observers were, to put it mildly, surprised by the Gallenstein decision, and expected or predicted either that other federal circuits would decline to accept its rationale, leading to a U.S. Supreme Court reversal, or that the Service would prevail upon Congress to "fix" what appeared to be an error or oversight. That has not happened. Instead, other courts have adopted the Gallenstein rationale and conclusion. (See Patten v. United States, 116 F.3d 1029).

And, as time goes by, the frequency of an estate owning property acquired before 1977 continues to diminish, and the Service appears to have turned its attention and resources to more pressing matters.

Tax Planning Considerations

Gallenstein holds promise for a surviving spouse who inherits property held in a spousal joint tenancy that was created before 1977. Based on the result in the case, the surviving spouse can receive a step-up in basis to the full extent of the contribution of the first spouse to die towards the purchase of the property, but there should be no increase in estate tax on the death of the first spouse because of the marital deduction. Under pre-1977 law, 100% of the value of jointly held property was included in the estate of the first spousal joint tenant to die except to the extent that the surviving joint tenant spouse could show that he or she had contributed to the purchase of the property. In most instances, it is likely that the holding in Gallenstein will work to the surviving spouse's advantage as it is typically the older spouse who contributed all of the purchase price and dies first. Thus, the surviving spouse's tax basis in the property should be 100% of the property's fair market value. If the property is sold shortly thereafter, no capital gains should be realized.

Garn-St. Germain Depository Institutions Act of 1982 - Due on Sale clause:

1701j-3. Preemption of due-on-sale prohibitions
(a) Definitions For the purpose of this section-

(1) the term "due-on-sale clause" means a contract provision which authorizes a lender, at its option, to declare due and payable sums secured by the lender’s security instrument if all or any part of the property, or an interest therein, securing the real property loan is sold or transferred without the lender’s prior written consent;
(2) the term "lender" means a person or government agency making a real property loan or any assignee or transferee, in whole or in part, of such a person or agency;
(3) the term "real property loan" means a loan, mortgage, advance, or credit sale secured by a lien on real property, the stock allocated to a dwelling unit in a cooperative housing corporation, or a residential manufactured home, whether real or personal property; and
(4) the term "residential manufactured home" means a manufactured home as defined in section 5402 (6) of title 42 which is used as a residence; and
(5) the term "State" means any State of the United States, the District of Columbia, the Commonwealth of Puerto Rico, the Virgin Islands, Guam, the Northern Mariana Islands, American Samoa, and the Trust Territory of the Pacific Islands.

(b) Loan contract and terms governing execution or enforcement of due-on-sale options and rights and remedies of lenders and borrowers; assumptions of loan rates

(1) Notwithstanding any provision of the constitution or laws (including the judicial decisions) of any State to the contrary, a lender may, subject to subsection (c) of this section, enter into or enforce a contract containing a due-on-sale clause with respect to a real property loan.
(2) Except as otherwise provided in subsection (d) of this section, the exercise by the lender of its option pursuant to such a clause shall be exclusively governed by the terms of the loan contract, and all rights and remedies of the lender and the borrower shall be fixed and governed by the contract.
(3) In the exercise of its option under a due-on-sale clause, a lender is encouraged to permit an assumption of a real property loan at the existing contract rate or at a rate which is at or below the average between the contract and market rates, and nothing in this section shall be interpreted to prohibit any such assumption.

(c) State prohibitions applicable for prescribed period; subsection (b) provisions applicable upon expiration of such period; loans subject to State and Federal regulation or subsection (b) provisions when authorized by State laws or Federal regulations

(1)In the case of a contract involving a real property loan which was made or assumed, including a transfer of the liened property subject to the real property loan, during the period beginning on the date a State adopted a constitutional provision or statute prohibiting the exercise of due-on-sale clauses, or the date on which the highest court of such State has rendered a decision (or if the highest court has not so decided, the date on which the next highest appellate court has rendered a decision resulting in a final judgment if such decision applies State-wide) prohibiting such exercise, and ending on October 15, 1982, the provisions of subsection (b) of this section shall apply only in the case of a transfer which occurs on or after the expiration of 3 years after October 15, 1982, except that-

(A) a State, by a State law enacted by the State legislature prior to the close of such 3-year period, with respect to real property loans originated in the State by lenders other than national banks, Federal savings and loan associations, Federal savings banks, and Federal credit unions, may otherwise regulate such contracts, in which case subsection (b) of this section shall apply only if such State law so provides; and

(B) the Comptroller of the Currency with respect to real property loans originated by national banks or the National Credit Union Administration Board with respect to real
property loans originated by Federal credit unions may, by regulation prescribed prior to the close of such period, otherwise regulate such contracts, in which case subsection (b) of this section shall apply only if such regulation so provides.
(2)
(A) For any contract to which subsection (b) of this section does not apply pursuant to this subsection, a lender may require any successor or transferee of the borrower to meet customary credit standards applied to loans secured by similar property, and the lender may declare the loan due and payable pursuant to the terms of the contract upon transfer to any successor or transferee of the borrower who fails to meet such customary credit standards.

(B) A lender may not exercise its option pursuant to a due-on-sale clause in the case of a transfer of a real property loan which is subject to this subsection where the transfer occurred prior to October 15, 1982.

(C) This subsection does not apply to a loan which was originated by a Federal savings and loan association or Federal savings bank.

(d) Exemption of specified transfers or dispositions

With respect to a real property loan secured by a lien on residential real property containing less than five dwelling units, including a lien on the stock allocated to a dwelling unit in a cooperative housing corporation, or on a residential manufactured home, a lender may not exercise its option pursuant to a due-on-sale clause upon-

(1) the creation of a lien or other encumbrance subordinate to the lender’s security instrument which does not relate to a transfer of rights of occupancy in the property;
(2) the creation of a purchase money security interest for household appliances;
(3) a transfer by devise, descent, or operation of law on the death of a joint tenant or tenant by the entirety;
(4) the granting of a leasehold interest of three years or less not containing an option to purchase;
(5) a transfer to a relative resulting from the death of a borrower;
(6) a transfer where the spouse or children of the borrower become an owner of the property;
(7) a transfer resulting from a decree of a dissolution of marriage, legal separation agreement, or from an incidental property settlement agreement, by which the spouse of the borrower becomes an owner of the property;
(8) a transfer into an inter vivos trust (a/k/a a revocable "living trust") in which the borrower is and remains a beneficiary and which does not relate to a transfer of rights of occupancy in the property; or
(9) any other transfer or disposition described in regulations prescribed by the Federal Home Loan Bank Board.

(e) Rules, regulations, and interpretations; future income bearing loans subject to due-on-sale options

(1) The Federal Home Loan Bank Board, in consultation with the Comptroller of the Currency and the National Credit Union Administration Board, is authorized to issue rules and regulations and to publish interpretations governing the implementation of this section.
(2) Notwithstanding the provisions of subsection (d) of this section, the rules and regulations prescribed under this section may permit a lender to exercise its option pursuant to a due-on-sale clause with respect to a real property loan and any related agreement pursuant to which a borrower obtains the right to receive future income.

(f) Effective date for enforcement of Corporation-owned loans with due-on-sale options

The Federal Home Loan Mortgage Corporation (hereinafter referred to as the "Corporation") shall not, prior to July 1, 1983, implement the change in its policy announced on July 2, 1982, with respect to enforcement of due-on-sale clauses in real property loans which are owned in whole or in part by the Corporation.

(g) Balloon payments

Federal Home Loan Bank Board regulations restricting the use of a balloon payment shall not apply to a loan, mortgage, advance, or credit sale to which this section applies.

http://en.wikipedia.org/wiki/Garn-St._Germain_Depository_Institutions_Act

http://www.newyorkfed.org/research/quarterly_review/1982v7/v7n4article6.pdf

http://www.foreclosureforum.com/mb/messages/17090.html

http://books.google.com/books

http://www.troyinsurancegroup.com/how-to-insure-seller-financed-wrap-arounds-and-properties-taken-subject-to-the-existing-loan/

Exemption (8) the Land Trust / or separate LLC "trick"

A land trust is form of a revocable, living trust which is exempted under the Garn Act. A land trust, like a living trust, is create by two legal documents:

1) A trust agreement between the creator (called "grantor" in legal terms) of the trust and the trustee which defines the trust arrangement; and
2) A deed from the creator of the trust to the trustee.

The trustee holds title for the benefit of the grantor (in this case, the grantor is also the "beneficiary"). If you place title to your property into a land trust, you have not violated the due-on-sale (so long as there is no change in occupancy).

Let's say that you come across a seller who is willing to give you title to his property. The only "glitch" is that the loan is not assumable because the mortgage has a due-on-sale clause. Here's the process for getting around it:

STEP 1: Sammy Seller signs a trust agreement with you as trustee of his trust. Sammy is named as the "beneficiary" of the trust.

STEP 2: Sammy Seller transfers title to the trustee (no violation of the due-on-sale clause)

STEP 3: Sammy Seller quietly assigns his interest under the trust to you (similar to a transfer of stock in a corporation). This assignment is not recorded in any public record. Sammy moves out and you move in.

STEP 4: You are now the beneficiary of the trust. Your trustee makes payments to the lender.

Keep in mind that the assignment of Sammy Seller's interest under the trust to you does trigger the due-on-sale, but who is going to tell the lender? In reality, the lender will discover the transfer of an interest in real estate in one of three ways:

1) Change of name on the deed. Not likely, since lenders don't readily have "spies" at the clerk's and recorder's office;

2) Different name on the check received for payment. Not likely, since the bank officers are far removed from the clerical workers who process payments; or

3) Change of hazard insurance beneficiary. This is the most common way a lender discovers a transfer of interest in the borrower's property.

If you notify your insurance carrier of a change in insurance beneficiary, the lender, who is also a named beneficiary, receives a copy of the change. However, if you transferred title into a land trust, the new beneficiary under the insurance policy will be the trustee of the land trust. The lender will probably not object, since it will assume the seller has implemented an estate planning device. If the beneficiary of the trust is assigned, the lender will not be notified since the insurance beneficiary (the trustee) has not changed.
http://www.legalwiz.com/due-on-sale-clause

Worthless Inventory Thor Power Tool Company v. Commissioner:

In this landmark case the IRS challenged Thor's practice of writing down the value of its spare parts inventory which it held to cover future warranty commitments. Thor contended that, although the sales price on the individual parts did not decline over the years, the probability of all the parts being sold decreased as time passed, and thus so did the net realizable value of the inventory as a whole. The IRS contended that a decline in inventory values for tax purposes must await actual decline in the sales price of the individual parts. The Supreme Court indicated that for tax purposes, the lower of cost or market method was to be applied on an individual item basis and that if no decline in sales price occurred, no loss should be permitted. (Intermediate Accounting, Kieso & Weygandt, 4th Edition, John Wiley & Sons, 1983, pp. 392-393)

Rexnord, Inc. v. United States of America
Rexnord reduced its 1977 and 1978 ending inventory by the goods it had sold to S.R. Sales, thus increasing its cost of goods sold and reducing its taxable income. The IRS claimed the reduction in ending inventory was not valid because the sale were not genuine, and the dispute over the $250,000 deficiency ended up in district court.

The Seventh Circuit Court of Appeals said the "sales" were an attempt to get around the U.S. Supreme Court's decision in Thor Power Tool Co. (taxpayer may not write off excess inventory it physically retains) and later cases in which manufacturers tried to write off excess inventory while keeping control over it. Rexnord claimed its sales were real because S.R. Sales had the right to resell the goods.

Result: The district court and the appellate court both held the sales were not bona fide. The economic reality was Rexnord maintained control over the inventory. Thus, the inventory writeoffs were not allowed.

The Tog Shop, Inc. v. United States
For its 1980 and 1981 tax years, Tog elected to use the "lower of cost or market method" and valued the excess inventory at net realizable value, which is the replacement cost of inventory less the direct cost of disposing of it. Tog did not compare cost and market for each individual item in its inventory. Instead, Tog applied a percentage formula to the total inventory, which was classified by age, to determine the value of the merchandise

Although this inventory valuation method met the provisions of GAAP and was consistently applied as required by Treas. Reg. Sec 1.471-2, the IRS argued that the method did not clearly reflect income. Even though GAAP would allow the valuation of classes of items, the court agreed with the IRS. Cited as precedent in Tog was Thor Power Tool Co.

§471 inventory rule under IRS Notice 2001-76 & Rev Proc 2001-10 & Rev Proc 2002-28:

Q: Do the new rules apply to all eligible taxpayers that fall under the $10 million threshold?

A: Yes, although taxpayers with average gross receipts of $1 million or less were already exempt under Rev. Proc. 2001-10. (5) That exemption applies without regard to the nature of the taxpayer's business; the Rev. Proc. 2002-28 exemption contains limits based on the taxpayer's business.

Q: Do the new rules exempt cash-basis taxpayers from the Sec. 471 inventory requirement?

A: Yes (but see the next Q&A). The exemption from Sec. 471 should be particularly beneficial for service businesses that also sell related products. As was discussed, the obligation of these service businesses to account for inventories has triggered extensive litigation.

Q: Does the Sec. 471 exemption mean that a cash-basis taxpayer can expense its merchandise in the tax year of purchase?

