CCA 201852019
In Chief Counsel Advice (CCA), IRS has concluded that an accrual method taxpayer, whose present method of accounting for an item of gross income is impermissible under Code Sec. 451(b)(1)(C), can obtain IRS’s automatic consent under Rev Proc 2018-60, 2018-51 IRB 1045, to change its accounting method to comply with Code Sec. 451(b)(1)(A), as amended by the Tax Cuts and Jobs Act (TCJA, P.L. 115-97, 12/22/2017).
Background. Code Sec. 451(b)(1)(C) provides that the all events test is met with respect to any item of gross income if all the events have occurred which fix the right to receive such income and the amount of such income can be determined with reasonable accuracy.
Generally effective for tax years beginning after Dec. 31, 2017, Code Sec. 451(b)(1)(A), as amended by the TCJA, provides that for an accrual method taxpayer, the all events test for any item of gross income will not be treated as met any later than when the item is taken into account as revenue for financial accounting purposes in an applicable financial statement (AFS) or such other financial statement as IRS may specify.
Code Sec. 446(e) generally provides that a taxpayer who changes its method of accounting on the basis of which it regularly computes income in keeping its books must, before computing taxable income under the new method, secure IRS’s consent. (Reg § 1.446-1(e)(3)(ii))
Rev Proc 2018-60, Sec. 3, modified the general procedures in Rev Proc 2018-31, 2018-22 IRB 637, under Code Sec. 446 and Reg § 1.446-1(e). Rev Proc 2018-60 provides automatic consent for method changes to comply with Code Sec. 451(b)(1)(A), as amended by the TCJA. The operative rule set out in Code Sec. 451(b)(1)(A) includes the requirements of the all events test under Code Sec. 451(b)(1)(C). Thus, to satisfy Code Sec. 451(b)(1)(A), a taxpayer must also comply with the all events test as defined in Code Sec. 451(b)(1)(C).
Facts. Taxpayer is an accrual method taxpayer with an applicable financial statement (AFS); it files its tax return on a calendar year basis. Taxpayer proposes to adopt a method under Rev Proc 2018-60 to comply with Code Sec. 451(b), as amended the TCJA. Taxpayer’s present accounting method is an impermissible method that does not comply with either the all events test of Code Sec. 451, as amended by the TCJA, or with Code Sec. 451, prior to being amended by the TCJA.
CCA’s conclusion. In the CCA, IRS concluded that an accrual method taxpayer that recognizes an item of income on an impermissible accounting method under Code Sec. 451(b)(1)(C)) can obtain IRS’s automatic consent under Rev Proc 2018-60, to change its method of accounting to comply with Code Sec. 451(b)(1)(A), if the taxpayer otherwise satisfies the terms and conditions set out in Rev Proc 2018-60.
References: For accounting method changes, see FTC 2d/FIN ¶G-2100 et seq.; United States Tax Reporter ¶4464.21.
