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IRS Code Section 481(a)
Form 3115
Form 3115 was last revised in December 2003. IRS Announcement 2004-16
prohibits the use of the older version after May 30, 2004.
Several new IRS rulings were issued in 2002 that retroactively changed
the year 2001 filing requirements for taxpayers filing under Trader
Status and using the Mark-to-Market (M2M) method of accounting for
trading losses.
The odds are that if you have filed using M2M for the first time in 2001
(and to a lesser extent for those using M2M for the first time after
2001) that your tax returns need to be amended as soon as possible.
(before the general three year statute of limitations has run out).
For first-time M2M filers, the new rules retroactively change the deduction for
built-in "paper" losses
at January 1, 2001 and may require form 3115 to be specially modified
and filed no later than September 10, 2002.
The new rules retroactively change your 2001 Net Operating Loss (NOL)
allowing you to re-file at this time no matter if you originally elected
to forgo the 2-year carryback, or even if you already elected to carryback
your losses. It may be beneficial to file or re-file form 1045
(revised May 2002) or substitute using form 1040X.
Our special offer:
You may send your completed tax forms for a
free review. If we see that
everything as prepared by yourself, or by your professional tax preparer
is in order, we'll tell you so - with no obligation and no fee due.
Our special offer #2:
The tax return review has been so successful we are now extending this.
An unbelievable number of traders have come on board after we
uncovered gross errors (in both directions). Sometimes the
taxpayers underpaid their taxes to the extent that they could be subject
to significant negligence penalties or even criminal prosecution.
Other taxpayers overpaid their taxes by doing it themselves or getting
advice from someone not thoroughly familiar with trader status taxation.
If we find that you are not in compliance with the new rules we'll tell
you that too, again with no obligation and no fee. If you then
decide to retain us to prepare the necessary filings - we will take what
we feel is the appropriate corrective action for you and bill you
accordingly (see below). We will request a retainer payment,
which you can pay using your credit card on our secured order page.
The forms needed for the free review
are: form 3115 pages 1 through 3 only + any attachments; form 1040 pages 1 &
2; and any related form 1045 or form 1040X. Additionally it may be beneficial to send us your
Schedule C pages 1 & 2; Schedule D pages 1 & 2 only; Form
4797 page 1 only; form 2106, form 4952, form 6251, form 8801 and
form 8829.
You can fax us,
email
your PDF or cleanly scanned images, or just send photocopies via regular
mail - of your prepared forms for this free review service. We welcome
email questions before
you send your tax forms.
Colin M. Cody, CPA, CMA
TraderStatus.com LLC
6004 Main Street
Trumbull, Connecticut 06611-2400
(203) 268-7000
Generally the professional fees for filing are: form 3115 $250; forms
1045/1040X $350 for each year effected by the NOL carryback.
For most taxpayers these are the forms we expect to find problems with.
If the review uncovers additional issues, we'll discuss them on a
one-on-one basis.
IRS Code Sec.
481. Adjustments Required By Changes In Method Of Accounting
481(a) General Rule
In computing the
taxpayer's taxable income for any taxable year (referred to in this
section as the "year of the change")--
481(a)(1) if such computation is under a method of accounting different
from the method under which the taxpayer's taxable income for the
preceding taxable year was computed, then
481(a)(2) there shall be taken into account those adjustments which are
determined to be necessary solely by reason of the change in order to
prevent amounts from being duplicated or omitted, except there shall not
be taken into account any adjustment in respect of any taxable year to
which this section does not apply unless the adjustment is attributable
to a change in the method of accounting initiated by the taxpayer.