A: No. Rev. Proc. 2002-28 makes clear that the treatment of merchandise purchases must follow the treatment prescribed for purchases of significant (nonincidental) materials and supplies. Taxpayers can deduct the cost of such nonincidental items only as they are consumed during the tax year, under Regs. Sec. 1.162-3. Applying this rule to merchandise purchases means that the cost of such items may be deducted in the year of sale to customers. An exception applies when the taxpayer pays for the merchandise in a tax year later than the year in which it sells the items to customers. In this event, the items are deductible in the later tax year.

http://webcache.googleusercontent.com/search?q=cache:66yxAqwtoO4J:goliath.ecnext.com/coms2/gi_0199-1953592/Use-of-cash-method-by.html+Exempt+Rev+Proc+2001-10+%22already+exempt+under+Rev.+Proc.+2001-10%22&cd=1&hl=en&ct=clnk&gl=us

IRS Regs. §1.132-6(a) de minimis rule:

de-minimis - IRS Regs. §1.132-6(a)
A benefit is de minimis when the value of the worker's personal use is so small or insignificant that accounting for it would be unreasonable or administratively impractical. An example of this is an employee who stops for lunch or runs a personal errand while driving a company car on business. De minimis personal use is not treated as taxable income to the employee.

IRS Code §132(d) Working Condition Fringe Defined
For purposes of this section, the term "working condition fringe" means any property or services provided to an employee of the employer to the extent that, if the employee paid for such property or services, such payment would be allowable as a deduction under section 162 or 167.

§132(e) De Minimis Fringe Defined
For purposes of this section--
§132(e)(1) In General - The term "de minimis fringe" means any property or service the value of which is (after taking into account the frequency with which similar fringes are provided by the employer to the employer's employees) so small as to make accounting for it unreasonable or administratively impracticable.

Hot Assets under IRS Code §751 are taxable as ordinary (earned) income:

Hot Assets
§751(a) Sale Or Exchange Of Interest In Partnership

The amount of any money, or the fair market value of any property, received by a transferor partner in exchange for all or a part of his interest in the partnership attributable to--

751(a)(1) unrealized receivables of the partnership, or
751(a)(2) inventory items of the partnership,
shall be considered as an amount realized from the sale or exchange of property other than a capital asset.

751(b) Certain Distributions Treated As Sales Or Exchanges
751(b)(1) General Rule   To the extent a partner receives in a distribution--
751(b)(1)(A) partnership property which is--
751(b)(1)(A)(i) unrealized receivables, or
751(b)(1)(A)(ii) inventory items which have appreciated substantially in value,
in exchange for all or a part of his interest in other partnership property (including money), or

751(b)(1)(B) partnership property (including money) other than property described in subparagraph (A)(i) or (ii) in exchange for all or a part of his interest in partnership property described in subparagraph (A)(i) or (ii),".
such transactions shall, under regulations prescribed by the Secretary, be considered as a sale or exchange of such property between the distributee and the partnership (as constituted after the distribution).

751(b)(2) Exceptions
Paragraph (1) shall not apply to--
751(b)(2)(A) A distribution of property which the distributee contributed to the partnership, or
751(b)(2)(B) payments, described in section 736(a), to a retiring partner or successor in interest of a deceased partner.
751(b)(3) Substantial Appreciation.--
For purposes of paragraph (1)--
751(b)(3)(A) In General.--
Inventory items of the partnership shall be considered to have appreciated substantially in value if their fair market value exceeds 120 percent of the adjusted basis to the partnership of such property.

751(b)(3)(B) Certain Property Excluded.--
For purposes of subparagraph (A), there shall be excluded any inventory property if a principal purpose for acquiring such property was to avoid the provisions of this subsection relating to inventory items."

Unrealized receivables include:

trade accounts receivable of a cash-basis partnership (less the cost of providing the goods or services which under Regs. 1.751-1(c)(2) shall include all costs or expenses attributable thereto paid or accrued but not previously taken into account under the partnership method of accounting. i.e. some of the accounts payable to the extent that are applicable to the services rendered + members' GPP compensation to the extent they were involved in the rendering of such services. )

unbilled services already rendered

unbilled services not yet rendered but which must be included as income (less the projected cost of providing the services per Regs. 1.751-1(c)(3))

amortization recapture on a disposition of an intangible asset

depreciation recapture

ordinary gain for trade name, trademarks

uncompleted contracts accounted for as long-term contracts

others...

Inventory items include:

accounts receivable of an accrual-basis partnership

sec 1231 property or property that is not a capital asset

Hot Stock under IRS Code §355 are taxed as dividend income:

Hot Stock
Defined under §355(a)(3)(B) if the IR Code. The stock of a controlled corporation is treated as boot if it is acquired within 5 years of the distribution in a taxable transaction.

(B) Stock Acquired In Taxable Transactions Within 5 Years Treated As Boot
For purposes of this section (other than paragraph (1)(D) of this subsection) and so much of section 356 as relates to this section, stock of a controlled corporation acquired by the distributing corporation by reason of any transaction--

355(a)(3)(B)(i) which occurs within 5 years of the distribution of such stock, and

355(a)(3)(B)(ii) in which gain or loss was recognized in whole or in part, shall not be treated as stock of such controlled corporation, but as other property.

Also see Private Letter Ruling PLR-123406-06 dated August 30, 2006
Section 355 of the Code provides that no gain or loss is recognized if (i) a corporation distributes to its shareholders with respect to its stock, stock or securities of a corporation which it controls immediately before the distribution, (ii) the transaction was not used principally as a device for the distribution of earnings and profits and (iii) both the distributing corporation and the controlled corporation have been engaged, throughout the five-year period ending on the date of the distribution, in an active trade or business and are engaged in an active trade or business immediately after the distribution.

Rev. Rul. 86-131, 1986-2 C.B. 135.
Since FX1 acquired the stock of FX2 within five years of the distribution of such stock in a transaction in which gain or loss was recognized, the distribution described above will not qualify as a tax-free distribution of stock under section 26 USC 355 of the Code and will be treated as a dividend to the extent provided in sections 26 USC 301 and 26 USC 316. Section 26 USC 355(a)(3)(B).

Hot Interest rule under IRS Code §6621(c) after a 30-day letter:

Hot Interest
In the case of a "large corporate underpayment", the underpayment rate for periods after the applicable date is equal to the federal short-term rate plus five percentage points. This increased rate of interest is known as "hot interest." Hot interest applies only to underpayments made by C corporations 12 when there is a threshold underpayment of tax for a taxable period that exceeds $100,000, computed without regard to interest, penalties, additional amounts, and additions to tax. 13 Underpayments of different types of taxes as well as underpayments relating to different taxable periods are not aggregated for purposes of determining whether the $100,000 threshold is satisfied.

6621(c) Increase In Underpayment Rate For Large Corporate Underpayments
6621(c)(1) In General - For purposes of determining the amount of interest payable under section 6601 on any large corporate underpayment for periods after the applicable date, paragraph (2) of subsection (a) shall be applied by substituting "5 percentage points" for "3 percentage points".

6621(c)(3) Large Corporate Underpayment
For purposes of this subsection--
6621(c)(3)(A) In General The term "large corporate underpayment" means any underpayment of a tax by a C corporation for any taxable period if the amount of such underpayment for such period exceeds $100,000.
6621(c)(3)(B) Taxable Period For purposes of subparagraph (A), the term "taxable period" means--
6621(c)(3)(B)(i) in the case of any tax imposed by subtitle A, the taxable year, or
6621(c)(3)(B)(ii) in the case of any other tax, the period to which the underpayment relates.

Tax Benefit Rule under IRS Code §111 (recoveries or refunds received by taxpayer in a year after the year of payment / year of deduction):

Tax Benefit Rule
An Internal Revenue Service provision stating that amounts received in one period, representing a recovery of an amount deducted in a prior year, are to be included in income to the extent that the prior deduction resulted in a decrease in taxable income in that year.

If a taxpayer recovers an amount that was deducted or credited against tax in a previous year, the recovery must be included in income to the extent that the deduction or credit reduced the tax liability in the earlier year. If no tax benefit was derived from a prior-year deduction or credit, the recovery does not have to be included in income.

If a taxpayer repays an amount that was previously included in taxable income, the repayment can be deducted in the year in which it is repaid.

IR Code §111 Recovery of tax benefit items:
(a) Deductions
Gross income does not include income attributable to the recovery during the taxable year of any amount deducted in any prior taxable year to the extent such amount did not reduce the amount of tax imposed by this chapter.

(b) Credits

In general
If- (A) a credit was allowable with respect to any amount for any prior taxable year, and
      (B) during the taxable year there is a downward price adjustment or similar adjustment,

the tax imposed by this chapter for the taxable year shall be increased by the amount of the credit attributable to the adjustment.

Exception where credit did not reduce tax
Paragraph (1) shall not apply to the extent that the credit allowable for the recovered amount did not reduce the amount of tax imposed by this chapter.

Exception for investment tax credit and foreign tax credit
This subsection shall not apply with respect to the credit determined under section 46 and the foreign tax credit.

(c) Treatment of carryovers
For purposes of this section, an increase in a carryover which has not expired before the beginning of the taxable year in which the recovery or adjustment takes place shall be treated as reducing tax imposed by this chapter.

(d) Special rules for accumulated earnings tax and for personal holding company tax
In applying subsection (a) for the purpose of determining the accumulated earnings tax under section 531 or the tax under section 541 (relating to personal holding companies)-

any excluded amount under subsection (a) allowed for the purposes of this subtitle (other than section 531 or section 541) shall be allowed whether or not such amount resulted in a reduction of the tax under section 531 or the tax under section 541 for the prior taxable year; and

where any excluded amount under subsection (a) was not allowable as a deduction for the prior taxable year for purposes of this subtitle other than of section 531 or section 541 but was allowable for the same taxable year under section 531 or section 541, then such excluded amount shall be allowable if it did not result in a reduction of the tax under section 531 or the tax under section 541.

Claim of Right Doctrine under IRS Code §1341 (payments returned from taxpayer in a year after the year of receipt / year of income) :

IR Code §1341 Claim of Right Doctrine:

An item is included in gross income for a prior taxable year (or years) because it appeared that the taxpayer had an unrestricted right to such item;

a deduction is allowable for the taxable year because it was established after the close of such prior taxable year (or years) that the taxpayer did not have an unrestricted right to such item or to a portion of such item; and

the amount of such deduction exceeds $3,000, then the tax imposed by this chapter for the taxable year shall be the lesser of the following:

the tax for the taxable year computed with such deduction; or

an amount equal to the tax for the taxable year computed without such deduction, minus the decrease in tax under this chapter (or the corresponding provisions of prior revenue laws) for the prior taxable year (or years) which would result solely from the exclusion of such item (or portion thereof) from gross income for such prior taxable year (or years).

http://www.nysscpa.org/cpajournal/2004/1004/essentials/p42.htm

Where to report:
Enter the amount claimed as a refundable credit on line 68 (or line 71 in 2012) of Form 1040. Write "IRC Section 1341" in the space to the right of line 68 (or line 71 in 2012).

Or take as in itemized deduction on line 28 of Schedule A of Form 1040 in 2012. (see IRS Publication 525)

Spiffs & Incentive Payments are not subject to employment taxes:

Spiffs or Special Performance Incentives for Field Force are "kickbacks" or incentives paid by manufacturers or distributors to the retail sales force.
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Where a salesperson is awarded a payment or bonus for selling selling a manufacturer's product, and the manufacturer is not the salesperson's employer, such performance incentive payments are considered other income not subject to self-employment tax.

These are mostly associated with the auto industry, The reason behind why they became not subject to the SE tax is that auto sales people used to write all their expenses off on Schedule C as opposed to Schedule A and they ended up paying less in taxes. So this "unfairness" was fixed by making spiffs not subject to self-employment taxes.

If the manufacturer erroneously puts the amount in box 7 of Form 1099-MISC, then you need to put it as revenue on Sch C and the same amount as other expenses with a description like "Manufacturer Incentive Reported on Page 1 Line 21". Then put the amount on line 21. If it is box 3 Other Income then just put it on Line 21 with no SE Tax.

http://www.irs.gov/pub/irs-pdf/p3204.pdf

one-time payments, even if "earned" might not qualify as a "trade or business" and therefore are not subject to S/E taxes
Batok, TC Memo 1992-727

TAM 9423004   TAM 9525003   TAM 9647003

Foreign Tax Paid election: to deduct on Schedule A, or to take as a foreign tax credit; - subject to a 10-year SOL for claiming a refund:

Proforma letter to the IRS after receiving rejections of Form 1040X :

The above taxpayers have received a denial of our claim for refund for the stated reason that at the time, more than 3 years had passed before filing the claim.

