Federal Register / Vol. 62, No. 250 / Wednesday, December 31, 1997 / Rules and Regulations 68167

(as of the time of the respective

purchases) exceeding 5 percent of the

aggregate value of all of the issuing

corporation’s stock as of the beginning

of such 2-year period.

(2) De minimis amount. For purposes

of this paragraph (b), stock exceeds a de

minimis amount only if the aggregate

amount paid for the stock exceeds

$10,000 and more than 2 percent of all

outstanding stock is purchased. The

following rules apply for purposes of

determining whether the 2-percent limit

is exceeded. The percentage of the stock

acquired in any single purchase is

determined by dividing the stock’s

value (as of the time of purchase) by the

value (as of the time of purchase) of all

stock outstanding immediately before

the purchase. The percentage of stock

acquired in multiple purchases is the

sum of the percentages determined for

each separate purchase.

(c) Transfers by shareholders in

connection with the performance of

services not treated as purchases. A

transfer of stock by a shareholder to an

employee or independent contractor (or

to a beneficiary of an employee or

independent contractor) is not treated as

a purchase of the stock by the issuing

corporation for purposes of this section

even if the stock is treated as having

first been transferred to the corporation

under § 1.83–6(d)(1) (relating to

transfers by shareholders to employees

or independent contractors).

(d) Exceptions for termination of

services, death, disability or mental

incompetency, or divorce. A stock

purchase is disregarded if the stock is

acquired in the following

circumstances:

(1) Termination of services—(i)

Employees and directors. The stock was

acquired by the seller in connection

with the performance of services as an

employee or director and the stock is

purchased from the seller incident to

the seller’s retirement or other bona fide

termination of such services;

(ii) Independent contractors.

[Reserved];

(2) Death. Prior to a decedent’s death,

the stock (or an option to acquire the

stock) was held by the decedent or the

decedent’s spouse (or by both), by the

decedent and joint tenant, or by a trust

revocable by the decedent or the

decedent’s spouse (or by both), and—

(i) The stock is purchased from the

decedent’s estate, beneficiary (whether

by bequest or lifetime gift), heir,

surviving joint tenant, or surviving

spouse, or from a trust established by

the decedent or decedent’s spouse; and

(ii) The stock is purchased within 3

years and 9 months from the date of the

decedent’s death;

(3) Disability or mental incompetency.

The stock is purchased incident to the

disability or mental incompetency of the

selling shareholder; or

(4) Divorce. The stock is purchased

incident to the divorce (within the

meaning of section 1041(c)) of the

selling shareholder.

(e) Effective date. This section applies

to stock issued after August 10, 1993.

Approved: December 22, 1997.

Michael P. Dolan,

Deputy Commissioner of Internal Revenue.

Donald C. Lubick,

Acting Assistant Secretary of the Treasury.

[FR Doc. 97–33987 Filed 12–30–97; 8:45 am]

BILLING CODE 4830–01–U

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 1, 301, 601, and 602

[TD 8742]

RIN 1545–AU42 and 1545–AV20

Requirements Respecting the

Adoption or Change of Accounting

Method; Extensions of Time To Make

Elections

AGENCY: Internal Revenue Service (IRS),

Treasury.

ACTION: Final regulations.

SUMMARY: This document contains final

regulations providing the procedures for

requesting an extension of time to make

certain elections under the Internal

Revenue Code. In addition, the

regulations provide the standards that

the Commissioner will use in

determining whether to grant taxpayers

extensions of time to make certain

elections including changes in

accounting method and accounting

period. The regulations also set forth the

time for filing a Form 3115, Application

for Change in Accounting Method, with

the Commissioner. The regulations

affect taxpayers requesting an extension

of time to make certain elections and

taxpayers requesting to change their

method of accounting for federal income

tax purposes.

DATES: These regulations are effective

December 31, 1997.

