Federal Register / Vol. 61, No. 125 / Thursday, June 27, 1996 / Rules and Regulations 33365

(b) Testing period may include a

period beginning before January 1, 1997.

A testing period for purposes of

§§ 1.1502–91T through 1.1502–96T and

1.1502–98T may include a period

beginning before January 1, 1997. Thus,

for example, in applying § 1.1502–

92T(b)(1)(i) (relating to the

determination of an ownership change

of a loss group), the determination of the

lowest percentage ownership interest of

any 5-percent shareholder of the

common parent during a testing period

ending on a testing date occurring on or

after January 1, 1997, takes into account

the period beginning before January 1,

1997, except to the extent that the

period is more than 3 years before the

testing date or is otherwise before the

beginning of the testing period. See

§ 1.1502–92T(b)(1).

(c) Transition rules—(1) Methods

permitted—(i) In general. For the period

ending before January 1, 1997, a

consolidated group is permitted to use

any method described in paragraph

(c)(2) of this section which is

consistently applied to determine if an

ownership change occurred with respect

to a consolidated net operating loss, a

net operating loss carryover (including

net operating loss carryovers arising in

SRLYs), or a net unrealized built-in loss.

If an ownership change occurred during

that period, the group is also permitted

to use any method described in

paragraph (c)(2) of this section which is

consistently applied to compute the

amount of the section 382 limitation

that applies to limit the use of taxable

income in any post-change year ending

before, on, or after January 1, 1997. The

preceding sentence does not preclude

the imposition of an additional, lesser

limitation due to a subsequent

ownership change nor, except as

provided in paragraph (c)(1)(iii) of this

section, does it permit the beginning of

a new testing period for the loss group.

(ii) Adjustments to offset excess

limitation. If an ownership change

occurred during the period ending

before January 1, 1997, and a method

described in paragraph (c)(2) of this

section was not used for a post-change

year, the members (or group) must

reduce the section 382 limitation for

post-change years for which an income

tax return is filed after January 1, 1997,

to offset, as quickly as possible, the

effects of any section 382 limitation that

members took into account in excess of

the amount that would have been

allowable under §§ 1.1502–91T through

1.1502–96T and 1.1502–98T.

(iii) Coordination with effective date.

Notwithstanding that a group may have

used a method described in paragraph

(c)(2)(ii) or (iii) of this section for the

period before January 1, 1997,

§§ 1.1502–91T through 1.1502–96T and

1.1502–98T apply to any testing date

occurring on or after January 1, 1997, for

purposes of determining whether there

is an ownership change with respect to

any losses and, if so, the collateral

consequences. Any ownership change of

a member other than the common

parent pursuant to a method described

in paragraph (c)(2)(ii) or (iii) of this

section does not cause a new testing

period of the loss group to begin for

purposes of applying § 1.1502–92T on

or after January 1, 1997.

(2) Permitted methods. The methods

described in this paragraph (c)(2) are:

(i) A method that does not materially

differ from the rules in §§ 1.1502–91T

through 1.1502–96T and 1.1502–98T

(other than those in § 1.1502–95T(c)

(relating to the apportionment of a

section 382 limitation) as they would

apply to a corporation that ceases to be

a member of the group before January 1,

1997). As the context requires, the

method must treat references to rules in

current regulations as references to rules

in regulations generally effective for

taxable years before January 1, 1997.

Thus, for example, the taxpayer must

treat a reference to § 1.382–4(d) (relating

to options) as a reference to § 1.382–

2T(h)(4) for any testing date to which

§ 1.382–2T(h)(4) applies. Similarly, a

reference to § 1.1502–21T(c) may be a

reference to § 1.1502–21A(c), as

appropriate. Furthermore, the method

must treat all corporations that were

affiliated on January 1, 1987, and

continuously thereafter as having met

the 5 consecutive year requirement of

§ 1.1502–91T(d)(2)(i) on any day before

January 1, 1992, on which the

determination of net unrealized built-in

gain or loss of a loss subgroup is made;

(ii) A reasonable application of the

rules in section 382 and the regulations

thereunder applied to each member on

a separate entity basis, treating each

member’s allocable part of a

consolidated net operating loss which is

attributable to it under § 1.1502–21T(b)

as a net operating loss of that member

and applying rules similar to § 1.382–8T

to avoid duplication of value in

computing the section 382 limitation for

the member (see § 1.382–8T(h) (relating

to the effective date and transition rules

regarding controlled groups)); or

(iii) A method approved by the

Commissioner upon application by the

common parent.