I request your reconsideration, because I believe that the Service has erred by inadvertently overlooking the §6511(d)(3) "ten-year rule."
I’d like to bring to your attention Chapter 61. LMSB International Program Audit Guidelines, Section 10. Foreign Tax Credit 4.61.10.7 (05-01-2006) Changes in the Amount of Foreign Taxes Claimed "4. There is a ten-year statute of limitations for filing a refund claim when a U.S. taxpayer pays foreign tax relating to an earlier year."
This is found on the following webpage:
http://www.irs.gov/irm/part4/irm_04-061-010.html

And pursuant to §6511(d)(3)(A) Special period of limitation with respect to foreign taxes paid or accrued.
If the claim for credit or refund relates to an overpayment attributable to any taxes paid or accrued to any foreign country or to any possession of the United States for which credit is allowed against the tax imposed by subtitle A in accordance with the provisions of section 901 or the provisions of any treaty to which the United States is a party, in lieu of the 3-year period of limitation prescribed in subsection (a), the period shall be 10 years from the date prescribed by law for filing the return for the year in which such taxes were actually paid or accrued.

§6511(d)(3)(B)Exception in the case of foreign taxes paid or accrued.-
In the case of a claim described in subparagraph (A), the amount of the credit or refund may exceed the portion of the tax paid within the period provided in subsection (b) or (c), whichever is applicable, to the extent of the amount of the overpayment attributable to the allowance of a credit for the taxes described in subparagraph (A).

And pursuant to regulation §301.6511(d)-3. Internal Revenue Service, Special rules applicable to credit against income tax for foreign taxes

(a)Period in which claim may be filed.-
In the case of an overpayment of income tax resulting from a credit, allowed under the provisions of section 901 or under the provisions of any treaty to which the United States is a party, for taxes paid or accrued to a foreign country or possession of the United States, a claim for credit or refund must be filed by the taxpayer within 10 years from the last date prescribed for filing the return (determined without regard to any extension of time for filing such return) for the taxable year with respect to which the claim is made. Such 10-year period shall be applied in lieu of the 3-year period prescribed in section 6511(a).

(b)Limit on amount to be credited or refunded.-
In the case of a claim described in paragraph (a) of this section, the amount of the credit or refund allowed or made may exceed the portion of the tax paid within the period prescribed in section 6511(b) or (c), whichever is applicable, to the extent of the amount of the overpayment attributable to the allowance of a credit against income tax referred to in paragraph (a) of this section [Reg. §301.6511(d)-3.]

Please contact the undersigned to discuss.

Sale of "Personal Goodwill" Martin Ice Cream case:

Martin Ice Cream Co. v. Commissioner, 110 T.C. 189 (1998).

http://www.foxfin.com/articles/personal-goodwill.htm

http://www.mercercapital.com/print/?id=363

http://www.journalofaccountancy.com/Issues/2001/May/AvoidTaxesInLiquidation.htm

Demutualization a life insurance company:

Though generally considered as being "tax-free," litigation may change the position on this from time-to-time:

http://www.demutualization.biz/

http://www.costbasis.com/stocks/demutualizationshares.html

http://www.kpmg.com/us/en/issuesandinsights/articlespublications/taxnewsflash/pages/life-insurance-federal-district-court-grants-taxpayer-refud-claim-sale-shares-received-demutualization-life-company.aspx

Sale of life Insurance policy by a terminally ill or chronically ill insured person "Viatical Settlements":
Viatical Settlements Viatication allows a terminally or chronically ill person to sell a life insurance policy to someone who is buying it as an investment (i.e., the buyer receives the life insurance proceeds upon the death of the insured). Amounts received from the sale or assignment of a life insurance contract on the life of a terminally ill individual to a qualified viatical settlement provider are excluded from gross income [IRC Sec. 101(g)(2)]. However, the exclusion does not apply if the payments are paid to someone other than the terminally ill individual if the recipient has a business or financial relationship with the insured [IRC Sec. 101(g)(5)]. (See the Preparation Pointer under "Accelerated Life Insurance Proceeds" for the forms used to report viatical settlement proceeds.) A chronically ill individual (defined later in this key issue) can also exclude amounts received for viatical settlements but only if the payments are used for long-term care services and subject to per day and annual limits [IRC Sec. 101(g)(3)]. (See Key Issue 6G.) The services cannot be compensated by insurance and generally cannot be reimbursable by Medicare. A viatical settlement provider is any person regularly engaged in the trade or business of purchasing or taking assignments of life insurance contracts on the lives of individuals who are terminally or chronically ill. In addition, the viatical settlement provider must generally be licensed in particular states where they do business, or must otherwise meet certain legal requirements [IRC Sec. 101(g)(2)(B)(i)]. See Rev. Rul. 2002-82 for details. An individual need not be terminally or chronically ill to enter into a viatical settlement. However, there is no income exclusion in this situation. Instead, the seller must report income to the extent the sales proceeds exceed his or her adjusted basis in the contract. The adjusted basis, which cannot be less than zero, is equal to (1) the amount of premiums the taxpayer paid up to the time of sale less (2) the amount of any refunded premiums, rebates, dividends, or unrepaid loans that were not included in the policyholder's income (Rev. Rul. 2009-13; Reg. 1.1021-1). Although a life insurance policy is a capital asset in the hands of the policyholder, gain to the extent of the policy's cash surrender value over the adjusted basis is taxed as ordinary income under the assignment of income doctrine (Gallun; Neese). To the extent the gain exceeds that amount, it is treated as capital gain, assuming it is a capital asset in the hands of the taxpayer (Rev. Rul. 2009-13).

Underpayment of withholding and estimated tax payments:

Underpayment of withholding and estimated tax payments - from IRS Publication 505:

General Rule
In general, you may owe a penalty for 2005 if the total of your withholding and estimated tax payments did not equal at least the smaller of:
1. 90% of your 2005 tax, or
2. 100% of your 2004 tax. (Your 2004 tax return must cover a 12-month period.)

Your 2005 tax, for this purpose, is your Total tax for 2005, defined under Exceptions, later.

Amended returns. If you file an amended return by the due date (ed note: is this the original due date or the extended due date? unanswered!) of your original return, use the tax shown on your amended return to figure your required estimated tax payments. If you file an amended return after the due date of the original return, use the tax shown on the original return.

However, if you and your spouse file a joint return after the due date to replace separate returns you originally filed by the due date, use the tax shown on the joint return to figure your required estimated tax payments. This rule applies only if both original separate returns were filed on time.

2004 joint return and 2005 separate returns. If you file a separate return for 2005, but you filed a joint return with your spouse for 2004, your 2004 tax is your share of the tax on the joint return. You filed a separate return if you filed as single, head of household, or married filing separately.

Rev. Rul. 82-208, 1982-2 C.B. 58, the IRS concluded that no deduction would be permitted in year 1 for state income tax estimated tax payments for year 1 that were unreasonably too high for year 1. The ruling involved a taxpayer whose income was salary and for which state income tax withholding was sufficient. Clearly the taxpayer was paying a high estimated state income tax in year 1 in order to benefit from the deduction, even though the payments would either be refunded or credited by the state towards the taxpayer's year 2 state income tax liability.

Where a taxpayer, pursuant to state law authorizing such payment, makes an estimated payment of state income taxes that is reasonably determined in good faith at the time of payment, such payments are deductible under section 164(a)(3) of the Code. But for this ruling, the IRS held that the taxpayer had no reasonable basis to believe that he owed any additional state income taxes and did not allow the estimated payment to be deducted on the 1981 income tax return.

In Estate of Cohen v. Comr., T.C. Memo 1970-272, the court rejected the IRS attempt to deny a deduction for high estimated state income tax payments made in year 1 towards year 1 state income tax liabilities because the amount of state income tax liability was uncertain at the time.

Employee withholding taxes, Form W-4:

Withholding Compliance Questions & Answers

Q1: In the past, as an employer, I was required to submit all Forms W-4 that claimed complete exemption from withholding (when $200 or more in weekly wages were regularly expected) or claimed more than 10 allowances. What Forms W-4 do I now have to submit to the IRS?
A1: Employers are no longer required to routinely submit Forms W-4 to the IRS. However, in certain circumstances, the IRS may direct you to submit copies of Forms W-4 for certain employees in order to ensure that the employees have adequate withholding. You are now required to submit the Forms W-4 to IRS only if directed to do so in a written notice or pursuant to specified criteria set forth in future published guidance.

Q2: If an employer no longer has to submit Forms W-4 claiming complete exemption from withholding or claiming more than 10 allowances, how does the IRS determine adequate withholding?
A2: The IRS is making more effective use of information contained in its records along with information reported on Form W-2 wage statements to ensure that employees have enough federal income tax withheld.

Q3: If the IRS determines that an employee does not have enough federal income tax withheld, what will an employer be asked to do?
A3: If the IRS determines that an employee does not have enough withholding, we will notify you to increase the
amount of withholding tax by issuing a “lock-in” letter that specifies the maximum number of withholding allowances
permitted for the employee. You will also receive a copy for the employee that identifies the maximum number of withholding exemptions permitted and the process by which the employee can provide additional information to the IRS for purposes of determining the appropriate number of withholding exemptions. If the employee still works for you, you must furnish the employee copy to the employee. If the employee no longer works for you, NO ACTION IS REQUIRED AT THIS TIME. However if the employee should return to work within twelve (12) months, you should begin withholding income tax from the employee’s wages based on the withholding rate stated in this letter.The employee will be given a period of time before the lock-in rate is effective to submit for approval to the IRS a new Form W-4 and a statement supporting the claims made on the Form W-4 that would decrease federal income tax
withholding. The employee must send the Form W-4 and statement directly to the IRS office designated on the lock-in letter. You must withhold tax in accordance with the lock-in letter as of the date specified in the lock-in letter, unless otherwise notified by the IRS. You will be required to take this action no sooner than 45 calendar days after the date of the lock-in letter. Once a lock-in rate is effective, an employer can not decrease withholding unless approved by the IRS.

Q4: As an employer, after I lock in withholding on an employee based on a lock-in letter from the IRS, what do I do if I receive a revised Form W-4 from the employee?
A4: After the receipt of a lock-in letter, you must disregard any Form W-4 that decreases the amount of withholding. The employee must submit for approval to the IRS any new Form W-4 and a statement supporting the claims made on the Form W-4 that would decrease federal income tax withholding. The employee should send the Form W-4 and statement directly to the address on the lock-in letter. The IRS will notify you to withhold at a specific rate if the employee’s request is approved. However, if, at any time, the employee furnishes a Form W-4 that claims a number of withholding allowances less than the maximum number specified in the lock-in letter, the employer must increase withholding by withholding tax based on that Form W-4.

Q5: As an employer who has received a modification letter (letter 2808C) from the WHC program, do I wait for another 60 days to change the marital status and/or number of allowances per the modification letter?
A5: No, the modifications to the marital status and/or number of allowances become effective immediately upon receipt of the letter 2808C.

Q6: I have been directed to lock in an employee’s withholding. What happens if I do not lock in the employee’s withholding as directed?
A6: Those employers who do not follow the IRS lock-in instructions will be liable for paying the additional amount of tax that should have been withheld.

Q7: Our employees can submit or change their Forms W-4 on line. How can I prevent them from changing their Forms W-4 after they have been locked-in by the IRS?
A7: You will need to block employees who have been locked-in from using an on line Form W-4 system to decrease their withholding.

Q8: What should I do if an employee submits a valid Form W-4 that appears to be claiming an incorrect withholding amount?
A8: You should withhold federal income tax based on the allowances claimed on the Form W-4. But, you should advise the employee that the IRS may review withholding to ensure it is adequate, and that the IRS may direct you, as the employer, to withhold income tax for the employee at a certain rate if the review indicates the employee’s withholding is inadequate. Once this occurs the employee will not be allowed to decrease their withholding unless approved by the IRS.

Q9: What do I do if an employee hands me a substitute Form W-4 developed by the employee?
A9: Employers may refuse to accept a substitute form developed by an employee and the employee submitting such a form will be treated as failing to furnish a Form W-4. In such case, you should inform the employee that you will not accept this form and offer the employee an opportunity to complete an official Form W-4 or a substitute Form W-4 developed by you. Until the employee furnishes a new Form W-4, the employer must withhold from the employee as from a single person claiming no allowances; if, however, a prior Form W-4 is in effect for the employee, the employer must continue to withhold based on the prior Form W-4. As an employer, a substitute withholding exemption certificate developed by you can be used in lieu of the official Form W-4, if you provide all the tables, instructions, and worksheets contained in the Form W-4 in effect at that time to the employee.

Q10: What do I do if an employee hands me an official IRS Form W-4 that is clearly altered?
A10: Any alteration of a Form W-4 (e.g. crossed out penalties of perjury statement above the signature) will cause the Form W-4 to be invalid. If an employer receives an invalid Form W-4, the employee will be treated as failing to furnish a Form W-4; the employer must inform the employee that the Form W-4 is invalid, and must request another Form W-4 from the employee. Until the employee furnishes a new Form W-4, the employer must withhold from the employee as from a single person claiming no allowances. If, however, a prior Form W-4 is in effect for the employee, the employer must continue to withhold based on the prior Form W-4.

Q11: I heard my employer no longer has to routinely submit Forms W-4 to the IRS. How will this affect me as an employee?
A11: There is no change in the requirement that employees have adequate income tax withholding. The withholding
calculator found on www.irs.gov is available to help employees determine the proper amount of federal income tax
withholding. Another useful resource, Publication 505, “Tax Withholding and Estimated Taxes" is available on the IRS
Web site or can be obtained by calling 1-800-TAX-FORM (829-3676). Individuals who do not have sufficient income tax
withholding are subject to penalties. The IRS will be making more effective use of information contained in its
records along with information reported on Form W-2 wage statements to ensure that employees have enough federal
income tax withheld.