FOR FURTHER INFORMATION CONTACT:

Cheryl Lynn Oseekey, (202) 622–4970

(not a toll-free number).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

The collection of information

contained in these final regulations has

been reviewed and approved by the

Office of Management and Budget in

accordance with the Paperwork

Reduction Act (44 U.S.C. 3507) under

control number 1545–1488. Responses

to this collection of information are

required to obtain an extension of time

to make 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.

The estimated annual burden per

respondent is 10 hours.

Comments concerning the accuracy of

this burden estimate and suggestions for

reducing this burden should be sent to

the Internal Revenue Service, Attn: IRS

Reports Clearance Officer, T:FP,

Washington, DC 20224, and to the

Office of Management and Budget, Attn:

Desk Officer for the Department of the

Treasury, Office of Information and

Regulatory Affairs, Washington, DC

20503.

Books or records relating to this

collection of information must be

retained as long as their contents may be

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

On June 27, 1996, temporary

regulations relating to the standards the

Commissioner will use to grant

taxpayers extensions of time to make

certain elections were published in the

Federal Register (TD 8680, 61 FR

33365), and cross-referenced to a notice

of proposed rulemaking published in

the Federal Register on the same date

(61 FR 33408). The regulations,

§§ 301.9100–1T through 301.9100–3T,

provide an automatic 6-month extension

from the due date of the return

excluding extensions to make statutory

and regulatory elections whose due

dates are the due date of the return or

the due date of the return including

extensions. The regulations also provide

an automatic 12-month extension of

time to make certain regulatory

elections. For regulatory elections not

eligible for the automatic extensions of

time, the regulations provide the

standards the Commissioner will use to

determine whether to grant an extension

of time to make the election. A public

hearing on the regulations was held on

October 30, 1996.

On May 15, 1997, temporary

regulations setting forth the time for

requesting a change in accounting

method and the standards the

Commissioner will use to grant an

extension of time to request a change in
68168 Federal Register / Vol. 62, No. 250 / Wednesday, December 31, 1997 / Rules and Regulations

accounting method were published in

the Federal Register (TD 8719, 62 FR

26740), and cross-referenced to a notice

of proposed rulemaking published in

the Federal Register on the same date

(62 FR 26755). On May 27, 1997,

corrections to TD 8719 were published

in the Federal Register (62 FR 28630).

The regulations extend the time for

filing a Form 3115, Application for

Change in Accounting Method,

pursuant to §§ 1.446–1(e)(3)(i) and

601.204(b) by allowing a taxpayer to file

its Form 3115 with the Commissioner

anytime during the taxable year in

which the taxpayer desires to make the

change in method of accounting. The

regulations also revised §§ 301.9100–1T

and 301.9100–3T to provide that an

extension of time to file a Form 3115

beyond the year provided in the

regulations will be granted only in

unusual and compelling circumstances.

No public hearing on the regulations

was requested or held.

One comment responding to the

notice of proposed rulemaking

published in the Federal Register on

June 27, 1996 (61 FR 33408) was

received. No comments responding to

the notice of proposed rulemaking

published in the Federal Register on

May 15, 1997 (62 FR 26755) were

received. After consideration of the

comment received, the regulations are

adopted as modified by this Treasury

decision.

Public Comment

The commentator recommended

several modifications to the regulations

prior to their adoption as final

regulations.

The commentator suggested that a

request for extension of time to make an

election should not be denied on the

basis that the taxpayer fails to qualify

for the underlying election. The

commentator noted that the regulations

provide that the granting of § 301.9100

relief is not a determination that the

taxpayer is otherwise eligible to make

the election. This suggested

modification has not been adopted. The

IRS and the Treasury Department

believe it is in the interest of sound tax

administration to deny § 301.9100 relief

when it becomes apparent in

considering the request for an extension

of time that the taxpayer is not

otherwise eligible to make the election.

This ensures that the resources of the

IRS are brought to bear in the resolution

of the issue regarding eligibility at the

earliest stage of the administrative

process.