(d) Amended returns. A group may

file an amended return in connection

with an ownership change occurring

before January 1, 1997, to modify the

amount of a section 382 limitation with

respect to a consolidated net operating

loss, a net operating loss carryover

(including net operating loss carryovers

arising in SRLYs), or a recognized builtin loss (or gain) only if it files amended

returns:

(1) For the earliest taxable year ending

after December 31, 1986, in which it had

an ownership change, if any, under

§ 1.1502–92T;

(2) For all subsequent taxable years

for which returns have already been

filed as of the date of the amended

return;

(3) The modification with respect to

all members for all taxable years ending

in 1987 and thereafter complies with

§§ 1.1502–91T through 1.1502–96T and

1.1502–98T; and

(4) The amended return(s) permitted

by the applicable statute of limitations

is/are filed before March 26, 1997.

(e) Section 383. This section also

applies for the purposes of section 383,

with appropriate adjustments to reflect

that section 383 applies to credits and

net capital losses.

PART 602—OMB CONTROL NUMBERS

UNDER THE PAPERWORK

REDUCTION ACT

Par. 3. The authority citation for part

602 continues to read in part as follows:

Authority: 26 U.S.C. 7805.

Par. 4. In § 602.101, paragraph (c) is

amended by adding an entry in

numerical order to the table to read as

follows:

§ 602.101 OMB Control numbers.

* * * * *

(c) * * *

CFR part or section where

identified or described

Current

OMB control No.

* * * * *

1.1502–95T ............................... 1545–1218

* * * * *

Margaret Milner Richardson,

Commissioner of Internal Revenue.

Approved: May 31, 1996.

Leslie Samuels,

Assistant Secretary of the Treasury.

[FR Doc. 96–15824 Filed 6–26–96; 8:45 am]

BILLING CODE 4830–01–U

26 CFR Parts 301 and 602

[TD 8680]

RIN 1545–AU41

Extensions of Time to Make Elections

AGENCY: Internal Revenue Service (IRS),

Treasury.
33366 Federal Register / Vol. 61, No. 125 / Thursday, June 27, 1996 / Rules and Regulations

ACTION: Temporary regulations.

SUMMARY: This document contains

temporary regulations concerning

extensions of time for making certain

elections under the Internal Revenue

Code (Code). The regulations provide

the standards that the Commissioner

will use to grant taxpayers extensions of

time for making these elections. The text

of these temporary regulations also

serves as the text of the proposed

regulations set forth in the notice of

proposed rulemaking on this subject in

the Proposed Rules section of this issue

of the Federal Register.

DATES: These regulations are effective

June 27, 1996.

For dates of applicability, see

§ 301.9100–1T(h) of these regulations.

FOR FURTHER INFORMATION CONTACT:

Robert A. Testoff at (202) 622–4960 (not

a toll-free number).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

These regulations are being issued

without prior notice and public

procedure pursuant to the

Administrative Procedure Act (5 U.S.C.

553). For this reason, the collection of

information contained in these

regulations has been reviewed and,

pending receipt and evaluation of

public comments, approved by the

Office of Management and Budget under

control number 1545–1488. Responses

to this collection of information are

required to obtain an extension of time

for making an election.

An agency may not conduct or

sponsor, and a person is not required to

respond to, a collection of information

unless the collection of information

displays a valid control number.

For further information concerning

this collection of information, where to

submit comments on the collection of

information and the accuracy of the

estimated burden, and suggestions for

reducing this burden, please refer to the

preamble to the cross-referencing notice

of proposed rulemaking published in

the Proposed Rules section of this issue

of the Federal Register.

Books or records relating to a

collection of information must be

retained as long as their contents may

become material in the administration

of any internal revenue law. Generally,

tax returns and tax return information

are confidential, as required by 26

U.S.C. 6103.

Background

This document contains temporary

regulations amending the Regulations

on Procedure and Administration (26

CFR part 301) concerning extensions of

time for making certain elections. The

regulations provide the standards that

the Commissioner will use to grant

taxpayers extensions of time for making

these elections. These standards provide

relief to taxpayers who reasonably and

in good faith fail to make a timely

election when granting relief will not

prejudice the interests of the

government. The regulations provide a

means by which taxpayers can be in the

same position they would have been in

had they made their elections in a

timely fashion.

Explanation of Provisions

These temporary regulations provide

the standards the Commissioner will

use to determine whether to grant an

extension of time to make an election

when the deadline for making the

election is prescribed by regulation,

revenue ruling, revenue procedure,

notice, or announcement published in

the Federal Register or the Internal

Revenue Bulletin (regulatory election).

Under section 6081(a), these regulations

also provide an automatic extension of

time to make an election when the

deadline for making the election is

prescribed by statute (statutory election)

and the deadline for making the election

is the due date of the return or the due

date of the return including extensions.

These regulations adopt and revise the

standards for relief provided in Rev.

Proc. 92–85, 1992–2 C.B. 490.