Q12: As an employee, what happens if the IRS determines that I do not have adequate withholding?
A12: The IRS may direct your employer to withhold federal income tax at an increased rate to ensure you have adequate withholding by issuing a lock-in letter. At that point, your employer must disregard any Form W-4 that decreases the amount of withholding. You will receive a copy of the lock-in letter. You will be given a period of time before the lock-in rate is put in effect to submit for approval to the IRS a new Form W-4 and a statement supporting the claims made on the Form W-4 that would decrease your federal income tax withholding. You should send the Form W-4 and statement directly to the address on the lock-in letter. Once a lock-in letter is issued, you will not be allowed to decrease your withholding unless approved by the IRS.

Q13: What if I don’t want to submit a Form W-4 to my employer?
A13: Your employer is required to withhold income tax from your wages as if you are single with zero allowances if you do not submit a Form W-4.

Page Last Reviewed or Updated: 30-Oct-2012

http://www.irs.gov/Individuals/Withholding-Compliance-Questions-&-Answers

30-day letter, 90-day letter & tax court:

Proposed Individual Tax Assessment (Letter 2566 SC/CG)

The Proposed Individual Tax Assessment is also referred to as a 30-day letter.

This letter notifies you that we have no record of receiving your Form 1040, U.S. Individual Income Tax Return.

It proposes a tax assessment with penalties and interest based on income reported to us by your employers, banks, etc.

The letter also states that within 30 days, you must submit one of the following:

Your Form 1040 completed and signed, including all schedules and forms with cover letter;

The Consent to Assessment and Collection form, signed and dated;

A statement explaining why you believe you are not required to file, or information you would like us to consider.

Notice of Deficiency (Letter 3219 SC/CG)

A Notice of Deficiency is sometimes referred to as a 90-day letter. The Notice of Deficiency tells you the tax we assess plus the interest and penalties you will owe. A Notice of Deficiency is required by law and is to advise you of your appeal rights to the U.S. Tax Court.

The letter also states that within 90 days, you must submit one of the following:

Your Form 1040 completed and signed, including all schedules and forms with cover letter;

The Consent to Assessment and Collection form, signed and dated;

A statement explaining why you believe you are not required to file, or information you would like us to consider.

Do I need to petition tax court?

If you file your return, it is not necessary to petition tax court, as your submitted return will be processed based on your information. This is true whether you file the return prior to the IRS proposed assessment being made or after the IRS assessment has been processed.

However if you do not file a return, and do not agree with the tax proposed by the IRS, you have 90 days from the date on the Notice of Deficiency to dispute the amount the IRS says you owe.

http://www.irs.gov/businesses/small/article/0,,id=171838,00.html

Trick to waive penalties for late filing a partnership tax return:

Under Rev. Proc. 84-35, the following partnerships will qualify for an automatic waiver of the Sec. 6698 late-filing penalty for a partnership return, if:

The partnership has 10 or fewer partners, all of whom are natural persons (other than nonresident aliens) or estates;

Each partners share of each partnership item is the same as such partners share of every other item;

The partnership can establish, if requested by the IRS, that all partners have fully reported their shares of income, deductions and credits on their timely filed returns.

Service Center Advice (Letter Ruling) SCA 200135029 suggested that taxpayers answer the following six questions:

Is the partnership a domestic partnership?

Does the partnership have 10 or fewer partners (husband and wife and their estates are treated as one partner)?

Are all partners natural persons (other than a nonresident alien) or an estate of a deceased partner?

Is each of the partner's shares of each partnership item the same as his share of every other item?

Have all of the partners timely filed their income tax returns?

Have all of the partners fully reported their share of the partnership's income, deductions and credits on their timely filed income tax returns?

If the taxpayer can answer "yes" to all of the above questions, the Service would abate abate any failure-to-file penalty for partnerships.

Rev. Proc. 84-35, 1984-1 C.B. 509
SECTION 1. PURPOSE
The purpose of this revenue Procedure is to update Rev. Proc. 81-11, 1981-1 C.B. 651, to conform to the small partnership provisions of section 6231(a)(1)(B) of the Internal Revenue Code. Rev. Proc. 81-11 sets forth the procedures under which partnerships with 10 or fewer partners will not be subject to the penalty imposed by section 6698 for failure to file a partnership return.

SECTION 2. BACKGROUND
.01 Section 6031(a) of the Code provides that every partnership must make a return for each taxable year including all information that the Secretary may by forms and regulations prescribe.
.02 Section 402 of the Tax Equity and Fiscal Responsibility Act of 1982, 1982-2 C.B. 462, 585, added sections 6621 through 6232 to the Code to provide that the tax treatment of partnership items must be determined at the partnership level. For purposes of these sections, section 6231(a)(1)(A) defines "partnership" to mean any partnership required to file a return under section 6031(a) except as provided in section 6231(a)(1)(B).

.03 Section 6231(a)(1)(B) of the Code provides an exception to the definition of "partnership" for small partnerships. In general, the term "partnership" does not include a partnership if the partnership has 10 or fewer partners, each of whom is a natural person (other than a nonresident alien) or an estate, and each partner's share of each partnership item is the same as such partner's share of every other item. A husband and wife, and their estates, are treated as one partner for this purpose.

.04 Section 6698 of the Code imposes a penalty if any partnership required to file a return under section 6031 fails to file a timely return, or files a return that fails to show the information required by that section, unless the failure is due to reasonable cause.

.05 The Conference Committee Report concerning section 6698 of the Code states:
The penalty will not be imposed if the partnership can show reasonable cause for failure to file a complete or timely return. Smaller partnerships (those with 10 or fewer partners) will not be subject to the penalty under this reasonable cause test so long as each partner fully reports his share of the income, deductions, and credits of the partnership...
H.R. Rep. No. 95-1800 (Conf. Report), 95th Cong., 2d Sess. 221 (1978), 1978-3 C.B. (Vol. 1) 521, 555. See also H.R. Rep. No. 95-1445, 95th Cong., 2d Sess. 75 (1978), 1978-3 C.B. (Vol. 1) 181, 249, and S. Rep. No. 95-1263, 95th Cong., 2d Sess. 106 (1978), 1978-3 C.B. (Vol. 1) 315, 403, which contain similar statements.

SECTION 3. REQUIRED PROCEDURES
.01 A domestic partnership composed of 10 or fewer partners and coming within the exceptions outlined in section 6231(a) (1)(B) of the Code will be considered to have met the reasonable cause test and will not be subject to the penalty imposed by section 6698 for the failure to file a complete or timely partnership return, provided that the partnership, or any of the partners, establishes, if so requested by the Internal Revenue Service, that all partners have fully reported their shares of the income, deductions, and credits of the partnership on their timely filed income tax returns.

.02 Partnerships having a trust or corporation as a partner, tier partnerships, and partnerships where each partner's interest in the capital and profits are not owned in the same proportion, or where all items of income, deductions, and credits are not allocated in proportion to the pro rata interests, do not come within the exception provisions of section 6231(a)(1)(B) of the Code and, are subject to the penalty imposed by section 6698.

.03 Although a partnership of 10 or fewer partners may not be automatically excepted from the penalty imposed by section 6698 of the Code under section 3.01, the partnership may show other reasonable cause for failure to file a complete or timely partnership return.

.04 In determining whether a partner has fully reported the partner's share of the income, deductions, and credits of the partnership, for purposes of section 3.01, all the relevant facts and circumstances will be taken into account. In making this determination, the nature and materiality of any error or omission will be considered. For example, although an isolated clerical error normally reflects no more than mere inadvertence, such an error may be of such magnitude that the partner will not be considered to have fully reported. If the error or omission results in a de minimis understatement of the net amount payable with respect to any income tax, the penalty will not be asserted. However, if the error or omission results in a material understatement of the net amount payable with respect to any income tax, the partner generally will not be considered to have fully reported and the penalty will be applied.

SECTION 4. EFFECT ON OTHER Revenue Procedures
Rev. Proc. 81-11 is modified and superseded.

SECTION 5. EFFECTIVE DATE
This revenue Procedure is effective for returns required to be filed after June 22, 1984.

IRM Exhibit 20.1.2-1 Revenue Procedure 84-35
http://www.irs.gov/irm/part20/irm_20-001-002-cont01.html#d0e5187

IRM 20.1.2.3.3.1 (04-19-2011) Revenue Procedure 84-35
http://www.irs.gov/irm/part20/irm_20-001-002-cont01.html#d0e4543

IRM 8.19.1.6.3.1 (12-01-2006) Small Partnership Exception
http://www.irs.gov/irm/part8/irm_08-019-001.html#d0e396

IRM 3.11.15.14.10 (1-1-2013) Reasonable Cause for Failing to File a Timely Return
http://www.irs.gov/irm/part3/irm_03-011-015r-cont01.html#d0e8820

Proforma request for penalty abatement:
Department of the Treasury
Internal Revenue Service Center
Cincinnati, OH 45999-0039

Re: XYZ Associates TIN: XX-XXXXXXX Form 1065 penalty

Dear Sirs:

The above taxpayer received a penalty of $195 per month, per partner for allegedly filing their tax return three months late.

The taxpayer respectfully requests abatement of the penalty under the provisions of Rev. Proc. 84-35, 1984-1 C.B. 509.

Under Section 2.05 of that Rev. Proc. A partnership is exempt from the penalty as follows:
The Conference Committee Report concerning section 6698 of the Code states: The penalty will not be imposed if the partnership can show reasonable cause for failure to file a complete or timely return. Smaller partnerships (those with 10 or fewer partners) will not be subject to the penalty under this reasonable cause test so long as each partner fully reports his share of the income, deductions, and credits of the partnership...

The partnership is comprised of only five partners and each reported on their Form 1040 tax return their share of the income, deductions, and credits of the partnership.

Please inform the taxpayer directly of your determination.

Very truly yours,

update: (IRM)
In late 2007 new law passed - late filing penalties for late filed Form 1065 will no longer be @ $50 per partner, per month, for up to 5 months or $250/K-1. Rather effective 12/20/07, for 2007 tax returns a Code §6698(b)(1) penalty is now $85, per K-1, per month, for up to 12 months, or $1,020/K-1. S-corp. Form 1120S K-1's which were exempt in the past, now have a Code §6699(b)(1) penalty for the same $1,020/K-1.

update:
For 2008 and 2009 tax returns, the Form 1065 and Form 1120S penalties were raised to $89 or $90 per K-1, per month, for up to 12 months or $1,068/K-1 or $1,080/K-1.
(the additional $1 increase was authorized by subsequent passing of The Hokie Act and depend on the beginning date of the taxable year)

update: 11/26/09
For 2010 tax returns, the Form 1065 and Form 1120S penalties were increased to $195, per K-1, per month, for up to 12 months or $2,340/K-1.
(over the fiscal period 2011 to 2019, these penalties are projected to raise $642 million (form 1065 partnership penalties) and $587 million (form 1120S S corporation penalties)
update:
For 2017 tax returns, the Form 1065 and Form 1120S penalties were increased to $200, per K-1, per month, for up to 12 months or $2,400/K-1.

update:
For 2018 tax returns, the Form 1065 penalty was increased to $210, per K-1, per month, for up to 12 months or $2,520/K-1.

update:
For 2019 tax returns, the Form 1065 and Form 1120S penalties were changed to $205, per K-1, per month, for up to 12 months or $2,460/K-1.

update:
For 2020 tax returns, the Form 1065 and Form 1120S penalties were changed to $210, per K-1, per month, for up to 12 months or $2,520/K-1.

comment:
Since 2018 the Form 1065 and Form 1120S penalties have inconsistently been set at $205 or $210. Actual example of a Form 1065 penalty notification dated November 8, 2021 "The penalty is $205.00 for each person who was a partner at anytime during the tax year, for each month or part of a month the return was late, for up to 12 months. Number of Partners: 2   Late filing penalty $420.00"

update 6/14/12
TC Summary Opinion 2012-55 determines reasonable cause (and not due to willful neglect) for S-corp for the purposes of the Code §6699(b)(1) penalty by interpreting 26 C.F.R. section 301-6651-1(c)(1) "If the taxpayer exercised ordinary business care and prudence and was nevertheless unable to file the return within the prescribed time, then the delay is due to a reasonable cause."

Potential effects of using IRS Form 8893 to make the election pursuant to IRC §6231(a)(1)(B)(ii) to have the provisions of subchapter C of chapter 63 of the IRC apply with respect to a partnership (that files Form 1065)

Starting in 2012, the IRS occasionally responds with a 168C or 854C letter to a partnership's request for section 6698 penalty abatement pursuant to Rev. Proc 84-35 by sending IRS LTR 854C to the partnership:
"The partnership does not qualify for a penalty waiver under Revenue Procedure 84-35 because our records indicate that the partnership elected to be subject to the consolidated audit procedures in IRS 6221 through IRC 6233."
"The partnership does not qualify for a waiver under Rev. Proc 84 35 because our records indicate that the partnership elected to be subject to the consolidated audit procedures in IRS 6221 through IRC 6233."