The commentator recommended that

an extension of time to make an election

be made available even when 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. This suggested modification

has not been adopted. The IRS and the

Treasury Department want to retain the

ability to tailor relief for specific

elections.

The commentator recommended

measuring the 12-month automatic

extension for eligible regulatory

elections whose deadlines are the due

date of the return or the due date of the

return including extensions from the

extended due date when the taxpayer

has obtained an extension. This

suggested modification has been

adopted. The commentator also

recommended that the automatic 6-

month extension for statutory and

regulatory elections be available even

when the return for the year of the

election was not timely filed. This

suggested modification has not been

adopted.

The commentator recommended that

the regulations not provide that the

interests of the Government are

ordinarily prejudiced if the taxable year

in which the regulatory election should

have been made or any affected taxable

years are closed by the period of

limitations on assessment. This

suggested modification was not

adopted. There are two policies that

must be balanced in formulating the

standards for § 301.9100 relief. The first

is the policy of promoting efficient tax

administration by providing limited

time periods for taxpayers to choose

among alterative tax treatments and

encouraging prompt tax reporting. The

second is the policy of permitting

taxpayers that are in reasonable

compliance with the tax laws to

minimize their tax liability by collecting

from them only the amount of tax they

would have paid if they had been fully

informed and well advised. The IRS and

the Treasury Department believe that

the regulation achieves an appropriate

balance between these policies.

Furthermore, the language of the

regulation does not foreclose in all

circumstances consideration of whether

the interests of the Government will not

be prejudiced.

The commentator questioned the

special rules for accounting method and

accounting period regulatory elections.

The regulations provide limited relief

for accounting methods or periods

subject to advance written consent from

the Commissioner ordinarily not to

exceed 90 days from the deadline for

filing the Form 3115, Application for

Change in Accounting Method, or the

Form 1128, Application to Adopt,

Change, or Retain a Tax Year. The

commentator suggested that the 90-day

period be extended. The regulations

published in the Federal Register on

May 15, 1997 (TD 8719, 62 FR 26740)

and corrected on May 27, 1997 (62 FR

28630) effectively extended the 90-day

period for accounting methods by

allowing the Form 3115 to be filed

anytime during the taxable year in

which the taxpayer desires to make the

change in method of accounting. This

rule is incorporated into the final

regulations. However, a similar

amendment was not made in regard to

accounting period elections because

extending the 90-day period would

delay the filing of the short period

return and result in less efficient tax

administration.

The commentator recommended that

the special rules for other accounting

method regulatory elections be modified

by eliminating the rule that, ordinarily,

the interests of the Government are

deemed to be prejudiced when the

election requires an adjustment under

section 481(a). This suggested

modification was not adopted. The IRS

and the Treasury Department believe it

is in the interest of sound tax

administration to generally preclude

taxpayers from requesting, or otherwise

making, a retroactive change in an

adopted method of accounting, whether

the change is from a permissible or

impermissible method. See generally,

Rev. Rul. 90–38 (1990–1 C.B. 57). In

considering an exception, the IRS and

the Treasury Department believe that

§ 301.9100 relief is most appropriate for

accounting method elections that relate

to nonrecurring transactions. These

elections are generally made on a cut-off

basis and a missed election would

preclude accounting for a transaction in

the year of the missed election under

the elective method. In contrast,

accounting method elections subject to

section 481(a) generally will provide the

benefit of the elective method for a

transaction in the year of the missed

election through an adjustment under

section 481(a).

The commentator suggested that the

regulations clarify when taxpayers may

obtain an extension of time to file a

request to change an accounting method

or an accounting period under an

unusual and compelling circumstances

standard. This suggested modification

was not adopted. What are unusual and

compelling circumstances must be

decided on a case-by-case basis in light

of all applicable facts and

circumstances.
Federal Register / Vol. 62, No. 250 / Wednesday, December 31, 1997 / Rules and Regulations 68169

Effective Date

The rules relating to the time for filing

an application for change in accounting

method apply to Forms 3115 submitted

on or after December 31, 1997.

