IRS Rulings: Cutting through the Red Tape

By MacDonald, Wendy | Journal of Accountancy, November 1989 | Go to article overview

IRS Rulings: Cutting through the Red Tape


MacDonald, Wendy, Journal of Accountancy


IRS RULINGS: CUTTING THROUGH THE RED TAPE

The Internal Revenue Service receives thousands of formal ruling requests for changes in accounting methods or periods, but many of them are unnecessary and can easily be avoided. Under a new initiative, the service has published a number of revenue procedures that allow taxpayers to avoid the formal ruling process for some changes.

In the past, those seeking such changes--and in some cases those who wanted to adopt or retain an accounting period -- had to file a formal ruling request with the IRS commissioner using either Form 1128, Application for Change in Accounting Period, or Form 3115, Application for Change in Accounting Method. Taxpayers that qualify under the new procedures must still file the appropriate forms but need not request rulings.

The IRS returns unnecessary ruling requests and refunds any accompanying user fees, but practitioners who are aware of the service's expeditious approval procedures can prevent delays for their clients. This article highlights some of the more common procedures.

ACCOUNTING PERIODS

C corporations: Revenue procedure 84-34, 1984-1 C.B. 508. Section 1.442-1(c)(2) of the income tax regulations allows many C corporations to change their accounting periods automatically. This procedure expands the group eligible for an automatic change by omitting the 80% annualization requirement found in that section and providing terms and conditions to follow whenever taxpayers have a net operating loss in the short period.

A C corporation can use this procedure as long as it

* Has not changed its tax year within the past 10 years.

* Is not a member of a partnership, beneficiary of a trust or estate or shareholder of a domestic international sales corporation (DISC).

* Is not a DISC.

* Is not an S corporation and does not elect this status for the year immediately following the change in accounting period.

* Is not a foreign corporation that meets the stock ownership requirements of a foreign personal holding company.

* Is not a controlled foreign corporation.

* Is not a tax-exempt organization.

* Is not a cooperative.

Section 4.02 of the procedure describes compliance requirements. Section 6 describes how the change should be effected.

Partnerships, S corporations and personal service corporations: Revenue procedure 87-32, 1987-2 C.B. 396. No formal ruling request is necessary in these circumstances:

* An adoption of or change by one of these entities to an accounting period that is its required tax year (usually the calendar year) is automatic as long as the entity is not terminating its IRC section 444 election and follows the special notification guidelines in section 5 of this procedure.

* A taxpayer terminating its section 444 election and changing to its required tax year must follow the procedures described in section 1.444-1T(a)(5) of the regulations.

Section 4 of the procedure describes provisions that allow expenditious approval for use of other than a required tax year. They apply to one of these entities if it is not

* A taxpayer that has already used these provisions in the past six years (unless it is an S corporation using them in the first tax year in which it no longer meets the ownership tax year test described below).

* A PSC seeking to change its tax year that elects S status for the tax year following the short tax year.

* A partner in a partnership, a beneficiary of a trust or estate, a U.S. shareholder of a controlled foreign corporation or a shareholder of a DISC as of the dates that are listed in the procedure.

Section 4 describes two expeditious approval tests. The ownership tax year test allows an S corporation to use a fiscal tax year if the same year is used by shareholders holding more than one-half of the issued and outstanding stock (as of the first day of the tax year to which the request relates) or if these shareholders also are changing to the tax year desired by the S corporation. …

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