But consider the IRS Nat'l Office Significant Service Center Advice No. 200135029 Memorandum for Associate Area Counsel, Boston Small Business/Self Employed CC:SB:1:BOS which states: "Section 6231(a)(1)(B) was enacted as part of the Tax Equity and Fiscal Responsibility Act (TEFRA) of 1982, Pub L 97-248, in an effort to provide unified partnership audit and litigation procedures. See generally I.R.C. §6221 through 6233. These provisions, which can be found in Subchapter C of Chapter 63 (governing tax treatment of partnership items) are completely unrelated and have no bearing on the application and scope of section 6698."

See LAW & ANALYSIS here: 200135029 Significant Service Center Advice - August 1, 2001

See Regs §301.6231(a)(1)-1 here: http://law.justia.com/cfr/title26/26-18.0.1.1.2.3.56.43.html

See Code §6231(a)(1)(B) here: http://www.law.cornell.edu/uscode/text/26/6231

S-Corp late filing penalty waived due to reasonable cause: T.C. Summary Opinion 2012-55   Ensyc Techs. v. Comm'r of Internal Revenue

19 DEC S Corp Late Filing Penalty Excused IRC 6699 Ensyc Technologies V. Commissioner
Reasonable Cause to Avoid Tax Penalties

Trick to waive penalty for late payment of individual income tax:

Proforma request for penalty abatement:
Department of the Treasury
Internal Revenue Service Center
P.O. Box 9019
Holtsville, NY 11742-9019
Re: James and Jane Lastname SSN: XXX-XX-XXXX Form 1040 penalty
Dear Sirs:

The above taxpayer received a penalty under Code Section 6651 for paying their 20XX taxes late.

The taxpayer respectfully requests abatement of the penalty due to reasonable cause, which is presumed when ninety percent (90%) or more of the 20XX tax liability was paid by April 15, 20XY and the balance due was remitted with the filing of the tax return. (see Regs. §301.6651-1(c)(3)).

Please inform the taxpayer directly of your determination.

Very truly yours,

Trick to use when Form W-2 is missing - new IRS/State crackdown starting 2007:

Were you an "employee" misclassified by your employer as a "self-employed sub-contractor"?
(Caution to businesses / employers: you need to be aware of these items available to your subcontractors / employees)

When Form W-2 is lost, missing or incorrect or was not even issued to "an employee," then IRS Form 4852 can be used as a substitute.

Additional new crackdown on employers "incorrect" reporting of employees:
Starting with 2007 employment as an "employee" - but you were not issued a Form W-2 or you were issued a Form 1099-MISC instead of a Form W-2, then IRS Form 8919 may be "required" to be filed.

To determine if a person is an employee (rather than a subcontractor) IRS Form SS-8 may be needed.

IRS Announcement 2001-64 Voluntary Classification Settlement Program VCSP is a new program developed by the IRS that allows taxpayers to voluntarily reclassify their workers as employees for future tax periods for employment tax purposes FAQ

Old rules - pre 2007:
IRS Notice 989 (issued March 1999) When IRS Determines Your Work Status is "Employee" gave the following instructions to these employees:
If you are filing an original Form 1040 return, show the total computed social security and Medicare tax due on Form 4137, Social Security and Medicare Tax on Unreported Tip Income. Cross out the word "TIP(S)" and insert the word "WAGE(S)" on the Form 4137 and use wage(s) in place of tip(s) when completing the form. Then enter the social security and Medicare tax total on Form 1040, page 2 in the other taxes section as instructed on the Form 4137. Use the appropriate forms for the tax year you are filing.

Starting with 2007 Form 4137 includes the following new instructions: "Use Form 4137 only to figure the social security and Medicare tax owed on tips you did not report to your employer, including any allocated tips shown on your Form(s) W-2 that you must report as income. " "If you believe you are an employee and you received Form 1099-MISC, Miscellaneous Income, instead of Form W-2, Wage and Tax Statement, because your employer did not consider you an employee, do not use Form 4137. Instead, use Form 8919, Uncollected Social Security and Medicare Taxes on Wages."

What to Do If You Are Missing a W-2
http://www.irs.gov/newsroom/article/0,,id=106470,00.html

IRS TAX TIP 2009-28
Did you get your W-2? These documents are essential to filling out most individual tax returns. You should receive a Form W-2, Wage and Tax Statement, from each of your employers each year. Employers have until February 2, 2009 to provide or send you a 2008 W-2 earnings statement either electronically or in paper form. If you haven’t received your W-2, follow these steps:

Contact your employer. If you have not received your Form W-2, contact your employer to inquire if and when the W-2 was mailed. If it was mailed, it may have been returned to the employer because of an incorrect or incomplete address. After contacting the employer, allow a reasonable amount of time for them to resend or to issue the W-2.

Contact the IRS. If you still do not receive your W-2 by February 17th, contact the IRS for assistance at 800-829-1040. When you call, have the following information:

Employer's name, address, city, and state, including zip code;

Your name, address, city and state, including zip code, and Social Security number; and

An estimate of the wages you earned, the federal income tax withheld, and the period you worked for that employer. The estimate should be based on year-to-date information from your final pay stub or leave-and-earnings statement, if possible.

File your return. You still must file your tax return on time even if you do not receive your Form W-2. If you have not received your Form W-2 by February 17th, and have completed steps 1 and 2 above, you may use Form 4852, Substitute for Form W-2, Wage and Tax Statement. Attach Form 4852 to the return, estimating income and withholding taxes as accurately as possible. There may be a delay in any refund due while the information is verified.

File a Form 1040X. On occasion, you may receive your missing documents at a later date and some may have conflicting information. You may receive a Form W-2 or W-2C (corrected form) after you filed your return using Form 4852, and the information differs from what you reported on your return. If this happens, you must amend your return by filing a Form 1040X, Amended U.S. Individual Income Tax Return.

Form 4852, Form 1040X, and instructions are available on the IRS Web site, IRS.gov or by calling 800-TAX-FORM (800-829-3676).

Links:

Form 4852, Substitute for Form W-2, Wage and Tax Statement (PDF 29K)

Form 14157, "E-filing Using Payroll Stub" question 13 page 1 and page 4 (PDF)

Form 14039, "Identity Theft Affidavit" (PDF)

Form 1040X, Amended U.S. Individual Income Tax Return (PDF 123K)

Instructions for Form 1040X (PDF 43K)

(Caution to businesses / employers: you need to be aware of this IRS / State crackdown)

FS-2007-25, November 2007
QETP Definition: Questionable employment tax practices (QETP) are employment tax schemes or practices that have no objective other than to avoid federal and/or state employment taxes.

Additional information from the IRS on the Questionable Employment Tax Practices (QETP) Memorandum of Understanding (MOU)

IRS Publication 1976 regarding relief available under Section 530 information

IRS offers tips on correcting misclassified employee reporting

IRS site search for updated information

Google search for updated information

Information for newly registered employers:
depositing employees' withholding taxes
small employer tax filings
business.gov - 10 steps to hiring your first employee

(Caution to businesses / employers: you need to be aware of this 2008 IRS / State crackdown)

IRS will be using a computer matching program to further check on the payees of any business that issues five or more Form 1099-MISC to workers in an amount exceeding $25,000 each. They will then do a search for all 1099's and W-2's to these workers and a listing of prospects for employment tax audits will be generated. (source: KiplingerTaxLetter 2/22/08)

(Voluntary Classification Settlement Program (VCSP) started by IRS in September 2011)

Employers may file an application using IRS Form 8952 if they consistently treated workers in question as outside contractors and must have issued Forms 1099 annually for at least the last three years. See IRS Announcement 2011-64 for details.     Application-for-Voluntary-Classification-Settlement-Program-(VCSP)

Re: payments as "employee reimbursements" and "independent contractor."

A person who is an employee, generally, may not provide services as an independent contractor (to the same business owner).
It is generally viewed as a form of tax evasion and is routinely reclassified to wages, along with interest and penalty, including as a penalty - the employer must pay the income taxes for the independent contractor/employee.

Employee expense reimbursements are okay only if they are paid pursuant to an "accountable plan" meaning that you reimburse the employee for the exact amount in exchange for appropriate receipts from the employee. Any "unaccountable plan" such as giving the employee a flat $100 to cover costs for uniforms, mileage or other costs of a business trip, must be added to the employee's W-2 as wages.

You may give one separate check to an employee in the amount of $25 each calendar year as a "gift" and this does not need to be reported on the employee's W-2.

Trick to use when Form W-2 is checked as being an active participant in retirement plan:

http://www.irs.gov/pub/irs-pdf/f8275.pdf

For information on the active participant rules, see Notice 87-16, 1987-1 C.B. 446, Notice 98-49, 1998-2 C.B. 365, section 219(g)(5), and Pub. 590, Individual Retirement Arrangements (IRAs).
Notice 87-16
I. DEDUCTIBLE CONTRIBUTIONS TO IRAs

A. ACTIVE PARTICIPANT STATUS

An individual who is not an active participant in a retirement arrangement specified in section 219(g)(5) of the Code may make a deductible IRA contribution for the taxable year of up to the lesser of $2,000 ($2,250 for spousal IRAs) or 100% of compensation. An individual who is married and files a joint federal income tax return will be treated as an active participant if such individual's spouse is an active participant.

Section 219(g) of the Code provides that if an individual is an active participant in such a retirement arrangement for a taxable year, the $2,000 ($2,250 for spousal IRAs) dollar limit on the individual's deduction may be reduced or eliminated for such year. Accordingly, the first step in determining the permissible IRA deduction for a year is to determine active participant status for the taxable year.

For purposes of the IRA deduction rules, an individual shall be an "active participant" for a taxable year if either the individual or the individual's spouse (with whom the individual files a joint tax return) actively participates in any of the following:

1) a qualified plan described in section 401(a) of the Code,

2) an annuity plan described in section 403(a) of the Code,

3) a plan established for its employees by the federal, state or local government or by an agency or instrumentality thereof (other than a plan described in section 457 of the Code),

4) an annuity contract or custodial account described in section 403(b) of the Code,

5) a simplified employee pension described in section 408(k) of the Code, or

6) a trust described in section 501(c)(18) of the Code.

See Questions Al through Al4 for active participant rules that apply to all plans.

In determining when an individual is an active participant in retirement arrangement for a taxable year, different rules are applied, depending upon whether the retirement arrangement is a defined benefit or a defined contribution plan.

Defined Benefit Plan Rule

In the case of a defined benefit plan, an individual who is not excluded under the eligibility provisions of the plan for the plan year ending with or within the individual's taxable year shall be an active participant in the plan, regardless of whethe r such individual has elected to decline participation in the plan, has failed to make a mandatory contribution specified under the plan or has failed to perform the minimum service required to accrue a benefit under the plan. For example:

An individual is a calendar year taxpayer who is not excluded from participation under the provisions of a defined benefit plan with a July 1 to June 30 plan year. The individual separates from service on December 31, 1987. Because the individual is not excluded under the plan's eligibility provisions for the plan year ending in such individual's 1988 taxable year, such individual shall be an active participant for the 1988 taxable year.

See Questions Al5 through Al8 for defined benefit plan active participant rules.

Defined Contribution Plan Rule

Generally, in the case of a defined contribution plan, an individual shall be an active participant if employer or employee contributions or forfeitures are allocated to such individual's account with respect to a plan year ending with or within the individual's taxable year. For example:

Company B sponsors a money purchase pension plan with a plan year ending on June 30. The plan provides that contributions must be allocated as of the last day of the plan year. On December 31, 1987, an individual employed by the Company separates from service. The contribution for the plan year ending on June 30, 1988 is not made until February 15, 1989, when the Company files its corporate return. In this case, the individual is an active participant for such individual's 1988 taxable year.

A special rule applies to certain plans in which it is impossible to determine whether or not an amount (other than earnings) will be allocated to an individual's account for a given plan year. If, with respect to a particular plan year, no amount attributable to forfeitures, employer contributions or employee contributions has been allocated to an individual's account by the last day of the plan year, and contributions to the plan are purely discretionary for the plan year, such individual shall not be an active participant for the taxable year in which such plan year ends. If, however, after the end of such plan year, the employer contributes an amount for such plan year, an individual to whose account an allocation is made shall be an active participant for the taxable year in which the contribution is made.

Contributions shall be treated as purely discretionary for the plan year if, as of the end of the plan year, the employer is not obligated under the law or terms of the plan to make a contribution for the plan year, and whether or not contributions are made to the plan is ultimately dependent upon the employer's decision or factors within the control of the employer. Contributions are not purely discretionary merely because they are dependant on profits.

For example:

An individual covered by a profit-sharing plan separated from service on December 31, 1987. The plan year runs from July 1 to June 30. Under the terms of the plan, employer contributions, if any, shall be made at the complete discretion of the Board of the Directors and shall be contributed to the plan prior to the due date for filing the employer's tax return. Such contributions are allocated as of the last day of the plan year, and allocations are made to the accounts of individuals who have any service during the plan year. As of June 30, 1988, no employer or employee contributions had been made that are allocated to the June 30, 1988 plan year, and no forfeitures had been allocated within the plan year. In addition, as of such date, the employer was not obligated to make a contribution for such plan year and it was impossible to determine whether or not a contribution would be made with respect to the plan year. On December 31, 1988, the Board of Directors agreed to contribute a specified amount to the plan, with respect to the plan year ending June 30, 1988; on February 15, 1989, such contribution was made to the plan. As a result of the amount allocated to such individual,s account as of June 30, 1988, the individual is an active participant in the plan for the 1989 calendar year but not for the 1988 year.