The rules relating to requests for an

extension of time apply to requests

submitted to the IRS on or after

December 31, 1997. The rules relating to

automatic extensions apply to elections

for which corrective action is taken on

or after December 31, 1997.

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 also has

been determined that section 553(b) of

the Administrative Procedure Act (5

U.S.C. chapter 5) does not apply to these

regulations.

Sections 1.446–1(e)(3)(i) and

601.204(b) in this regulation, originally

published in the Federal Register for

May 15, 1997 as a temporary regulation

and cross-reference notice of proposed

rulemaking, merely extend the time for

filing a Form 3115, Application for

Change in Accounting Method, with the

Commissioner and, therefore, do not

contain a new collection of information.

Sections 301.9100–2 and 301.9100–3 of

this regulation, originally published in

the Federal Register for June 27, 1996

as a temporary regulation and crossreference notice of proposed

rulemaking, contain a collection of

information. However, an initial

regulatory flexibility analysis was not

required because the regulations were

published within 90 days of the

enactment of Subtitle D of the Contract

with America Advancement Act of 1996

(Public Law 104–21, 110 Stat. 847, 868

(1996)). With respect to these final

regulations, it is hereby certified that the

collection of information in those

sections will not have a significant

economic impact on a substantial

number of small entities. This

certification is based on the fact that, on

average, no more than 500 requests for

an extension of time to make an election

are received on an annual basis.

Therefore, a Regulatory Flexibility

Analysis under the Regulatory

Flexibility Act (5 U.S.C. chapter 6) is

not required.

Pursuant to section 7805(f) of the

Internal Revenue Code, these

regulations were submitted to the Small

Business Administration for comment

on their impact on small business.

Drafting Information

The principal author of these

regulations is Cheryl Lynn Oseekey,

Office of Assistant Chief Counsel

(Income Tax and Accounting). However,

other personnel from the IRS and the

Treasury Department participated in

their development.

List of Subjects

26 CFR Part 1

Income taxes, Reporting and

recordkeeping requirements.

26 CFR Part 301

Employment taxes, Estate taxes,

Excise taxes, Gift taxes, Income taxes,

Penalties, Reporting and recordkeeping

requirements.

26 CFR Part 601

Administrative practice and

procedure, Freedom of information,

Reporting and recordkeeping

requirements, Taxes.

26 CFR Part 602

Reporting and recordkeeping

requirements.

Adoption of Amendments to the

Regulations

Accordingly, 26 CFR parts 1, 301, 601,

and 602 are amended as follows:

PART 1—INCOME TAXES

Paragraph 1. The authority citation

for part 1 continues to read in part as

follows:

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

§ 1.446–1 [Amended]

Par. 2. Section 1.446–1 is amended as

follows:

1. The first sentence of paragraph

(e)(3)(i) is amended by removing the

language ‘‘within 180 days after the

beginning of’’ and adding ‘‘during’’ in

its place.

2. Paragraph (e)(3)(iii) is revised to

read as follows:

§ 1.446–1 General rule for methods of

accounting.

* * * * *

(e) * * *

(3) * * *

(iii) This paragraph (e)(3) applies to

Forms 3115 filed on or after December

31, 1997. For other Forms 3115, see

§ 1.446–1(e)(3) in effect prior to

December 31, 1997 (§ 1.446–1(e)(3) as

contained in the 26 CFR part 1 edition

revised as of April 1, 1997).

§ 1.446–1T [Removed]

Par. 3. Section 1.446–1T is removed.

PART 301—PROCEDURE AND

ADMINISTRATION

Par. 4. The authority citation for part

301 continues to read in part as follows:

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

Par. 5. Section 301.9100–0 is added to

read as follows:

§ 301.9100–0 Outline of regulations.

This section lists the paragraphs in

§§ 301.9100–1 through 301.9100–3.

§ 301.9100–1 Extensions of time to make

elections.

(a) Introduction.

(b) Terms.

(c) General standards for relief.

(d) Exceptions.

