For Tax Professionals  
T.D. 8742 January 09, 1998

Requirements Respecting the Adoption or Change of
Accounting Method; Extensions of Time to Make Elections

DEPARTMENT OF THE TREASURY
Internal Revenue Service 26 CFR Parts 1, 301, 601, and 602 [TD 8742]
RIN 1545-AU42 and 1545-AV20

TITLE: 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.

EFFECTIVE DATE: 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 hoU.S. 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 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.

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. * * *

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,
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:

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 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 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.

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 Current OMB identified and described
control no.

* * * * *

301.9100-1.................................1545-1488

* * * * *

(2) Removing the following entries from the table:

CFR part or section where Current OMB identified and described
control no.

* * * * *

301.9100-1T.................................1545-1488

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

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

* * * * *

Deputy Commissioner of Internal Revenue
Approved:
Acting Assistant Secretary of the Treasury


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