481(b) Limitation On Tax Where Adjustments Are Substantial
481(b)(1) Three Year Allocation
If--
481(b)(1)(A) the method of accounting from which the change is made was
used by the taxpayer in computing his taxable income for the 2 taxable
years preceding the year of the change, and
481(b)(1)(B) the increase in taxable income for the year of the change
which results solely by reason of the adjustments required by subsection
(a)(2) exceeds $3,000, then the tax under this chapter attributable to
such increase in taxable income shall not be greater than the aggregate
increase in the taxes under this chapter (or under the corresponding
provisions of prior revenue laws) which would result if one-third of
such increase in taxable income were included in taxable income for the
year of the change and one-third of such increase were included for each
of the 2 preceding taxable years.
481(b)(2) Allocation Under New Method Of Accounting
If--
481(b)(2)(A) the increase in taxable income for the year of the change
which results solely by reason of the adjustments required by subsection
(a)(2) exceeds $3,000, and
481(b)(2)(B) the taxpayer establishes his taxable income (under the new
method of accounting) for one or more taxable years consecutively
preceding the taxable year of the change for which the taxpayer in
computing taxable income used the method of accounting from which the
change is made, then the tax under this chapter attributable to such
increase in taxable income shall not be greater than the net increase in
the taxes under this chapter (or under the corresponding provisions of
prior revenue laws) which would result if the adjustments required by
subsection (a)(2) were allocated to the taxable year or years specified
in subparagraph (B) to which they are properly allocable under the new
method of accounting and the balance of the adjustments required by
subsection (a)(2) was allocated to the taxable year of the change.
481(b)(3) Special Rules For
Computations Under Paragraphs (1) And (2)
For purposes of this
subsection--
481(b)(3)(A) There shall be taken into account the increase or decrease
in tax for any taxable year preceding the year of the change to which no
adjustment is allocated under paragraph (1) or (2) but which is affected
by a net operating loss (as defined in section 172) or by a capital loss
carryback or carryover (as defined in section 1212), determined with
reference to taxable years with respect to which adjustments under
paragraph (1) or (2) are allocated.
481(b)(3)(B) The increase or decrease in the tax for any taxable year
for which an assessment of any deficiency, or a credit or refund of any
overpayment, is prevented by any law or rule of law, shall be determined
by reference to the tax previously determined (within the meaning of
section 1314(a)) for such year.
481(b)(3)(C) In applying section 7807(b)(1), the provisions of chapter 1
(other than subchapter E, relating to self-employment income) and
chapter 2 of the Internal Revenue Code of 1939 shall be treated as the
corresponding provisions of the Internal Revenue Code of 1939.
481(c) Adjustments Under Regulations
In the case of any change described in subsection (a), the taxpayer
may, in such manner and subject to such conditions as the Secretary may
by regulations prescribe, take the adjustments required by subsection
(a)(2) into account in computing the tax imposed by this chapter for the
taxable year or years permitted under such regulations.
(Aug. 16, 1954, ch. 736, 68A Stat. 160; Sept. 2, 1958, Pub. L. 85-866,
title I, Sec. 29(a), (b), 72 Stat. 1626-1628; Dec. 30, 1969, Pub. L.
91-172, title V, Sec. 512(f)(4), 83 Stat. 641; Oct. 4, 1976, Pub. L.
94-455, title XIX, Sec. 1901(a)(70), 1906(b)(13)(A), 90 Stat. 1776,
1834; Oct. 19, 1980, Pub. L. 96-471, Sec. 2(b)(3), 94 Stat. 2254; Pub.
L. 105-34, title IX, X, Sec. 961(b)(2), 1004(b)(2)(C), 1042(b)(1),
1088(b)(2), Aug. 5, 1997, 111 Stat 788.)
Little known facts regarding
IRS Form 3115 and the Sec 481(a) adjustment:
(The following all assume that the taxpayer is not under IRS
examination. Special rules apply when an examination in ongoing)
¶3570.09b. Adjustments
Beginning with the year of change, a taxpayer changing its
accounting method under Rev. Proc. 94-49 generally must take its
required adjustment (282) into account ratably over four tax years,
regardless of whether the adjustment is positive or negative. (283)
A de minimis rule is provided under which an adjustment of less than
$25,000 may be taken into account in the year of change.
