For Tax Professionals  
T.D. 8756 January 21, 1998

Election Not to Apply Look-Back Method in
De Minimis Cases

DEPARTMENT OF THE TREASURY
Internal Revenue Service 26 CFR Parts 1 and 602 [TD 8756] RIN 1545-
AV78

TITLE: Election Not to Apply Look-Back Method in De Minimis Cases

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final and temporary regulations.

SUMMARY: This document contains final and temporary regulations
explaining how a taxpayer elects under section 460(b)(6) not to
apply the look-back method to long-term contracts in de minimis
cases. The regulations reflect changes to the law made by the
Taxpayer Relief Act of 1997 and affect manufacturers and
construction contractors whose long-term contracts otherwise are
subject to the look-back method. The text of the 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 January 13, 1998.

These regulations apply to long-term contracts completed in taxable
years ending after August 5, 1997.

FOR FURTHER INFORMATION CONTACT: Leo F. Nolan II or John M. Aramburu
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 (OMB) under control number
1545-1572. Responses to this collection of information are required
for a taxpayer to elect not to apply the look-back method to long-
term contracts in de minimis cases.

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 OMB control number.

For further information concerning this collection of information,
and where to submit comments on the collection of information and
the accuracy of the estimated burden, and suggestions for reducing
the burden, please refer to the preamble in 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 amendments to the Income Tax Regulations (26
CFR Part 1). Section 460(b)(6) of the Internal Revenue Code was
added by section 1211 of the Taxpayer Relief Act of 1997, Public Law
105-34, 111 Stat.

788, 998, to provide an election not to apply the look-back method
of section 460(b)(2) to long-term contracts in de minimis cases.
These regulations provide guidance concerning this new election.

Explanation of Provisions Section 460(b) provides that, upon the
completion of any long-term contract, the look-back method is
applied to amounts reported under the contract using the percentage-
of- completion method (PCM). The PCM requires the use of estimates
of total contract price and total contract costs for reporting
income in taxable years preceding the year of contract completion.
The look-back method is intended to offset the time-value-of-money
effects of using estimates during the life of a contract that differ
from the actual amounts determined in the year of contract
completion.

Under the look-back method, taxpayers are required to pay interest
if a tax liability is deferred as a result of underestimating the
total contract price or overestimating total contract costs.
Conversely, taxpayers are entitled to receive interest if a tax
liability is accelerated as a result of overestimating the total
contract price or underestimating total contract costs.

Section 1.460-6(e) contains an elective relief provision concerning
the look-back method, which is called the delayed reapplication
method. Under the delayed reapplication method, a taxpayer does not
apply the look- back method to any post-completion taxable year
until the first of the following conditions is met: (1) the net
undiscounted value of increases or decreases in the contract price
occurring since the last application of the look-back method exceeds
the lesser of $1,000,000 or 10 percent of the total contract price
as of that time; (2) the net undiscounted value of increases or
decreases in the contract costs occurring since the last application
of the look-back method exceeds the lesser of $1,000,000 or 10
percent of the total actual contract costs as of that time; (3) the
taxpayer goes out of existence; (4) the taxpayer reasonably believes
the contract is finally settled and closed; or (5) five taxable
years have passed since the last application of the look-back
method.

In the Taxpayer Relief Act of 1997, section 460(b)(6) was added to
provide taxpayers with an election not to apply the look-back method
to long-term contracts in either of the following cases (de minimis
cases). First, a taxpayer does not apply the look-back method in the
completion year if, for each prior contract year, the cumulative
taxable income (or loss) actually reported under the contract is
within 10 percent of the cumulative look-back income (or loss).

Cumulative look-back income (or loss) is the amount of taxable
income (or loss) that the taxpayer would have reported if the
taxpayer had used actual contract price and costs instead of
estimated contract price and costs.

Second, a taxpayer does not apply the look-back method in a post-
completion taxable year if, as of the close of the post-completion
taxable year, the cumulative taxable income (or loss) under the
contract is within 10 percent of the cumulative look-back income (or
loss) under the contract as of the close of the most recent year in
which the look-back method was applied to the contract (or would
have been applied but for this election).