See Questions Al9 through A26 for the defined contribution plan rules.

GENERAL ACTIVE PARTICIPANT QUESTIONS

Al: How will an employer report active participant status for a taxable year?

A: An individual's employer (or former employer) must inform an individual of active participant status for the taxable year of the individual. This status must be reported on a Form W- 2.

A2: If an individual is not an active participant, but such individual's spouse is an active participant, will the individual be treated as an active participant?

A: If the couple files a joint federal income tax return for the applicable year, active participation by either spouse will cause both spouses to be treated as active participants. But see Question A3.

A3: If an individual is married but files a separate tax return, will active participation by his or her spouse affect the individual's active participant status?

HMTZ Note: This answer is no longer the correct answer. Congress changed the law after a year to remove this option.
A: No. Section 219(g)(4) of the Code provides that a married individual who files a separate tax return is considered single for purposes of determining active participant status. Thus, if the individual is not an active participant. the fact that his or her spouse is an active participant will not limit such individual's IRA deduction.

A4: If a married individual obtains a divorce during his or her taxable year (and does not remarry during such year), is the individual considered an active participant merely because the former spouse is an active participant for the year?

A: No. Marital status is determined as of the end of the year. Thus, if the individual is not married at the end of the year, the fact that his or her former spouse is an active participant will not cause the individual to be treated as an active parti cipant. Similarly, if an individual marries during the year, and the individual's new spouse is an active participant, the individual shall be treated as an active participant for the entire year if the couple files a joint tax return.

A5: If a married individual dies during a taxable year and is an active participant for such taxable year, will the survivor be treated as an active participant for purposes of section 219(g) of the Code?

A: Yes. In the taxable year of death, active participation is determined as if the deceased spouse was still alive. Thus, if the deceased spouse was an active participant for the taxable year of death and a joint return is filed for the taxable year of death, the survivor will also be treated as an active participant. In such a case, the applicable dollar limitation for AGI purposes is $40,000. (See I. B., below.) For taxable years following the taxable year of death, the deceased spouse's status as an active participant in the year of death has no effect on the survivor's status as an active participant because the survivor is not treated as married to the deceased spouse for purposes of the active participation rules. However, for AGI purposes, in th ose cases in which the survivor meets the filing status requirements under section 2(a) of the Code, the survivor will use the same $40,000 applicable dollar limitation used by married taxpayers filing jointly.

A6: An individual has an amount deferred for a taxable year in a plan described in section 457 of the Code. Does participation in such a plan cause the individual to be an active participant?

A: No. Section 219(g)(5) of the Code specifically exempts unfunded deferred compensation plans described in section 457 of the Code from the definition of relevant plans for purposes of determining who is an active participant. Participation in any ret irement plan established by a state or local government, other than a plan described in section 457 of the Code, is active participation for purposes of section 219(g)(5) of the Code.

A7: Is an individual who is covered under Social Security or Railroad Retirement (Tier I or Tier II) an active participant?

A: No. Under Section 219(g)(5), neither Social Security nor Railroad Retirement (Tier I and Tier II) is a retirement arrangement for purposes of determining active participant status.

A8: Is a retired individual who is receiving pension annuity payments an active participant?

A: No. An individual will not be treated as an active participant merely because the individual receives benefits under a retirement arrangement described in section 219(g)(5) of the Code.

A9: If an individual is ineligible for benefit accrual in a retirement plan that is integrated with Social Security solely because the compensation of that individual is below the integration level or because the full benefit will be offset by Social S ecurity, is the individual an active participant?

A: No. In the case of a defined benefit plan, an individual who is not excluded under the eligibility provisions of the plan, but who is nonetheless ineligible to accrue a benefit under a plan because compensation is below the integration level or whos e benefit will be fully offset by social security for the plan year ending with or within the taxable year, shall not be an active participant in such plan. (Note: This is an exception to the general rule applicable to defined benefit plans, and it is lim ited to the facts set forth in the preceding sentence.) Similarly, in a defined contribution plan, if an individual is ineligible for an allocation in a plan year because the individual's compensation is below the integration level, such individual shall not be an active participant for the taxable year with or within which such defined contribution plan year ends.

A10: Is an individual who makes employee contributions to a qualified plan described in section 219(g)(5) an active participant?

A: Yes. If an individual makes either voluntary or mandatory employee contributions to a plan, such individual shall be an active participant for the individual's taxable year containing the end of the plan year in which the contributions are allocated .

A11: In the case of a plan year that begins in 1986 and ends in 1987, will actions attributable to the 1986 part of the plan year that would normally make an individual an active participant for a year, make an individual an active participant for the 1987 taxable year?

A: No. For purposes of determining whether an individual is an active participant for 1987, a plan year beginning in 1986 and ending in 1987 (an "overlap plan year") is to be treated as two short plan years, the first ending on December 31, 1986 and th e second beginning on January 1, 1987. In addition, any employee contributions or employer contributions or forfeitures allocated during the 1987 portion of the overlap plan year shall be treated as allocated on December 31, 1986 to the extent such contri butions are attributable (i) to compensation that would have been paid (but for a deferral election) or was actually paid before January 1, 1987 or (ii) to services performed before January 1, 1987.

For example, if a participant in a cash or deferred arrangement that is part of a plan with an overlap plan year elects to have no elective deferrals made out of compensation that would have been paid (but for the deferral election) in the 1987 portion of the overlap plan year, such participant will not be treated as an active participant for the 1987 taxable year merely because of the elective deferrals made out of compensation that would have been paid (but for the deferral election) before January 1 , 1987. Similarly, if a participant in a defined contribution plan with an overlap plan year separates from service from the employer on December 31, 1986, such participant will not be treated as an active participant for the 1987 taxable year merely beca use an employer contribution that is based on the participants's compensation and service before January 1, 1987 is allocated to such participant's account as of the last day of the overlap plan year.

A12: Is an individual considered an active participant merely because such individual participates in a plan as an Armed Forces reservist if the individual has less than 90 days of active duty during the year, or participates in a plan described in sec tion 219(g)(5)(A)(iii) of the Code, based on activities as a volunteer firefighter?

A: No. Such individual is not an active participant pursuant to section 219(g)(6) of the Code.

A13: If only a single dollar is allocated to an individual's account for a plan year (in a defined contribution plan), or an individual accrues a benefit of only one dollar for a plan year (in a defined benefit plan), is such an individual an active pa rticipant in such plan?

A: Yes.

A14: If an amount is allocated to an individual's plan account for a plan year in a defined contribution plan, or an individual accrues a benefit for a plan year in a defined benefit plan, but such individual has no vested interest in such account or a ccrual, is such an individual an active participant in such plan?

A: Yes. Active participant status is determined without regard to vesting.

DEFINED BENEFIT PLAN ACTIVE PARTICIPATION QUESTIONS

A15: In many defined benefit plans a participant's right to benefit accruals is conditioned upon the performance of a prescribed number of hours of service. If an individual does not complete the requisite hours of service needed in order to accrue a b enefit in a plan year, is the individual an active participant for such year?

A: Yes. If the individual is not excluded under the eligibility provisions of the plan for the plan year ending with or within the individual's taxable year, the individual is an active participant.

A16: If an individual participates in a defined benefit plan in which benefit accruals are frozen for the entire plan year ending with or within the individual's taxable year, is such individual an active participant in such plan for the taxable year?

A: No. When a plan is frozen, i.e., when benefit accruals under a plan have ceased for all participants, an individual in such a plan is not an active participant. However, where a benefit may vary with future compensation, all accruals will not be con sidered to have ceased. For example, a "High 3" plan, in which future accruals have ceased but the actual benefit will depend upon future compensation, will not be considered as a plan in which accruals have ceased for all participants.

A17: If a calendar year defined benefit plan terminates on January 2, 1988, is an individual who is covered under the plan an active participant for such individual's 1988 taxable year?

A: Yes. If an individual is not excluded under the eligibility provisions of the plan for any portion of the plan year ending with or within the taxable year, the individual is an active participant. Accordingly, an individual covered by the plan shall be an active participant for the taxable year in which the plan year ends, whether or not the plan terminated.

A18: If a calendar year defined benefit plan terminates on November 30, 1987, but does not commence distributions until January 31, 1988, is an individual covered under the plan an active participant in either plan year?

A: As noted in question Al7, the individual will be an active participant for the taxable year within which the plan terminates (1987) because such individual was not excluded under the eligibility provisions of the plan in the plan year which ended wi th or within the taxable year. In the 1988 plan year, a participant is excluded under the eligibility provisions for the plan year which ends with or within the participant's taxable year because the plan has terminated.

DEFINED CONTRIBUTION PLAN ACTIVE PARTICIPATION QUESTIONS

A19: Is an individual an active participant merely because earnings are allocated to such individual's account?

A: No. An individual is not an active participant merely because earnings have been allocated to such individual's account.

A20: Certain defined contribution plans condition the right to an allocation on the performance of a specified number of hours (e.g., 1,000) or on the employment of the participant on a certain day. In such a plan, if an individual does not meet the co ndition for a particular plan year, is the individual an active participant with respect to the taxable year within which such plan year ends?

A: No. An individual is not an active participant in a defined contribution plan if, under the terms of the plan, the individual is not entitled to an allocation of contributions or forfeitures to the individual's account with respect to the plan year ending with or within the individual's taxable year.

A21: If an employer sponsoring a defined contribution plan is required to make a contribution to an individual's account but fails to do so (whether or not in violation of section 412(d) of the Code), is an individual for whom an allocation is required an active participant in the plan for the plan year ending in the individual's taxable year?

A: Yes. In the case of such a plan, if an allocation must be made to an individual's account with respect to a particular plan year, such individual shall be an active participant in the taxable year in which such plan year ends, regardless of whether the contribution is made.

A22: If a plan is required to make a top heavy minimum allocation for the plan year, and must make an allocation to the account of an individual who would not otherwise be entitled to an allocation for the plan year, is the individual an active partici pant merely because a top heavy minimum allocation is made to such individual's account?

A: Yes. If a top heavy minimum is required to be allocated to an individual's account, the individual is an active participant for the taxable year in which ends the plan year with or within which the allocation is required to be made.

A23: If an individual elects to defer compensation under a section 401(k) cash or deferred arrangement (CODA), is such individual an active participant?

A: Yes. An individual who elects to defend compensation pursuant to a plan described in section 401(k) shall be an active participant. The same rule applies to elective deferrals and salary reductions under sections 408(k), 501(c)(18), and 403(b).

A24: If an individual who is eligible to make elective deferrals under a CODA declines to make elective deferrals for a year, and no other contributions or forfeitures are allocated to such individual's account for the plan year ending with or within t he individual's taxable year, is such individual an active participant for that year?

A: No. An individual shall not be an active participant merely due to eligibility to participate in a CODA.

A25: If an individual makes an elective deferral during a plan year, but later has the deferral distributed from the plan as an excess deferral, pursuant to section 402(g)(2) of the Code, is such individual an active participant for the taxable year wi th or within which ends the plan year?

A: Yes. For purposes of determining active participant status, if an individual chooses to make an elective deferral to a plan, the individual is an active participant for the plan year as of which the deferral contribution is allocated, regardless of whether the contribution remains in the individual's account.

A26: A profit sharing plan has a July 1 to June 30 plan year. Under the terms of the plan, employer contributions, if any, are made at the sole discretion of the Board of Directors. As of June 30, 1987, no employee or employer contributions have been m ade and no amounts have been forfeited for the plan year ending June 30, 1987. Moreover, it is impossible to determine whether a contribution will be made for the plan year ending on June 30, 1987. On January 15, 1988, the employer makes a contribution fo r the plan year ending on June 30, 1987. On November 30, 1988, the employer makes a contribution for the plan year ending June 30, 1988.

On June 30, 1989 it is again impossible to determine whether a contribution will be made for the plan year ending on that date, and no contribution is made by December 31, 1989. Will a participant in the plan described above be an active participant on ly for the 1988 taxable year?

A: No. In such a situation, when contributions to a discretionary defined contribution plan for two plan years are made in one calendar year, solely for the purposes of determining active participant status, the contributions for the later plan year ar e deemed to be made in the next taxable year. In the fact pattern described above, the contribution made on November 30, 1988 is deemed to be made in taxable year 1989. Thus, the individual is an active participant in both the 1988 and 1989 taxable years.

Notice 98-49
http://www.irs.gov/pub/irs-drop/n-98-49.pdf.

Sec. 1.219-2 Definition of active participant
(a) In general. This section defines the term active participant for individuals who participate in retirement plans described in section 219(b)(2). Any individual who is an active participant in such a plan is not allowed a deduction under section 219(a) for contributions to an individual retirement account.