Additional exceptions to the general four-year adjustment period are
provided by cross-reference to Rev. Proc. 92-20, e.g., if 90% or more
of the adjustment is attributable to the tax year immediately preceding
the change year, or if the taxpayer is a cooperative. Because the
final uniform capitalization regulations only apply to costs incurred in
tax years beginning after 1993, in the case of non-inventory property,
no adjustment is required to comply with the final uniform
capitalization rules, i.e., the changes are generally effected on a
cut-off basis.
/Footnote/ 282 Pursuant to §481(a).
/Footnote/ 283 Rev. Proc. 94-49, §4.
Rev. Proc. 92-20, 1992-1 C.B.
685
SEC. 8. EXCEPTIONS TO THE GENERAL SECTION 481(a) ADJUSTMENT PERIOD.
.01 GENERAL.
In general, the section 481(a)
adjustment periods are provided in sections 5, 6, and 7. The section
481(a) adjustment periods prescribed in sections 5, 6 and 7 will be
shortened in the following situations.
(1) DE MINIMIS RULE.
If the entire net section 481(a)
adjustment is less than $25,000 (either positive or negative), the
taxpayer may elect to use a one- year adjustment period in lieu of
the adjustment period otherwise provided by this revenue Procedure. The
taxpayer must affirmatively state on an attachment to Form 3115 that it
desires to elect this de minimis rule.
(2) ATTRIBUTABLE TO IMMEDIATELY
PRECEDING TAXABLE YEAR.
If 90 percent or more of the
net section 481(a) adjustment is attributable to the taxable year
immediately preceding the year of change, the taxpayer
must take the entire net section 481(a)
adjustment into account in computing taxable income for the year of
change. The amount attributable to the taxable year immediately
preceding the year of change is the difference between the amount of the
net adjustment determined under section 481(a) of the Code for the year
of change and the amount of the net adjustment that would have been
required under section 481(a) if the same change in method of accounting
had been made in the preceding year.
Note - many security traders would be covered
under this 90% exception and therefore would be required to recognize
all their prior "on paper gains and losses" in the year of election to
use M2M.
If the taxpayer's books and records do not contain sufficient
information to compute the net section 481(a) adjustment
attributable to the taxable year immediately preceding the year of
change, the taxpayer may reasonably estimate this amount, attach to the
Form 3115 the computations upon which the estimate is based, and
attach the following signed statement to the Form 3115:
Under penalties
of perjury, I hereby certify that:
(a) the books and
records of [name of the taxpayer] do not contain sufficient information
to permit a computation of the net section 481(a) adjustment
attributable to the taxable year immediately preceding the year of
change, and
(b) based on the
information that is contained in such records, to the best of my
knowledge and belief, 90 percent or more of the net section 481(a)
adjustment [indicate "is" or "is not", as the case may be] attributable
to the taxable year immediately preceding the year of change.
(i) EXAMPLE.
Y timely files an application to
change its method of accounting for valuing inventory to a method that
is in accord with the provisions of section 1.471-3 of the regulations,
beginning with its 1992 taxable year. The information furnished shows
that Y used its present method of valuing inventory for nine taxable
years prior to the year of change and that the entire net adjustment
required under section 481(a) of the Code for the year of change is
$300,000. The information furnished further shows that the adjustment
required under section 481(a) would have been $20,000 had the change
been made for Y's 1991 taxable year. Thus, 93.3 percent
(280,000/300,000=93.3%) of the amount of the adjustment is attributable
to the taxable year immediately preceding the proposed year of change.
Under these circumstances, Y will take the entire $300,000 net section
481(a) adjustment into account in computing its taxable income for its
1992 taxable year.
As then modified in 1997:
Rev. Proc. 97-27, 1997-1 C.B.
680
5.02 Terms and conditions of change.
(3) Section 481(a) adjustment period.
5.03(a) In general. Except as provided in sections 5.02(3)(b) and 7.03
of this revenue procedure, the section 481(a) adjustment period for
positive and negative section 481(a) adjustments is four taxable years.