Automatic Extensions

Rev. Proc. 92–85 provides an

automatic 12-month extension for

certain regulatory elections listed in

Appendix A of that revenue procedure.

The temporary regulations continue the

automatic 12-month extension and

update the list of eligible regulatory

elections.

Rev. Proc. 92–85 also provides an

automatic 6-month extension for

statutory elections when the deadline

for making the election is prescribed as

the due date of the return or the due

date of the return including extensions.

The temporary regulations expand the

automatic 6-month extension to include

regulatory elections.

Other Extensions

Rev. Proc. 92–85 provides relief for

certain regulatory elections that do not

qualify for relief under the automatic

extensions. Rev. Proc. 92–85 requires a

taxpayer to demonstrate that (1) it acted

reasonably and in good faith and (2)

granting relief will not prejudice the

interests of the government. The

temporary regulations continue to

provide extensions for such regulatory

elections upon a showing of reasonable

action and good faith and no prejudice

to the interests of the government.

The temporary regulations adopt the

standards for reasonable action and

good faith in Rev. Proc. 92–85. The

regulations provide that a taxpayer is

deemed to have acted reasonably and in

good faith if: (1) the taxpayer applies for

relief before the failure to make the

regulatory election is discovered by the

IRS; (2) the taxpayer inadvertently failed

to make the election because of

intervening events beyond its control;

(3) the taxpayer failed to make the

election because after exercising

reasonable diligence the taxpayer was

unaware of the necessity for the

election; (4) the taxpayer reasonably

relied on written advice of the IRS; or

(5) the taxpayer relied on a qualified tax

professional, including a professional

employed by the taxpayer, and the

professional failed to make or advise the

taxpayer to make the election. However,

a taxpayer is deemed to have not acted

reasonably and in good faith if: (1) the

taxpayer is requesting relief for an

election to alter a return position for

which an accuracy-related penalty

could have been imposed under section

6662; (2) the taxpayer was fully

informed of the required election and

related tax consequences and chose not

to file the election; or (3) the taxpayer

uses hindsight in requesting relief.

The temporary regulations adopt the

standards for prejudice to the interests

of the government in Rev. Proc. 92–85.

The regulations provide that the

interests of the government are deemed

to be prejudiced if granting relief would

result in a taxpayer having a lower tax

liability than the taxpayer would have

had if the regulatory election had been

timely made. In addition, the interests

of the government are ordinarily

deemed to be prejudiced if the tax year

in which the election should have been

made or any affected tax years are

closed by the statute of limitations.

Accounting Method and Period

Elections

Rev. Proc. 92–85 provides limited

relief (ordinarily not to exceed 90 days

from the deadline for filing Form 3115,

Application for Change in Accounting

Method) for requests to change an

accounting method subject to the

procedure described in § 1.446–1(e)(3)(i)

(requiring the advance written consent

of the Commissioner). The temporary

regulations continue this limited relief.

Rev. Proc. 92–85 provides an automatic

12-month extension for the election to

use the last-in, first-out (LIFO) inventory

method under section 472 and also

provides relief for the section 472
Federal Register / Vol. 61, No. 125 / Thursday, June 27, 1996 / Rules and Regulations 33367

election beyond the automatic 12-month

extension. Rev. Proc. 92–85 is otherwise

inapplicable to accounting method

regulatory elections, except for three

specific elections listed in Appendix B

of that revenue procedure.

The temporary regulations provide

relief for all accounting method

regulatory elections. For example, relief

will now be available for elections

under sections 197 (amortization of

goodwill and certain other intangibles)

and 468A (special rules for nuclear

decommissioning costs).

The temporary regulations provide

additional rules regarding what

constitutes prejudice to the interests of

the government for accounting method

regulatory elections. The temporary

regulations provide that the interests of

the government are deemed to be

prejudiced except in unusual and

compelling circumstances if: (1) the

election requires an adjustment under

section 481(a); (2) the taxpayer is under

examination, requests relief to change

from an impermissible method of

accounting, and granting relief will

provide the taxpayer a more favorable

method of accounting or more favorable

terms and conditions than the taxpayer

would receive if the change is made as

part of the examination; or (3) the

election provides a more favorable

method of accounting or more favorable

terms and conditions if the election is

made by a certain date or taxable year.

Rev. Proc. 92–85 provides an

automatic 12-month extension for

elections to use other than the required

taxable year under section 444. Rev.

Proc. 92–85 also provides limited relief

(ordinarily not to exceed 90 days from

the deadline for filing Form 1128,

Application to Adopt, Change, or Retain

a Tax Year) for accounting period

regulatory elections subject to Rev. Proc.

87–32, 1987–2 C.B. 396. Rev. Proc. 92–

85 is otherwise inapplicable to

accounting period regulatory elections.

