Td 8742

Part I. Rulings and Decisions Under the Internal Revenue Code of 1986
Section 162.—Trade or
Business Expenses
26 CFR 1.162–1: Trade or business expenses.
What are the procedures for taxpayers to obtain
written guidance from the Service on the tax treatment under § 162 of the Code of environmental
cleanup costs incurred in projects that span several
years? See Rev. Proc. 98–17, page 21.

Section 165.—Losses
26 CFR 1.165–1: Losses.
What are the procedures for taxpayers to obtain
written guidance from the Service on the tax treatment under § 165 of the Code of environmental
cleanup costs incurred in projects that span several
years? See Rev. Proc. 98–17, page 21.

Section 198.—Expensing of
Environmental Remediation
Costs
What are the procedures for taxpayers to obtain
written guidance from the Service on the tax treatment under § 198 of the Code of environmental
cleanup costs incurred in projects that span several
years? See Rev. Proc. 98–17, page 21.

Section 263.—Capital
Expenditures
26 CFR 1.263(a)–1: Capital expenditures; in
general.
What are the procedures for taxpayers to obtain
written guidance from the Service on the tax treatment under § 263 of the Code of environmental
cleanup costs incurred in projects that span several
years? See Rev. Proc. 98–17, page 21.

Section 7805.—Rules and
Regulations
26 CFR 301.9100–1: Extensions of time to make
elections.

T.D. 8742
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Parts 1, 301, 601, and
602

February 2, 1998

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) 6224970 (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.

4

The estimated annual burden per respondent is 10 hours.
Comments concerning the accuracy of
this burden estimate and suggestions for
reducing this burden should be sent to the
Internal Revenue Service, Attn: IRS
Reports Clearance Officer, T:FP, Washington, DC 20224, and to the Office of
Management and Budget, Attn: Desk
Officer for the Department of the Treasury, Office of Information and Regulatory Affairs, Washington, DC 20503.
Books or records relating to this collection of information must be retained as
long as their contents may be material in
the administration of any internal revenue
law. Generally, tax returns and tax return
information are confidential, as required
by 26 U.S.C. 6103.
Background
On June 27, 1996, temporary regulations relating to the standards the Commissioner will use to grant taxpayers
extensions of time to make certain elections were published in the Federal Register (TD 8680, 61 FR 33365 [1996–2
C.B. 194]), and cross-referenced to a notice of proposed rulemaking published in
the Federal Register on the same date
(61 FR 33408 [IA–29–96 C.B. 483]).
The regulations, §§301.9100–1T through
301.9100–3T, provide an automatic 6month 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

1998–5 I.R.B.

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

1998–5 I.R.B

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 consid-

5

eration 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

February 2, 1998

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

February 2, 1998

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.
*

*

*

*

*

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) * * *

6

*

*

(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)
(b)
(c)
(d)
(e)

Introduction.
Terms.
General standards for relief.
Exceptions.
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)
(b)
(1)
(2)
(3)
(c)
(1)
(i)
(ii)

In general.
Reasonable action and good faith.
In general.
Reasonable reliance on a qualified
tax professional.
Taxpayer deemed to have not
acted reasonably or in good faith.
Prejudice to the interests of the
Government.
In general.
Lower tax liability.
Closed years.

1998–5 I.R.B.

(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

1998–5 I.R.B

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 tax-

7

payer 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 12month 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, firstout (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

February 2, 1998

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 elec-

February 2, 1998

tion 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 profes-

8

sional 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 ac-

1998–5 I.R.B.

count 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.

1998–5 I.R.B

(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 docu-

9

ments, 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;

February 2, 1998

(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 report-

February 2, 1998

ing 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.

Authority: 26 U.S.C. 301 and 552, unless otherwise noted.

§§301.9100–1T, 301.9100–2T, and
301.9100–3T [Removed]

CFR part or section
where identified
and described

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:

10

§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 identified
and described
*

*

Current OMB
control No.

*

*

*

301.9100–1 . . . . . . . . . . . . . .1545–1488
*

*

*

*

*

(2) Removing the following entries
from the table:

*

*

Current OMB
control No.

*

*

*

§301.9100–1T . . . . . . . . . . . .1545–1488
§301.9100–2T . . . . . . . . . . . .1545–1488
§301.9100–3T . . . . . . . . . . . .1545–1488
*

*

*

*

*

1998–5 I.R.B.

Michael P. Dolan,
Deputy Commissioner of
Internal Revenue.
Approved December 10, 1997.
Donald C. Lubick,
Acting Assistant Secretary
of the Treasury.
(Filed by the Office of the Federal Register on
December 30, 1997, 8:45 a.m., and published in the
issue of the Federal Register for December 31, 1997,
62 F.R. 68167)

1998–5 I.R.B

11

February 2, 1998