(b) Defined benefit plans—(1) In general. Except as provided in subparagraphs (2), (3) and (4) of this paragraph, an individual is an active participant in a defined benefit plan if for any portion of the plan year ending with or within such individual's taxable year he is not excluded under the eligibility provisions of the plan. An individual is not an active participant in a particular taxable year merely because the individual meets the plan's eligibility requirements during a plan year beginning in that particular taxable year but ending in a later taxable year of the individual. However, for purposes of this section, an individual is deemed not to satisfy the eligibility provisions for a particular plan year if his compensation is less than the minimum amount of compensation needed under the plan to accrue a benefit. For example, assume a plan is integrated with Social Security and only those individuals whose compensation exceeds a certain amount accrue benefits under the plan. An individual whose compensation for the plan year ending with or within his taxable year is less than the amount necessary under the plan to accrue a benefit is not an active participant in such plan.

(2) Rules for plans maintained by more than one employer. In the case of a defined benefit plan described in section 413(a) and funded at least in part by service-related contributions, e.g., so many cents-per-hour, an individual is an active participant if an employer is contributing or is required to contribute to the plan an amount based on that individual's service taken into account for the plan year ending with or within the individual's taxable year. The general rule in paragraph (b)(1) of this section applies in the case of plans described in section 413(a) and funded only on some non-service-related unit, e.g., so many cents-per-ton of coal.

(3) Plans in which accruals for all participants have ceased. In the case of a defined benefit plan in which accruals for all participants have ceased, an individual in such a plan is not an active participant. However, any benefit that may vary with future compensation of an individual provides additional accruals. For example, a plan in which future benefit accruals have ceased, but the actual benefit depends upon final average compensation will not be considered as one in which accruals have ceased.

(4) No accruals after specified age. An individual in a defined benefit plan who accrues no additional benefits in a plan year ending with or within such individual's taxable year by reason of attaining a specified age is not an active participant by reason of his participation in that plan.

(c) Money purchase plan. An individual is an active participant in a money purchase plan if under the terms of the plan employer contributions must be allocated to the individual's account with respect to the plan year ending with or within the individual's taxable year. This rule applies even if an individual is not employed at any time during the individual's taxable year.

(d) Profit-sharing and stock-bonus plans—(1) In general. This paragraph applies to profit-sharing and stock bonus plans. An individual is an active participant in such plans in a taxable year if a forfeiture is allocated to his account as of a date in such taxable year. An individual is also an active participant in a taxable year in such plans if an employer contribution is added to the participant's account in such taxable year. A contribution is added to a participant's account as of the later of the following two dates: the date the contribution is made or the date as of which it is allocated. Thus, if a contribution is made in an individual's taxable year 2 and allocated as of a date in individual's taxable year 1, the later of the relevant dates is the date the contribution is made. Consequently, the individual is an active participant in year 2 but not in year 1 as a result of that contribution.

(2) Special rule. An individual is not an active participant for a particular taxable year by reason of a contribution made in such year allocated to a previous year if such individual was an active participant in such previous year by reason of a prior contribution that was allocated as of a date in such previous year.

(e) Employee contributions. If an employee makes a voluntary or mandatory contribution to a plan described in paragraphs (b), (c), or (d) of this section, such employee is an active participant in the plan for the taxable year in which such contribution is made.

(f) Certain individuals not active participants. For purposes of this section, an individual is not an active participant under a plan for any taxable year of such individual for which such individual elects, pursuant to the plan, not to participate in such plan.

(g) Retirement savings for married individuals. The provisions of this section apply in determining whether an individual or his spouse is an active participant in a plan for purposes of section 220 (relating to retirement savings for certain married individuals).

(h) Examples. The provisions of this section may be illustrated by the following examples:

Example 1.   The X Corporation maintains a defined benefit plan which has the following rules on participation and accrual of benefits. Each employee who has attained the age of 25 or has completed one year of service is a participant in the plan. The plan further provides that each participant shall receive upon retirement $12 per month for each year of service in which the employee completes 1,000 hours of service. The plan year is the calendar year. B, a calendar-year taxpayer, enters the plan on January 2, 1980, when he is 27 years of age. Since B has attained the age of 25, he is a participant in the plan. However, B completes less than 1,000 hours of service in 1980 and 1981. Although B is not accruing any benefits under the plan in 1980 and 1981, he is an active participant under section 219(b)(2) because he is a participant in the plan. Thus, B cannot make deductible contributions to an individual retirement arrangement for his taxable years of 1980 and 1981.

Example 2.   The Y Corporation maintains a profit-sharing plan for its employees. The plan year of the plan is the calendar year. C is a calendar-year taxpayer and a participant in the plan. On June 30, 1980, the employer makes a contribution for 1980 which as allocated on July 31, 1980. In 1981 the employer makes a second contribution for 1980, allocated as of December 31, 1980. Under the general rule stated in §1.219–2(d)(1), C is an active participant in 1980. Under the special rule stated in §1.219–2(d)(2), however, C is not an active participant in 1981 by reason of that contribution made in 1981.

(i) Effective date. The provisions set forth in this section are effective for taxable years beginning after December 31, 1978.

Presumption of correctness of 1099-MISC forms (in CP2000 and CP2501 cases):

Portillo v. Commissioner, 932 F.2nd 1128 (1991) / Weimerskirch v. Commissioner, 596 F.2d 358 (1979) and others...
various excerpts:

The presumption of correctness generally prohibits a court from looking behind the Commissioner's determination even though it may be based on hearsay or other evidence inadmissible at trial. See Clapp v. Commissioner, 875 F.2d 1396, 1402-03 (9th Cir.1989); Zuhone v. Commissioner, 883 F.2d 1317, 1326 (7th Cir.1989); Dellacroce v. Commissioner, 83 T.C. 269, 280 (1984). Justification for the presumption of correctness lies in the government's strong need to accomplish swift collection of revenues and in the need to encourage taxpayer recordkeeping. Carson, 560 F.2d at 696. The need for tax collection does not serve to excuse the government, however, from providing some factual foundation for its assessments. Id. "The tax collector's presumption of correctness has a herculean muscularity of Goliathlike reach, but we strike an Achilles' heel when we find no muscles, no tendons, no ligaments of fact."

In this case we find that the notice of deficiency lacks any "ligaments of fact." As the Supreme Court has held, the presumption of correctness does not apply when the government's assessment falls within a narrow but important category of a " 'naked' assessment without any foundation whatsoever...." Janis, 428 U.S. at 442, 96 S.Ct. at 3026. Several courts, including this one, have noted that a court need not give effect to the presumption of correctness in a case involving unreported income if the Commissioner cannot present some predicate evidence supporting its determination. Carson, 560 F.2d at 696; Anastasato, 794 F.2d at 887; Weimerskirch v. Commissioner, 596 F.2d 358, 360 (9th Cir.1979); Pizzarello v. United States, 408 F.2d 579 (2d Cir.), cert. denied, 396 U.S. 986, 90 S.Ct. 481, 24 L.Ed.2d 450 (1969). Although a number of these cases involved unreported illegal income, given the obvious difficulties in proving the nonreceipt of income2, we agree with the Third Circuit that this principle should apply whether the unreported income was allegedly obtained legally or illegally. See Anastasato, 794 F.2d at 887.

It is obvious that a naked assessment without any foundation is arbitrary and erroneous; see United States v. Janis, supra. This is the law in at least nine Circuits and has in fact been the law since at least 1935. In Helvering v. Taylor, 293 U.S. 507, 55 S.Ct. 287 (1935), the Commissioner determined a deficiency of $9,156.69 on account of respondent's 1928 income tax and the Board of Tax Appeals made the same determination. But on appeal, the circuit court held it excessive and concluded that the evidence did not show the correct amount; it thus reversed the order of the Board and remanded the case for further proceedings in accordance with the opinion. The petition for writ to the Supreme Court stated the question to be presented as follows:

"In asserting that a new rule was pronounced in this case, the government turns its back on United States v. Janis... Janis holds that where 'the assessment is shown to be naked and without any foundation,' it is not entitled to the presumption of correctness ordinarily conferred upon a notice of tax deficiency. The inception of this holding is found in Helvering v. Taylor, 293 U.S. 507..., a case which was decided in 1935!" Id., at 28-29.

"It is well established that as a general matter, the Commissioner's determination of deficiency is presumed correct, and the taxpayer bears 'the burden of proving it wrong.' (Cites omitted). In Helvering v. Taylor, 293 U.S. 507, 515... (1935), the Court refined its formulation of this burden, holding that the taxpayer is entitled to have the determination set aside if he can prove that it is 'arbitrary and excessive,' regardless of whether he can prove the amount he actually owes. Under the Taylor decision, the determination of the correct amount of tax is an inquiry entirely separate from, and subsequent to, the finding that the Commissioner's determination of deficiency should be rejected as arbitrary and excessive.

For example, in Weimerskirch v. Commissioner, 596 F.2d 358, 361 (9th Cir. 1979), the court held that the Commissioner may not rely on a presumption of correctness of deficiency 'in the absence of a minimal evidentiary foundation.' Since the Commissioner in that case offered no evidence from which it could even be inferred that Taxpayer engaged in the sale of narcotics, introduced no records to substantiate the computations made by IRS, and made no attempt to support the charge of unreported income by 'any other means such as by showing net worth, bank deposits, cash expenditures, or source and application of funds,' the Notice of Deficiency was arbitrary. Id. at 362 (emphasis added). See also Portillo v. Commissioner, 932 F.2d 1128, 1133 (5th Cir. 1991) (Commissioner was not entitled to a presumption of correctness where the notice of deficiency lacked any 'ligaments of fact' and the Commissioner relied solely upon naked assertion; 'Commissioner would merely need to attempt to substantiate the charge of unreported income by some [] means, such as by showing the taxpayer's net worth, bank deposits, cash expenditures, or source and application of funds.'); Carson v. United States, 560 F.2d 693 (5th Cir. 1977) (single $10 notebook entry and cryptic statement that review of the records seized from the taxpayer 'revealed that taxpayer received wagers' did not provide the Commissioner with a presumption of correctness from the Notice of Deficiency 'particularly where none of the records or other evidence introduced at trial by the government support[ed] such a revelation of wagering activities.'); Tokarski v. Commissioner, 87 T.C. 74, 1986 WL 22155 (1986) (the presumption of correctness is not given effect in an unreported illegal income case and Commissioner must come forward with evidence linking the taxpayer to an income producing activity only where 'there was no evidence that the Taxpayer had actually received anything during the period in issue.')," Id., at 764.

In a series of decisions beginning with Stout v. Commissioner, 273 F.2d 345, 350 (4th Cir. 1959), the Fourth Circuit had developed this separate, subordinate procedural scheme under which the burden of production during the first phase of the suit can shift to the government. In Stout, that court held:

The Fourth Circuit later revisited the question of the means by which the taxpayer may overcome the "presumption of correctness" in Foster v. Commissioner, 391 F.2d 727 (4th Cir. 1968). In Higginbotham v. United States, 556 F.2d 1173, 1176 (4th Cir. 1977), Chief Judge Haynsworth, the author of Stout, reformulated the approach taken in Foster:

"...[t]he discussion of the burden of proof in Foster applies only to the procedural effects of the presumption that an assessment is accurate. Once a taxpayer has introduced evidence sufficient to support a finding that the assessment is wrong, Foster prevents the Government from simply resting on the presumption and requires it to come forward with some evidence to support a conclusion that the assessment is correct in spite of the taxpayer's evidence. But the taxpayer continues to bear the risk of nonpersuasion. Foster does not relieve the taxpayer of the burden of proving the government's assessment wrong by a preponderance of evidence."

The court in Cebollero, 967 F.2d, at 991, recounted what it had stated in Higginbotham:

"Higginbotham has not been uniformly interpreted as reaffirming Stout. In Anastasato v. Commissioner, 794 F.2d 884, 887 (3d Cir. 1986), the Court cited Stout for the proposition that the ultimate burden as to the amount of a deficiency can 'shift' to the Commissioner. The Court erroneously cited Higginbotham, however, as standing for the view that the burden of persuasion remains on the taxpayer even after the 'presumption of correctness' has been overcome. It is worth emphasizing that there is no such inconsistency in our cases. In this Circuit, the Commissioner always has the burden of persuasion as to the amount and existence of any deficiency."

In summary, there are many cases which have held that an assessment like the one here dated September 16, 1991, is nothing more than a "naked" assessment which will not even be enforced civilly; proof of that "nakedness" is derived from Silkman's proposed Ex. 106. If such an assessment is invalid for civil purposes, it is equally invalid here where the burden of proof clearly fell upon the Government.

http://bulk.resource.org/courts.gov/c/F2/932/932.F2d.1128.90-4343.html

http://fly.hiwaay.net/~becraft/Silkmanbrief.htm

In fiscal year 2010 the IRS made over 15 million contacts that taxpayers might regard as examinations, but treated only 1.6 million as "real" examinations, subject to real examination and taxpayer protections procedures. 78% of the "real" examinations were handled by correspondence in a highly-automated campus setting.   IRS closed 4.336.000 Automated Underreporter cases, such as with the CP2000 & CP2501 notices. http://www.irs.gov/pub/irs-utl/2011_arc_revenueprotectionmsps.pdf

			Elections & Extensions (under Regs 301.9100)
Home Order more Information			Tricks and traps to watch out for including NOL filing tips
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You may search the U.S. Code for most all the laws of the United States here: http://www.law.cornell.edu/uscode/index.html#TITLES Internal Revenue Code Title 26 Example: IRC §707(a)(2)(a)

Tax Code, Regulations and Official Guidance: http://www.irs.gov/Tax-Professionals...