The temporary regulations extend the

limited relief for elections subject to

Rev. Proc. 87–32 to all other accounting

period regulatory elections except for

the section 444 election, and provide

relief for the section 444 election

beyond the automatic 12-month

extension.

Effect on Other Documents

Rev. Proc. 92–85, 1992–2 C.B. 490, as

modified and clarified by Rev. Proc. 93–

28, 1993–2 C.B. 344, is obsolete as of

June 27, 1996.

Rev. Proc. 92–20, 1992–1 C.B. 685, is

modified as of June 27, 1996 to the

extent that the provisions of this

regulation apply to applications for

relief with respect to requests to change

an accounting method subject to the

procedures of Rev. Proc. 92–20.

Rev. Proc. 87–32, 1987–2 C.B. 396, is

modified as of June 27, 1996 to the

extent that the provisions of this

regulation apply to applications for

relief with respect to requests to change

an accounting period subject to the

procedures of Rev. Proc. 87–32.

Special Analyses

It has been determined that this

Treasury decision is not a significant

regulatory action as defined in EO

12866. Therefore, a regulatory

assessment is not required. It has also

been determined that section 553(b) of

the Administrative Procedure Act (5

U.S.C. chapter 5) and the Regulatory

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

not apply to these regulations, and,

therefore, a Regulatory Flexibility

Analysis is not required. Pursuant to

section 7805(f) of the Internal Revenue

Code, these temporary regulations will

be submitted to the Chief Counsel for

Advocacy of the Small Business

Administration for comment on their

impact on small businesses.

Drafting Information

The principal author of these

regulations is Robert A. Testoff of the

Office of Assistant Chief Counsel

(Income Tax and Accounting). However,

other personnel from the IRS and

Treasury Department participated in

their development.

List of Subjects

26 CFR Part 301

Employment taxes, Estate taxes,

Excise taxes, Gift taxes, Income taxes,

Penalties, Reporting and recordkeeping

requirements.

26 CFR Part 602

Reporting and recordkeeping

requirements.

Adoption of Amendments to the

Regulations

Accordingly, 26 CFR parts 301 and

602 are amended as follows:

PART 301—PROCEDURE AND

ADMINISTRATION

Paragraph 1. The authority citation for

part 301 is amended by adding entries

in numerical order to read as follows:

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

Section 301.9100–1T also issued under 26

U.S.C. 6081;

Section 301.9100–2T also issued under 26

U.S.C. 6081;

Section 301.9100–3T also issued under 26

U.S.C. 6081; * * *

PAR. 2. Sections 301.9100–1T through

301.9100–3T are added to read as

follows:

§ 301.9100–1T Extensions of time to make

elections (temporary).

(a)–(c) [Reserved].

(d) Introduction. The regulations

under this section and §§ 301.9100–2T

through 301.9100–3T provide the

standards the Commissioner will use to

determine whether to grant an extension

of time to make a regulatory election.

The regulations under this section and

§§ 301.9100–2T through 301.9100–3T

also provide an automatic extension of

time to make certain statutory elections.

An extension of time is available for

elections that a taxpayer is otherwise

eligible to make and the granting of an

extension of time is not a determination

that the taxpayer is otherwise eligible to

make the election. Section 301.9100–2T

provides automatic extensions of time

for making regulatory and statutory

elections when the deadline for making

the election is the due date of the return

or the due date of the return including

extensions. Section 301.9100–3T

provides extensions of time for making

regulatory elections that do not meet the

requirements of § 301.9100–2T.

(e) Terms. The following terms have

the meanings provided below:

Election includes an application for

relief in respect of tax; a request to

adopt, change, or retain an accounting

method or accounting period; but does

not include an application for an

extension of time for filing a return

under section 6081.

Regulatory election means an election

whose deadline is prescribed by a

regulation published in the Federal

Register, or a revenue ruling, revenue

procedure, notice, or announcement

published in the Internal Revenue

Bulletin.

Statutory election means an election

whose deadline is prescribed by statute.

Taxpayer means any person within

the meaning of section 7701(a)(1).