5.03(b) Changes within the LIFO method. Any change within the LIFO
inventory method must be made using a cut-off method. However,
Announcement 91-173, 1991-47 I.R.B. 29 (regarding LIFO taxpayers
changing their method of accounting for certain bulk bargain purchases
of inventory to comply with Hamilton Industries, Inc. v. Commissioner ,
97 T.C. 120 (1991)) is an example of other published guidance that
requires a section 481(a) adjustment.
7.03 Shortened or accelerated adjustment periods. The four-year section
481(a) adjustment period provided in sections 5.02(3) and 6.04 of this
revenue procedure will be shortened or accelerated in the following
situations:
(1) De minimis rule. A taxpayer may elect to use a one-year adjustment
period in lieu of the section 481(a) adjustment period otherwise
provided by this revenue procedure if the entire section 481(a)
adjustment is less than $25,000 (either positive or negative). The
taxpayer must complete the appropriate line on the Form 3115 to elect
this de minimis rule.
(2)Cooperatives
(3) Ceasing to engage in the trade or business.
SECTION 13. EFFECTIVE DATE
.01 In general. Except as provided in section 13.02(1) of this revenue
procedure, this revenue procedure is effective for Forms 3115 filed
on or after May 15, 1997.
P.L. 105-34, §1001(d)(4),
provides:
(4) ELECTION OF MARK TO MARKET BY
SECURITIES TRADERS AND TRADERS AND DEALERS IN COMMODITIES. --
(A) IN GENERAL. --The amendments
made by subsection (b) shall apply to taxable years ending after the
date of the enactment of this Act.
(B) 4-YEAR SPREAD OF ADJUSTMENTS.
--In the case of a taxpayer who elects under subsection (e) or (f) of
section 475 of the Internal Revenue Code of 1986 (as added by this
section) to change its method of accounting for the taxable year which
includes the date of the enactment of this Act --
(i) any identification required
under such subsection with respect to securities and commodities held on
the date of the enactment of this Act shall be treated as timely made if
made on or before the 30th day after such date of enactment, and
(ii) the net
amount of the adjustments required to be taken into account by the
taxpayer under section 481 of such Code shall be taken into account
ratably over the 4-taxable year period beginning with such first taxable
year.
As then modified in 2002:
Rev. Proc. 2002-19, 2002-13
I.R.B. 696 (4/1/2002)
SECTION 2. CHANGES
.01 Changes to BACKGROUND
Sections. Section 2.01(3) in each of Rev. Proc. 97-27 and Rev. Proc.
2002-9 is deleted.
.02 Changes to section 481(a)
Spread Period for Negative section 481(a) Adjustments.
(1) Section 5.02(3)(a) of Rev.
Proc. 97-27 is modified to read as follows:
"(a) In general. Except as
otherwise provided in sections 5.02(3)(b) and 7.03 of this revenue
procedure, the section 481(a) adjustment period is four taxable years
for a net positive adjustment for an accounting method change, and
one taxable year for a net negative adjustment for an accounting
method change."
SECTION 4. EFFECTIVE DATE
4.01 In General. Except as otherwise provided in section 4.02 and 4.03
of this revenue procedure, this revenue procedure is effective for
taxable years ending on or after December 31, 2001.
4.02 Changes to Scope Restrictions of Rev. Proc. 97-27. Notwithstanding
section 4.01 of this revenue procedure, the changes to the scope
restrictions of Rev. Proc. 97-27 provided in section 2.03(1)(a) and (b),
2.03(2)(a) and (b), and 2.03(3)(a) and (b) of this revenue procedure are
effective for taxable years ending on or after March 14, 2002.
4.03 Notional Principal Contracts. Notwithstanding section 4.01 of this
revenue procedure, the deletion of section 14.02 of Rev. Proc. 97-27 is
effective for Forms 3115 pending with the national office on March 14,
2002.
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