These temporary regulations provide that a taxpayer may elect not to
apply the look-back method to long-term contracts in de minimis
cases by attaching a statement to the taxpayer's timely filed
federal income tax return (including extensions) for the taxable
year the election is effective or to an amended return for that
year, provided the amended return is filed on or before March 31,
1998.

This election applies to all long-term contracts completed during
and after the year of election, unless the Commissioner consents to
the revocation of the election.

These temporary regulations apply to long-term contracts completed
in taxable years ending after August 5, 1997.

Special Analyses

It has been determined that this final and temporary regulation is
not a significant regulatory action as defined in EO 12866.
Therefore, a regulatory assessment is not required. It is hereby
certified that the collection of information in these regulations
will not have a significant economic impact on a substantial number
of small entities.

This certification is based on the fact that the time required to
prepare and file an election statement is minimal and will not have
a significant impact on those small entities that choose to make the
election. In addition, the election need only be made once by a
taxpayer.

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, this final and
temporary regulation will be submitted to the Chief Counsel for
Advocacy of the Small Business Administration for comment on its
impact on small business.

Drafting Information

The principal author of these final and temporary regulations is Leo
F. Nolan II, 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 1 Income taxes, Reporting and recordkeeping
requirements.

26 CFR Part 602 Reporting and recordkeeping requirements.

Amendments to the Regulations Accordingly, 26 CFR part 1 is amended
as follows:

PART 1--INCOME TAXES

Paragraph 1. The authority citation for part 1 is amended by adding
an entry for Section 1.460-6T in numerical order to read in part as
follows:

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

1.460-6T also issued under 26 U.S.C. 460(h). * * *

Par. 2. Section 1.460-0 is amended by adding an entry for 1.460-6T
to read as follows:

1.460-0 Outline of regulations under section 460.

* * * * *

1.460-6T Look-back method (temporary).

(a) through (i) [Reserved]

(j) Election not to apply look-back method in de minimis cases.

* * * * *

Par. 3. Section 1.460-6T is added to read as follows:

1.460-6T Look-back method (temporary).

(a) through (h) [Reserved] For further guidance, see 1.460-6(a)
through (h).

(i) [Reserved]

(j) Election not to apply look-back method in de minimis cases.
Section 460(b)(6) provides taxpayers with an election not to apply
the look-back method to long-term contracts in de minimis cases,
effective for contracts completed in taxable years ending after
August 5, 1997. To make an election, a taxpayer must attach a
statement to its timely filed original federal income tax return
(including extensions) for the taxable year the election is to
become effective or to an amended return for that year, provided the
amended return is filed on or before March 31, 1998.

This statement must have the legend "NOTIFICATION OF ELECTION UNDER
SECTION 460(b)(6)"; provide the taxpayer's name and identifying
number and the effective date of the election; and identify the
trades or businesses that involve long-term contracts. An election
applies to all long-term contracts completed during and after the
taxable year for which the election is effective. An election may
not be revoked without the Commissioner's consent. A consolidated
group of corporations, as defined in 1.1502-1(h), is subject to
consistency rules analogous to those in 1.460- 6(e)(2) (concerning
election to use delayed reapplication method) and in 1.460-6(d)(4)
(ii)(C) (concerning election to use simplified marginal impact
method).

PART 602--OMB CONTROL NUMBERS UNDER THE PAPERWORK REDUCTION ACT

Par. 4. The authority citation for part 602 continues to read as
follows:

Authority: 26 U.S.C. 7805.

Par. 5. In 602.101, paragraph (c) is amended by adding an entry to
the table in numerical order to read as follows:

602.101 OMB Control numbers.

* * * * *

(c) * * *

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

* * * * *

1.460-6T(j).....................................1545-1572

* * * * *

Michael P. Dolan
Deputy Commissioner of Internal Revenue
Approved: December 18, 1997
Donald C. Lubick
Acting Assistant Secretary of the Treasury


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