(e) Effective dates.

§ 301.9100–2 Automatic extensions.

(a) Automatic 12-month extension.

(1) In general.

(2) Elections eligible for automatic 12-month

extension.

(b) Automatic 6-month extension.

(c) Corrective action.

(d) Procedural requirements.

(e) Examples.

§ 301.9100–3 Other extensions.

(a) In general.

(b) Reasonable action and good faith.

(1) In general.

(2) Reasonable reliance on a qualified tax

professional.

(3) Taxpayer deemed to have not acted

reasonably or in good faith.

(c) Prejudice to the interests of the

Government.

(1) In general.

(i) Lower tax liability.

(ii) Closed years.

(2) Special rules for accounting method

regulatory elections.

(3) Special rules for accounting period

regulatory elections.

(d) Effect of amended returns.

(1) Second examination under section

7605(b).

(2) Suspension of the period of limitations

under section 6501(a).

(e) Procedural requirements.

(1) In general.

(2) Affidavit and declaration from taxpayer.

(3) Affidavits and declarations from other

parties.

(4) Other information.

(5) Filing instructions.

(f) Examples.

Par. 6. Section 301.9100–1 is revised

to read as follows:

§ 301.9100–1 Extensions of time to make

elections.

(a) Introduction. The regulations

under this section and §§ 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

§ 301.9100–2 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. However,
68170 Federal Register / Vol. 62, No. 250 / Wednesday, December 31, 1997 / Rules and Regulations

the granting of 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

§ 301.9100–2.

(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 § 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).

(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 §§ 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.

(d) Exceptions. Notwithstanding the

provisions of paragraph (c) of this

section, an extension of time will not be

granted—

(1) For elections under section

4980A(f)(5); or

(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 § 601.601(d)(2) of

this chapter).

(e) Effective dates. In general, this

section and §§ 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 December 31, 1997. However, the

automatic 12-month and 6-month

extensions provided in § 301.9100–2

apply to elections for which corrective

action is taken on or after December 31,

1997. For other requests for an

extension of time, see §§ 301.9100–1T

through 301.9100–3T in effect prior to

December 31, 1997 (§§ 301.9100–1T

through 301.9100–3T as contained in

the 26 CFR part 1 edition revised as of

April 1, 1997).

Par. 7. Sections 301.9100–2 and

301.9100–3 are added to read as follows:

§ 301.9100–2 Automatic extensions.

(a) Automatic 12-month extension—

(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.

(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 Internal Revenue Service

(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 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.

(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 § 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.

(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 § 301.9100–2’’. 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.

(e) Examples. The following examples

illustrate the provisions of this section:
Federal Register / Vol. 62, No. 250 / Wednesday, December 31, 1997 / Rules and Regulations 68171

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).

§ 301.9100–3 Other extensions.

(a) In general. Requests for extensions

of time for regulatory elections that do

not meet the requirements of

§ 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.

(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 Internal

Revenue Service (IRS);

(ii) 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 Internal Revenue Service

(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 informed in all material

respects 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 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.

(c) Prejudice to the interests of the

Government—(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.

(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.

(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.

(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—

(i) Is subject to the procedure

described in § 1.446–1(e)(3)(i) of this

chapter (requiring the advance written

consent of the Commissioner);

(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);

(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

(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.

(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
68172 Federal Register / Vol. 62, No. 250 / Wednesday, December 31, 1997 / Rules and Regulations

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).

(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 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.

(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 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.

(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.’’

(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 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;

(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

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

(v) When applicable, the taxpayer

must submit a copy of the 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 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 cutoff 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
Federal Register / Vol. 62, No. 250 / Wednesday, December 31, 1997 / Rules and Regulations 68173

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 cutoff 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 cutoff 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.

§§ 301.9100–1T, 301.9100–2T, and 301.9100–

3T [Removed]

Par. 8. Sections 301.9100–1T,

301.9100–2T, and 301.9100–3T are

removed.