(f) General standards for relief. The

Commissioner in the Commissioner’s

discretion may grant a reasonable

extension of time to make a regulatory

election, or a statutory election (but no

more than 6 months except in the case

of a taxpayer who is abroad), under all

subtitles of the Internal Revenue Code

except subtitles E, G, H, and I, provided

the taxpayer demonstrates to the

satisfaction of the Commissioner

that——

(1) The taxpayer acted reasonably and

in good faith; and

(2) Granting relief will not prejudice

the interests of the government.
33368 Federal Register / Vol. 61, No. 125 / Thursday, June 27, 1996 / Rules and Regulations

(g) Exceptions. Notwithstanding the

provisions of paragraph (f) of this

section, an extension of time will not be

granted—

(1) For elections under section

4980A(f)(5);

(2) For elections required to be made

prior to November 20, 1970, in the case

of an election——

(i) Required to be made in or with the

taxpayer’s original income tax return;

(ii) Required to be exercised by filing

a claim for credit or refund, unless the

election is required to be exercised on

or before a date that precedes the date

of expiration of the period of limitations

provided in section 6511;

(iii) Required to be filed in a petition

to the Tax Court;

(iv) To change a previous election;

(v) To change an accounting method

as described in §§ 1.77–1 of this chapter

and 1.446–1 of this chapter;

(vi) To change an accounting period

as described in § 1.442–1 of this chapter;

or

(vii) To change the method of treating

bad debts as described in § 1.166–1 of

this chapter; or

(3) For elections that are expressly

excepted from relief or where

alternative relief is provided by a

statute, a regulation published in the

Federal Register, or a revenue ruling,

revenue procedure, notice, or

announcement published in the Internal

Revenue Bulletin.

(h) Effective dates. In general, this

section and §§ 301.9100–2T through

301.9100–3T are effective for all

requests for relief being considered by

the IRS on June 27, 1996 and for all

requests for relief submitted on or after

June 27, 1996. However, the automatic

12-month extension and the automatic

6-month extension provided in

§ 301.9100–2T are effective for elections

whose due dates are on or after June 27,

1996.

§ 301.9100–2T Automatic extensions

(temporary).

(a) Automatic 12-month extension—

(1) In general. An automatic extension

of 12 months from the original deadline

for making a regulatory election is

granted to make elections described in

paragraph (a)(2) of this section provided

the taxpayer takes corrective action as

defined in paragraph (c) of this section

within that 12-month extension period.

(2) Elections eligible for automatic 12-

month extension. The following

regulatory elections are eligible for the

automatic 12-month extension

described in paragraph (a)(1) of this

section——

(i) The election to use other than the

required taxable year under section 444;

(ii) The election to use the last-in,

first-out (LIFO) inventory method under

section 472;

(iii) The 15-month rule for filing an

exemption application for a section

501(c)(9), 501(c)(17), or 501(c)(20)

organization under section 505;

(iv) The 15-month rule for filing an

exemption application for a section

501(c)(3) organization under section

508;

(v) The election to be treated as a

homeowners association under section

528;

(vi) The election to adjust basis on

partnership transfers and distributions

under section 754;

(vii) The estate tax election to

specially value qualified real property

(where the IRS has not yet begun an

examination of the filed return) under

section 2032A(d)(1);

(viii) The chapter 14 gift tax election

to treat a qualified payment right as

other than a qualified payment under

section 2701(c)(3)(C)(i); and

(ix) The chapter 14 gift tax election to

treat any distribution right as a qualified

payment under section 2701(c)(3)(C)(ii).

(b) Automatic 6-month extension. An

automatic extension of 6 months from

the due date of a return excluding

extensions is granted to make regulatory

or statutory elections whose deadlines

are prescribed as the due date of the

return or the due date of the return

including extensions in the case of a

taxpayer that timely filed its return for

the year the election should have been

made, provided the taxpayer takes

corrective action as defined in

paragraph (c) of this section within that

6-month extension period. This

extension does not apply, however, to

regulatory or statutory elections that

must be made by the due date of the

return excluding extensions.

(c) Corrective action. For purposes of

this section, corrective action means

filing an original or an amended return

for the year the regulatory or statutory

election should have been made and

attaching the appropriate form or

statement for making the election. For

those elections not required to be filed

with a return, corrective action means

taking the steps required to file the

election in accordance with the statute,

the regulation published in the Federal

Register, or the revenue ruling, revenue

procedure, notice, or announcement

published in the Internal Revenue

Bulletin. Taxpayers who make an

election under an automatic extension

(and all taxpayers whose tax liability

would be affected by the election) must

report their income in a manner that is

consistent with the election and comply

with all other requirements for making

the election for the year the election

should have been made and for all

affected years; otherwise, the Service

may invalidate the election.

(d) Procedural requirements. Any

return, statement of election, or other

form of filing that must be made to

obtain an automatic extension must

provide the following statement at the

top of the document: ‘‘FILED

PURSUANT TO § 301.9100–2T’’. Any

filing made to obtain an automatic

extension must be sent to the same

address that the filing to make the

election would have been sent had the

filing been timely made. No request for

a letter ruling is required to obtain an

automatic extension. Accordingly, user

fees do not apply to taxpayers taking

corrective action to obtain an automatic

extension.

(e) The following example illustrates

the rules of this section:

Example. Taxpayer A fails to make a

certain election when filing A’s 1996 income

tax return on March 17, 1997, the due date

of the return. This election does not affect the

tax liability of any other taxpayer. The

applicable regulation requires that the

election be made by attaching the appropriate

form to a timely filed return including

extensions. In accordance with paragraphs

(b) and (c) of this section, A may make the

regulatory election by filing an amended

return with the appropriate form by

September 15, 1997 (6 months from the

March 17, 1997, due date).

§ 301.9100–3T Other extensions

(temporary).

(a) In general. Requests for extensions

of time for regulatory elections that do

not meet the requirements of

§ 301.9100–2T must be made under the

rules of this section. Requests for relief

subject to this section will be granted

when the taxpayer provides the

evidence (including affidavits described

in paragraph (e) of this section) to

establish that the taxpayer acted

reasonably and in good faith, and

granting relief will not prejudice the

interests of the government.

(b) Reasonable action and good

faith—(1) In general. Except as provided

in paragraphs (b)(3)(i) through (iii) of

this section, a taxpayer is deemed to

have acted reasonably and in good faith

if the taxpayer—

(i) Requests relief under this section

before the failure to make the regulatory

election is discovered by the IRS;

(ii) Inadvertently failed to make the

election because of intervening events

beyond the taxpayer’s control;

(iii) Failed to make the election

because, after exercising reasonable

diligence (taking into account the

taxpayer’s experience and the

complexity of the return or issue), the
Federal Register / Vol. 61, No. 125 / Thursday, June 27, 1996 / Rules and Regulations 33369

taxpayer was unaware of the necessity

for the election;

(iv) Reasonably relied on the written

advice of the IRS; or

(v) Reasonably relied on a qualified

tax professional, including a tax

professional employed by the taxpayer,

and the tax professional failed to make,

or advise the taxpayer to make, the

election.

(2) Reasonable reliance on a qualified

tax professional. For purposes of this

paragraph (b), a taxpayer will not be

considered to have reasonably relied on

a qualified tax professional if the

taxpayer knew or should have known

that the professional was not—

(i) Competent to render advice on the

regulatory election; or

(ii) Aware of all relevant facts.

(3) Taxpayer deemed to have not

acted reasonably or in good faith. For

purposes of this paragraph (b), a

taxpayer is deemed to have not acted

reasonably and in good faith if the

taxpayer—

(i) Seeks to alter a return position for

which an accuracy-related penalty has

been or could be imposed under section

6662 at the time the taxpayer requests

relief (taking into account any qualified

amended return filed within the

meaning of § 1.6664–2(c)(3)) of this

chapter and the new position requires or

permits a regulatory election for which

relief is requested;

(ii) Was fully informed of the required

election and related tax consequences,

but chose not to file the election; or

(iii) Uses hindsight in requesting

relief. If specific facts have changed

since the original deadline for making

the election that make the election

advantageous to a taxpayer, the IRS will

not ordinarily grant relief. In such a

case, the IRS will grant relief only when

the taxpayer provides strong proof that

the taxpayer’s decision to seek relief did

not involve hindsight.

(c) Prejudice to the interests of the

government—(1) In general—(i) Lower

tax liability. The interests of the

government are prejudiced if granting

relief would result in a taxpayer having

a lower tax liability in the aggregate for

all years to which the regulatory

election applies than the taxpayer

would have had if the election had been

timely made (taking into account the

time value of money). Similarly, if the

tax consequences of more than one

taxpayer are affected by the election, the

government’s interests are prejudiced if

extending the time for making the

election may result in the affected

taxpayers, in the aggregate, having a

lower tax liability than if the election

had been timely made.

(ii) Closed years. The interests of the

government are ordinarily prejudiced if

the tax year in which the regulatory

election should have been made or any

tax years that would have been affected

by the election had it been timely made

are closed by the period of limitations

on assessment under section 6501(a)

before the taxpayer’s receipt of a ruling

granting relief under this section. The

IRS may condition a grant of relief on

the taxpayer providing the IRS with a

statement from an independent auditor

(other than an auditor providing an

affidavit pursuant to paragraph (e)(3) of

this section) certifying that the

requirements of paragraph (c)(1)(i) of

this section are satisfied.

(2) Special rules for accounting

method regulatory elections. The

interests of the government are deemed

to be prejudiced except in unusual and

compelling circumstances if the

accounting method regulatory election

is—

(i) Subject to the procedure described

in § 1.446–1(e)(3)(i) of this chapter

(requiring the advance written consent

of the Commissioner), and the request

for relief under this section is filed more

than 90 days after the deadline for filing

the Form 3115, Application for Change

in Accounting Method;

(ii) Not an election described in

paragraph (c)(2)(i) of this section and

requires an adjustment under section

481(a) (or would require an adjustment

under section 481(a) if the taxpayer

changed to the method of accounting for

which relief is requested in a taxable

year subsequent to the taxable year the

election should have been made);

(iii) Not an election described in

paragraph (c)(2)(i) of this section, the

taxpayer is under examination and

requests relief under this section to

change from an impermissible method

of accounting, and granting relief will

provide the taxpayer a more favorable

method of accounting or more favorable

terms and conditions than the taxpayer

would receive if the change from the

impermissible method is made as part of

the examination; or

(iv) Not an election described in

paragraph (c)(2)(i) of this section and

the election provides a more favorable

method of accounting or more favorable

terms and conditions if the election is

made by a certain date or taxable year.