Internal Revenue Manual: http://www.irs.gov/irm/ http://www.irs.gov/pub/irm/_Sorted_By_Date.html

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Comment on IRS forms and Publications: email the IRS or fill-in form: http://www.irs.gov/uac/Comment-on-Tax-Forms-and-Publications

IRS Form & Instructions - current: http://www.irs.gov/app/picklist/list/formsInstructions.html

Statutory elections: defined by statute. Regulatory elections: defined by regulation. The IRS has greater discretion to permit late filed regulatory elections. You may search the Internal Revenue Regulations: http://www.law.cornell.edu/cfr/text/26/chapter-I

IRS - Tax Code, Regulations and Official Guidance: http://www.irs.gov/Tax-Professionals/Tax-Code,-Regulations-and-Official-Guidance

GPO - Code of Federal Regulations: http://www.gpo.gov/fdsys/browse/collectionCFR... http://ecfr.gpoaccess.gov/cgi/t/text/text-idx?c=ecfr&tpl=%2Findex.tpl

IRS Forms - previous year forms. instructions & publications: http://www.irs.gov/app/picklist/list/priorFormPublication.html

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IRS Forms - expert interface: http://www.irs.gov/pub/ http://www.irs.gov/pub/irs-drop/ http://www.irs.gov/pub/irs-pdf/ http://www.irs.gov/pub/irs-prior/

21.5.3.4.4.1 (10-01-2002) Special Handling of Signature Requests http://www.irs.gov/irm/part21/irm_21-005-003r.html#d0e1221

Note:

Note:

Note:

Also see: 21.5.3.4.1 (10-21-2009) Tax Increase or Credit Decrease Processing http://www.irs.gov/irm/part21/irm_21-005-003r.html#d0e482

21.5.3.4.1.1 (10-02-2007) Tax Increase and Credit Increase Processing http://www.irs.gov/irm/part21/irm_21-005-003r.html#d0e580

25.6.1.5 (10-01-2010) Basic Guide for Processing Cases with Statute of Limitations Issues http://www.irs.gov/irm/part25/irm_25-006-001r.html#d0e573

Elect to Include Income Earned in the Decedent’s Trust on the Estate’s Income Tax Return

Deadline for NOL carryback elections:

Deadline for NOL carryback refunds:

Capital Loss Carryback / Carryforward election: TBA

Reasons why a Husband and Wife might want to make the election not to be treated as a partnership

Definition of a qualified joint venture

http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Election-for-Husband-and-Wife-Unincorporated-Businesses

Rev. Rul. 91-26 partner compensation (no Form W-2 is to be issued to partners nor to sole-proprietors):

IRS Publication 541 - Partnerships (December 2013) Guaranteed Payments

TEFRA POA and POA issues (and §6229 extensions) / Tax Matters Partner:

Power of Attorney (POA), Form 2848

IRM 4.31.2.2.5 Power of Attorney (POA) Appointed by the Tax Matters Partner.

IRM 8.19.1.5.3 (10-01-2013)

Terminology

TEFRA

Tax Matters Partner (TMP)

8.1.6.1 (10-23-2007) Practice Before Appeals

8.1.6.1.1 (10-23-2007) Disclosure of Information— Department of Justice

8.1.6.1.2 (10-23-2007) Disclosure of Information of a Confidential Nature

8.1.6.1.2.1 (10-23-2007) Disclosure of Information - Informants

8.1.6.1.2.2 (10-23-2007) Authorizations to Disclose Information of a Confidential Nature - Forms 2848 and 8821

8.1.6.1.3 (10-23-2007) Representatives Qualified to Practice Before Appeals

8.1.6.1.3.1 (10-23-2007) Prohibitions of Federal and State Officials or Employees in Representing Taxpayers Before the Service

8.1.6.1.3.2 (10-23-2007) Attorneys, Certified Public Accountants, Enrollees, Limited Practice and Special Orders

8.1.6.1.3.3 (10-23-2007) Powers, Authorizations, Declarations— Form 2848

8.1.6.1.4 (10-23-2007) Disposition of Powers of Attorney

Note:

§ 301.6229(b)-1 Extension by agreement.

§ 301.6231(a)(7)-2 Designation or selection of tax matters partner for a limited liability company (LLC).

IRS CPE text, circa 1986

Entity Classification Election: see Form 8832 and Form 2553

S-Corp shareholders' medical deductions IRC §105 & §106 (belong on Form W-2): Do not confuse §106 Health insurance vs. §105 Medical expenses

Treating Medical Insurance Premiums as Wages

Health Insurance Purchased in Name of Shareholder

One-shareholder s-corporation (or few shareholders) payroll issues:

IRS Regs. §1.183-2(b) Trade or Business: Nine nonexclusive factors under IRS Regs. §1.183-2(b) that the IRS looks to to determine if an activity is a "trade or business" are:

IRS Regs. §1.469-5T(a) LLC has non-passive activity:

Two-Year rule 4.11.6.3 (05-13-2005) Adoption of a Method of Accounting

Treatment of Limited Liability Company members (SECA tax): [Proposed Regulations, NPRM REG-209824-96], I.R.B. 1997-11,Internal Revenue Service, (Jan. 13, 1997) [Code Sec. 1402]

IRS Proposed Regulation Section 1.1402(a)-2

IRS Code §475(f) Mark-to-Market election for taxpayers who have filed at least one federal income tax return (normally the year immediately preceding the election year): Normal Defective TBA

IRS Code §481 elections: See lower portion of the Form 3115 web page

IRS Code §1256 Mark-to-Market election for dealers: TBA

IRS Code §1256 hedging election: TBA

Deadline to be Extended for Elections Under Mark-to-Mark Accounting:

Exception: The maximum extension time for Form 1041 (except Form 1041 for bankruptcy estates), Form 1065 and Form 8804 is 5 months from the due date of the return.

(b) Loan contract and terms governing execution or enforcement of due-on-sale options and rights and remedies of lenders and borrowers; assumptions of loan rates

(c) State prohibitions applicable for prescribed period; subsection (b) provisions applicable upon expiration of such period; loans subject to State and Federal regulation or subsection (b) provisions when authorized by State laws or Federal regulations

Hot Assets under IRS Code §751 are taxable as ordinary (earned) income: Hot Assets §751(a) Sale Or Exchange Of Interest In Partnership

Claim of Right Doctrine under IRS Code §1341 (payments returned from taxpayer in a year after the year of receipt / year of income) : IR Code §1341 Claim of Right Doctrine:

Foreign Tax Paid election: to deduct on Schedule A, or to take as a foreign tax credit; - subject to a 10-year SOL for claiming a refund:

Sale of "Personal Goodwill" Martin Ice Cream case:

Martin Ice Cream Co. v. Commissioner, 110 T.C. 189 (1998).

http://www.foxfin.com/articles/personal-goodwill.htm

Demutualization a life insurance company:

Sale of life Insurance policy by a terminally ill or chronically ill insured person "Viatical Settlements":

Trick to waive penalty for late payment of individual income tax: Proforma request for penalty abatement: Department of the Treasury Internal Revenue Service Center P.O. Box 9019 Holtsville, NY 11742-9019

IRS Announcement 2001-64 Voluntary Classification Settlement Program VCSP is a new program developed by the IRS that allows taxpayers to voluntarily reclassify their workers as employees for future tax periods for employment tax purposes FAQ

Trick to use when Form W-2 is checked as being an active participant in retirement plan:

I. DEDUCTIBLE CONTRIBUTIONS TO IRAs

A. ACTIVE PARTICIPANT STATUS

You may search the U.S. Code for most all the laws of the United States here:
http://www.law.cornell.edu/uscode/index.html#TITLES

Internal Revenue Code Title 26
Example: IRC §707(a)(2)(a)

Tax Code, Regulations and Official Guidance:
http://www.irs.gov/Tax-Professionals...

Internal Revenue Manual:
http://www.irs.gov/irm/
http://www.irs.gov/pub/irm/_Sorted_By_Date.html

IRS Forms & Publications - current:
http://www.irs.gov/app/picklist/list/formsPublications.html

Comment on IRS forms and Publications: email the IRS or fill-in form:
http://www.irs.gov/uac/Comment-on-Tax-Forms-and-Publications

IRS Form & Instructions - current:
http://www.irs.gov/app/picklist/list/formsInstructions.html

Statutory elections: defined by statute.

Regulatory elections: defined by regulation.
The IRS has greater discretion to permit late filed regulatory elections.

You may search the Internal Revenue Regulations:
http://www.law.cornell.edu/cfr/text/26/chapter-I

IRS - Tax Code, Regulations and Official Guidance:
http://www.irs.gov/Tax-Professionals/Tax-Code,-Regulations-and-Official-Guidance

GPO - Code of Federal Regulations:
http://www.gpo.gov/fdsys/browse/collectionCFR...
http://ecfr.gpoaccess.gov/cgi/t/text/text-idx?c=ecfr&tpl=%2Findex.tpl

IRS Forms - previous year forms. instructions & publications:
http://www.irs.gov/app/picklist/list/priorFormPublication.html

IRS Forms - future use (Drafts):
http://www.irs.gov/pub/irs-dft/

IRS Forms - expert interface:
http://www.irs.gov/pub/
http://www.irs.gov/pub/irs-drop/
http://www.irs.gov/pub/irs-pdf/
http://www.irs.gov/pub/irs-prior/

21.5.3.4.4.1 (10-01-2002)
Special Handling of Signature Requests
http://www.irs.gov/irm/part21/irm_21-005-003r.html#d0e1221

Also see:
21.5.3.4.1 (10-21-2009)
Tax Increase or Credit Decrease Processing
http://www.irs.gov/irm/part21/irm_21-005-003r.html#d0e482

21.5.3.4.1.1 (10-02-2007)
Tax Increase and Credit Increase Processing
http://www.irs.gov/irm/part21/irm_21-005-003r.html#d0e580

25.6.1.5 (10-01-2010)
Basic Guide for Processing Cases with Statute of Limitations Issues
http://www.irs.gov/irm/part25/irm_25-006-001r.html#d0e573

Capital Loss Carryback / Carryforward election:

TBA

IRS Publication 541 - Partnerships (December 2013)
Guaranteed Payments

8.1.6.1 (10-23-2007)
Practice Before Appeals

8.1.6.1.1 (10-23-2007)
Disclosure of Information— Department of Justice

8.1.6.1.2 (10-23-2007)
Disclosure of Information of a Confidential Nature

8.1.6.1.2.1 (10-23-2007)
Disclosure of Information - Informants

8.1.6.1.2.2 (10-23-2007)
Authorizations to Disclose Information of a Confidential Nature - Forms 2848 and 8821

8.1.6.1.3 (10-23-2007)
Representatives Qualified to Practice Before Appeals

8.1.6.1.3.1 (10-23-2007)
Prohibitions of Federal and State Officials or Employees in Representing Taxpayers Before the Service

8.1.6.1.3.2 (10-23-2007)
Attorneys, Certified Public Accountants, Enrollees, Limited Practice and Special Orders

8.1.6.1.3.3 (10-23-2007)
Powers, Authorizations, Declarations— Form 2848

8.1.6.1.4 (10-23-2007)
Disposition of Powers of Attorney

Entity Classification Election:
see Form 8832 and Form 2553

S-Corp shareholders' medical deductions IRC §105 & §106 (belong on Form W-2):

Do not confuse §106 Health insurance vs. §105 Medical expenses

IRS Regs. §1.183-2(b) Trade or Business:

Nine nonexclusive factors under IRS Regs. §1.183-2(b) that the IRS looks to to determine if an activity is a "trade or business" are:

Two-Year rule

4.11.6.3 (05-13-2005)
Adoption of a Method of Accounting

Treatment of Limited Liability Company members (SECA tax):

[Proposed Regulations, NPRM REG-209824-96], I.R.B. 1997-11,Internal Revenue Service, (Jan. 13, 1997)
[Code Sec. 1402]

IRS Code §475(f) Mark-to-Market election for taxpayers who have filed at least one federal income tax return (normally the year immediately preceding the election year):

Normal

Defective

TBA

IRS Code §481 elections:

See lower portion of the Form 3115 web page

IRS Code §1256 Mark-to-Market election for dealers:

TBA

IRS Code §1256 hedging election:

TBA

Exception:
The maximum extension time for Form 1041 (except Form 1041 for bankruptcy estates), Form 1065 and Form 8804 is 5 months from the due date of the return.

Hot Assets under IRS Code §751 are taxable as ordinary (earned) income:

Hot Assets
§751(a) Sale Or Exchange Of Interest In Partnership

Claim of Right Doctrine under IRS Code §1341 (payments returned from taxpayer in a year after the year of receipt / year of income) :

IR Code §1341 Claim of Right Doctrine:

Trick to waive penalty for late payment of individual income tax:

Proforma request for penalty abatement:
Department of the Treasury
Internal Revenue Service Center
P.O. Box 9019
Holtsville, NY 11742-9019

Presumption of correctness of 1099-MISC forms (in CP2000 and CP2501 cases):

Portillo v. Commissioner, 932 F.2nd 1128 (1991) / Weimerskirch v. Commissioner, 596 F.2d 358 (1979) and others...
various excerpts: