[Federal Register Volume 62, Number 250 (Wednesday, December 31, 1997)]
[Rules and Regulations]
[Pages 68167-68173]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-33357]


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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.

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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, Secs. 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

[[Page 68168]]

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 Secs. 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 Secs. 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 Sec. 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 Sec. 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 
Sec. 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 
Sec. 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.

[[Page 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 cross-
reference 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. * * *

Sec. 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:


Sec. 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 Sec. 1.446-1(e)(3) in 
effect prior to December 31, 1997 (Sec. 1.446-1(e)(3) as contained in 
the 26 CFR part 1 edition revised as of April 1, 1997).


Sec. 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:


Sec. 301.9100-0  Outline of regulations.

    This section lists the paragraphs in Secs. 301.9100-1 through 
301.9100-3.


Sec. 301.9100-1  Extensions of time to make elections.

(a) Introduction.
(b) Terms.
(c) General standards for relief.
(d) Exceptions.
(e) Effective dates.

Sec. 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.

Sec. 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:


Sec. 301.9100-1  Extensions of time to make elections.

    (a) Introduction. The regulations under this section and 
Secs. 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 
Sec. 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,

[[Page 68170]]

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 
Sec. 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 Sec. 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 Secs. 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 
Sec. 601.601(d)(2) of this chapter).
    (e) Effective dates. In general, this section and Secs. 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 
Sec. 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 Secs. 301.9100-1T through 301.9100-3T in effect prior to 
December 31, 1997 (Secs. 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:


Sec. 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 
Sec. 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 Sec. 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:


[[Page 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).


Sec. 301.9100-3  Other extensions.

    (a) In general. Requests for extensions of time for regulatory 
elections that do not meet the requirements of Sec. 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 Sec. 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 Sec. 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

[[Page 68172]]

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 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

[[Page 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 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.


Secs. 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.


Sec. 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.


Sec. 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 
Secs. 301.9001-2T and 301.9001-3T, and adding the following entry in 
numerical order to the table to read as follows:


Sec. 602.101  OMB control numbers.

* * * * *
    (c) * * *

------------------------------------------------------------------------
                                                             Current OMB
     CFR part or section where identified and described      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