(3) Special rules for accounting period

regulatory elections. The interests of the

government are deemed to be

prejudiced except in unusual and

compelling circumstances if an election

is an accounting period regulatory

election (other than the election to use

other than the required taxable year

under section 444) and the request for

relief is filed more than 90 days after the

deadline for filing the Form 1128,

Application to Adopt, Change, or Retain

a Tax Year (or other required statement).

(d) Effect of amended returns—(1)

Second examination under section

7605(b). Taxpayers requesting and

receiving an extension of time under

this section waive any objections to a

second examination under section

7605(b) for the issue(s) that is the

subject of the relief request and any

correlative adjustments.

(2) Suspension of the period of

limitations under section 6501(a). A

request for relief under this section does

not suspend the period of limitations on

assessment under section 6501(a). Thus,

for relief to be granted, the IRS may

require the taxpayer to consent under

section 6501(c)(4) to an extension of the

period of limitations on assessment for

the tax year in which the regulatory

election should have been made and

any tax years that would have been

affected by the election had it been

timely made.

(e) Procedural requirements—(1) In

general. Requests for relief under this

section must provide evidence that

satisfies the requirements in paragraphs

(b) and (c) of this section, and must

provide additional information as

required by this paragraph (e).

(2) Affidavit and declaration from

taxpayer. The taxpayer, or the

individual who acts on behalf of the

taxpayer with respect to tax matters,

must submit a detailed affidavit

describing the events that led to the

failure to make a valid regulatory

election and to the discovery of the

failure. When the taxpayer relied on a

qualified tax professional for advice, the

taxpayer’s affidavit must describe the

engagement and responsibilities of the

professional as well as the extent to

which the taxpayer relied on the

professional. The affidavit must be

accompanied by a dated declaration,

signed by the taxpayer, which states:

‘‘Under penalties of perjury, I declare

that, to the best of my knowledge and

belief, the facts presented herein are

true, correct, and complete.’’ The

individual who signs for an entity must

have personal knowledge of the facts

and circumstances at issue.

(3) Affidavits and declarations from

other parties. The taxpayer must submit

detailed affidavits from the individuals

having knowledge or information about

the events that led to the failure to make

a valid regulatory election and to the

discovery of the failure. These

individuals must include the taxpayer’s

income tax return preparer, any

individual (including an employee of

the taxpayer) who made a substantial
33370 Federal Register / Vol. 61, No. 125 / Thursday, June 27, 1996 / Rules and Regulations

contribution to the preparation of the

return, and any accountant or attorney,

knowledgeable in tax matters, who

advised the taxpayer with regard to the

election. An affidavit must describe the

engagement and responsibilities of the

individual as well as the advice that the

individual provided to the taxpayer.

Each affidavit must include the name,

current address, and taxpayer

identification number of the individual,

and be accompanied by a dated

declaration, signed by the individual,

which states: ‘‘Under penalties of

perjury, I declare that, to the best of my

knowledge and belief, the facts

presented herein are true, correct, and

complete.’’

(4) Other Information. The request for

relief filed under this section must also

contain the following information—

(i) The taxpayer must state whether

the taxpayer’s return(s) for the tax year

in which the regulatory election should

have been made or any tax years that

would have been affected by the

election had it been timely made is

being examined by a district director, or

is being considered by an appeals office

or a federal court. The taxpayer must

notify the IRS office considering the

request for relief if the IRS starts an

examination of any such return while

the taxpayer’s request for relief is

pending;

(ii) The taxpayer must state when the

applicable return, form, or statement

used to make the election was required

to be filed and when it was actually

filed;

(iii) The taxpayer must submit a copy

of any documents that refer to the

election;

(iv) When requested, the taxpayer

must submit a copy of the taxpayer’s

income tax return for any taxable year

for which the taxpayer requests an

extension and any return affected by the

election; and

(v) When applicable, the taxpayer

must submit a copy of the income tax

returns of other taxpayers affected by

the election.

(5) Filing instructions. A request for

relief under this section is a request for

a letter ruling. Requests for relief should

be submitted in accordance with the

applicable procedures for requests for a

letter ruling and must be accompanied

by the applicable user fee.

