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Rev Proc conforms 481(a) adjustment period for “qualified foreign plan” elections

In a Revenue Procedure, IRS has modified earlier guidance on accounting method changes and provided that, in line with Code Sec. 404A(g)(5), the Code Sec. 481 adjustment period for elections of qualified foreign plan status under Code Sec. 404A is 15 years.

Background—accounting method changes. Under Code Sec. 446(e), taxpayers must obtain IRS’s consent before changing a method of accounting for federal income tax purposes. In most cases, a taxpayer that wishes to change its method of accounting must apply and secure the prior consent of IRS. For some accounting method changes, IRS provides an automatic procedure for obtaining its consent to the change. In general, a taxpayer uses Form 3115 for an accounting method change.

In any year in which taxpayer uses a different tax accounting method from the method used in the preceding year, adjustments must be made under Code Sec. 481(a) to prevent items of income or expense from being duplicated or entirely omitted. The adjustments, which can be either positive or negative (i.e., increasing or decreasing taxable income), must take into account inventories, accounts receivable, accounts payable, and any other necessary items. (Reg. § 1.481-1(b); Reg. § 1.481-1(c) )

Rev Proc 2015-13, 2015-5 IRB 419, issued by IRS in January 2015 (see Weekly Alert ¶  28  01/22/2015) and modified by Rev Proc 2015-33, 2015-24 IRB 1067 (see Weekly Alert ¶  5  06/04/2015 ), updated and revised the general procedures under Code Sec. 446(e) and Reg. § 1.446-1(e) that taxpayers use to obtain IRS’s consent to change an accounting method for federal income tax purposes. Specifically, Rev Proc 2015-13 provides the general procedures to obtain an advance (non-automatic) IRS consent and the procedures to obtain an automatic IRS consent to change an accounting method described in Rev Proc 2015-14, 2015-5 IRB 450 (or a successor to it).

A change in accounting method must be implemented in accordance with the terms and conditions provided in Rev Proc 2015-13 and either the list of Automatic Changes or the letter ruling for the change in method for non-automatic changes. (Rev Proc 2015-13, Sec. 7.01) One such condition is that a taxpayer making a change in accounting method must compute an adjustment as required by Code Sec. 481(a) and take this adjustment into account in the manner provided in Rev Proc 2015-13, Sec. 7.03. Rev Proc 2015-13, Sec. 7.03states that, except as otherwise provided, the Code Sec. 481(a) adjustment period is one tax year (year of change) when the Code Sec. 481(a) adjustment is negative and four tax years (year of change and next three tax years) when the Code Sec. 481(a) adjustment is positive. Special rules are provided for when there is a shortened or accelerated adjustment period.

Background—election under Code Sec. 404A. Under Code Sec. 404A, a “qualified reserve plan” is a qualified foreign plan with respect to which an election made by the taxpayer is in effect for the tax year. This elected status essentially allows employers to deduct certain amounts paid or accrued under a qualified foreign plan. Under Code Sec. 404A(g)(5), a Code Sec. 404A election is treated as a change in method for which an adjustment under Code Sec. 481(a) is required. The period for taking into account a change in accumulated profits, earnings and profits, or taxable income resulting from a Code Sec. 481(a)(2) adjustment is the year when the election is made and the next 14 years. (Code Sec. 404A(g)(5); Prop Reg § 1.404A-6(e))

New guidance. Rev Proc 2017-59 modifies Rev Proc 2015-13 to provide that, pursuant to Code Sec. 404A(g)(5), the Code Sec. 481(a) adjustment period with respect to a Code Sec. 404A election is 15 tax years (year of change and next 14 tax years) for a positive Code Sec. 481(a) adjustment and 15 tax years (year of change and next 14 tax years) for a negative Code Sec. 481(a) adjustment.

Effective date. Rev Proc 2017-59 is effective for Forms 3115 filed under Rev Proc 2015-13 on or after Nov. 13, 2017.

References: For accounting method changes, see FTC 2d/FIN ¶  G-2100  et seq.; United States Tax Reporter ¶  4464.21.

Rev Proc 2017-59, 2017-48 IRB