PART 601—STATEMENT OF

PROCEDURAL RULES

Par. 9. The authority citation for part

601 continues to read as follows:

Authority: 26 U.S.C. 301 and 552, unless

otherwise noted.

§ 601.204 [Amended]

Par. 10. Section 601.204 is amended

as follows:

1. In paragraph (b), the fourth

sentence is amended by removing the

language ‘‘within 180 days after the

beginning of’’ and adding ‘‘during’’ in

its place.

2. In paragraph (b), the last sentence

is removed.

§ 601.204T [Removed]

Par. 11. Section 601.204T is removed.

PART 602—OMB CONTROL NUMBERS

UNDER THE PAPERWORK

REDUCTION ACT

Par. 12. The authority citation for part

602 continues to read as follows:

Authority: 26 U.S.C. 7805.

Par. 13. Section 602.101(c) is

amended by removing the entries for

§§ 301.9001–2T and 301.9001–3T, and

adding the following entry in numerical

order to the table to read as follows:

§ 602.101 OMB control numbers.

* * * * *

(c) * * *

CFR part or section where

identified and described

Current

OMB control No.

* * * * *

301.9100–1 ............................... 1545–1488

* * * * *

Michael P. Dolan,

Deputy Commissioner of Internal Revenue.

Approved: December 10, 1997.

Donald C. Lubick,

Acting Assistant Secretary of the Treasury.

[FR Doc. 97–33357 Filed 12–30–97; 8:45 am]

BILLING CODE 4830–01–U

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 1 and 602

[TD 8746]

RIN 1545–AU09

Amortizable Bond Premium

AGENCY: Internal Revenue Service (IRS),

Treasury.

ACTION: Final regulations.

SUMMARY: This document contains final

regulations relating to the federal

income tax treatment of bond premium

and bond issuance premium. The

regulations reflect changes to the law

made by the Tax Reform Act of 1986

and the Technical and Miscellaneous

Revenue Act of 1988. The regulations

will provide needed guidance to holders

and issuers of debt instruments.

DATES: Effective date: March 2, 1998.

Applicability dates: For dates of

applicability of the final regulations, see

Effective Dates under SUPPLEMENTARY

INFORMATION.

FOR FURTHER INFORMATION CONTACT:

William E. Blanchard, (202) 622–3950

(not a toll-free number).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

The collections of information

contained in these final regulations have

been reviewed and approved by the

Office of Management and Budget in

accordance with the requirements of the

Paperwork Reduction Act of 1995 (44

U.S.C. 3507(d)) under control number

1545–1491. Responses to these

collections of information are required

by the IRS to determine whether a

holder of a bond has elected to amortize

bond premium and whether an issuer or

a holder has changed its method of

accounting for premium.

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.

The estimated annual burden per

respondent varies from 0.25 hours to

0.75 hours, depending on individual

circumstances, with an estimated

average of 0.5 hours.

Comments concerning the accuracy of

this burden estimate and suggestions for

reducing this burden should be sent to

the Internal Revenue Service, Attn: IRS

Reports Clearance Officer, T:FP,

Washington, DC 20224, and to the

Office of Management and Budget, Attn:

Desk Officer for the Department of

Treasury, Office of Information and

Regulatory Affairs, Washington, DC

20503.

Books or records relating to the

collections 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

Sections 1.171–1 through 1.171–4 of

the Income Tax Regulations were

promulgated in 1957 and last amended

in 1968. In the Tax Reform Act of 1986,

section 171(b) was amended to require

that bond premium be amortized by

reference to a constant yield. In the

Technical and Miscellaneous Revenue

Act of 1988, section 171(e) was

amended to require that amortizable

bond premium be treated as an offset to

interest income.

On June 27, 1996, the IRS published

a notice of proposed rulemaking in the

Federal Register (61 FR 33396) relating

to the federal income tax treatment of

bond premium and bond issuance

premium. A public hearing was not held

because no one requested to speak at the

hearing that had been scheduled for

October 23, 1996. The IRS did receive