(f) Examples. The following examples

illustrate the provisions of this section:

Example 1. Taxpayer discovers own error.

Taxpayer A prepares A’s 1996 income tax

return. A is unaware that a particular

regulatory election is available to report a

transaction in a particular manner. A files the

1996 return without making the election and

reporting the transaction in a different

manner. In 1998, A hires a qualified tax

professional to prepare A’s 1998 return. The

professional discovers that A did not make

the election. A promptly files for relief in

accordance with this section. Assuming

paragraphs (b)(3)(i) through (iii) of this

section do not apply, A is deemed to have

acted reasonably and in good faith.

Example 2. Reliance on qualified tax

professional. Taxpayer B hires a qualified tax

professional to advise B on preparing B’s

1996 income tax return and provides the

professional with all the information

requested. The professional fails to advise B

that a regulatory election is necessary in

order for B to report income on B’s 1996

return in a particular manner. Nevertheless,

B reports this income in a manner that is

consistent with having made the election. In

1999, during the examination of the 1996

return by the IRS, the examining agent

discovers that the election has not been filed.

B promptly files for relief in accordance with

this section, including attaching an affidavit

from B’s professional stating that the

professional failed to advise B that the

election was necessary. Assuming paragraphs

(b)(3)(i) through (iii) of this section do not

apply, B is deemed to have acted reasonably

and in good faith.

Example 3. Accuracy-related penalty.

Taxpayer C reports income on its 1996

income tax return in a manner that

contravenes a statutory provision. C was

aware of the statutory provision that

prohibited the manner in which C reported

this income, but did not provide adequate

disclosure of the return position within the

meaning of § 1.6662–3(c) of this chapter. In

1999, during the examination of the 1996

return, the IRS raises an issue regarding the

reporting of this income on C’s return. C

requests relief under this section to elect an

alternative method of reporting the income.

Under paragraph (b)(3)(i) of this section, C is

deemed to have not acted reasonably and in

good faith because C seeks to alter a return

position for which an accuracy-related

penalty could be imposed under section

6662.

Example 4. Election not requiring

adjustment under section 481(a). Taxpayer D

prepares D’s 1996 income tax return. D is

unaware that a particular accounting method

regulatory election is available. D files the

1996 return using another method of

accounting. In 1998, D hires a qualified tax

professional to prepare D’s 1998 return. The

professional discovers that D did not make

the election. D promptly files for relief in

accordance with this section. Assume the

applicable regulation provides that the

election does not require an adjustment

under section 481(a) and the election is not

subject to the procedure described in

§ 1.446–1(e)(3)(i) of this chapter. Further

assume that if D were granted an extension

of time to make the election, D would pay no

less tax than if the election had been timely

made. Under paragraph (c) of this section, the

interests of the government are not deemed

to be prejudiced.

Example 5. Election requiring adjustment

under section 481(a). The facts are the same

as in Example 4 of this paragraph (f) except

that the applicable regulation provides that

the election requires an adjustment under

section 481(a). Under paragraph (c)(2)(ii) of

this section, the interests of the government

are deemed to be prejudiced except in

unusual or compelling circumstances.

Example 6. Under examination. A

regulation permits an automatic change from

an impermissible method of accounting on a

cut-off basis. Any change to this method

made as part of an examination is made with

a section 481(a) adjustment. Taxpayer E

reports income on E’s 1996 income tax return

using the impermissible method of

accounting. In 1999, during the examination

of the 1996 return by the IRS, the examining

agent questions the propriety of E’s method

of accounting. E requests relief under this

section to make the change pursuant to the

regulation for 1996. E will receive less

favorable terms and conditions if the change

in method of accounting is made with a

section 481(a) adjustment by the examining

agent than if the change is made on a cut-off

basis pursuant to the regulation. Under

paragraph (c)(2)(iii) of this section, the

interests of the government are deemed to be

prejudiced except in unusual and compelling

circumstances

PART 602—OMB CONTROL NUMBERS

UNDER THE PAPERWORK

REDUCTION ACT

Par. 3. The authority citation for part

602 continues to read as follows:

Authority: 26 U.S.C. 7805.

Par. 4. Section 602.101(c) is amended

by adding the following entries in

numerical order to the table:

§ 602.101 OMB Control numbers

* * * * *

(c) * * *

CFR part or section where

identified and described

Current

OMB control number

* * * * *

§ 301.9100–2T .......................... 1545–1488

§ 301.9100–3T .......................... 1545–1488

* * * * *

Margaret Milner Richardson,

Commissioner of Internal Revenue.

Approved:

Donald C. Lubick,

Assistant Secretary of the Treasury.

[FR Doc. 96–16376 Filed 6–26–96; 8:45 am]

BILLING CODE 4830–01–U