Internal Revenue Code:Sec. 481. Adjustments required by changes in method of accounting
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Contents |
Location in Internal Revenue Code
TITLE 26 - INTERNAL REVENUE CODE
Subtitle A - Income Taxes
CHAPTER 1 - NORMAL TAXES AND SURTAXES
Subchapter E - Accounting Periods and Methods of Accounting
PART III - ADJUSTMENTS
Statute
Sec. 481. Adjustments required by changes in method of accounting
(a) General rule
In computing the taxpayer's taxable income for any taxable year
(referred to in this section as the ''year of the change'') -
(1) if such computation is under a method of accounting
different from the method under which the taxpayer's taxable
income for the preceding taxable year was computed, then
(2) there shall be taken into account those adjustments which
are determined to be necessary solely by reason of the change in
order to prevent amounts from being duplicated or omitted, except
there shall not be taken into account any adjustment in respect
of any taxable year to which this section does not apply unless
the adjustment is attributable to a change in the method of
accounting initiated by the taxpayer.
(b) Limitation on tax where adjustments are substantial
(1) Three year allocation
If -
(A) the method of accounting from which the change is made
was used by the taxpayer in computing his taxable income for
the 2 taxable years preceding the year of the change, and
(B) the increase in taxable income for the year of the change
which results solely by reason of the adjustments required by
subsection (a)(2) exceeds $3,000,
then the tax under this chapter attributable to such increase in
taxable income shall not be greater than the aggregate increase
in the taxes under this chapter (or under the corresponding
provisions of prior revenue laws) which would result if one-third
of such increase in taxable income were included in taxable
income for the year of the change and one-third of such increase
were included for each of the 2 preceding taxable years.
(2) Allocation under new method of accounting
If -
(A) the increase in taxable income for the year of the change
which results solely by reason of the adjustments required by
subsection (a)(2) exceeds $3,000, and
(B) the taxpayer establishes his taxable income (under the
new method of accounting) for one or more taxable years
consecutively preceding the taxable year of the change for
which the taxpayer in computing taxable income used the method
of accounting from which the change is made,
then the tax under this chapter attributable to such increase in
taxable income shall not be greater than the net increase in the
taxes under this chapter (or under the corresponding provisions
of prior revenue laws) which would result if the adjustments
required by subsection (a)(2) were allocated to the taxable year
or years specified in subparagraph (B) to which they are properly
allocable under the new method of accounting and the balance of
the adjustments required by subsection (a)(2) was allocated to
the taxable year of the change.
(3) Special rules for computations under paragraphs (1) and (2)
For purposes of this subsection -
(A) There shall be taken into account the increase or
decrease in tax for any taxable year preceding the year of the
change to which no adjustment is allocated under paragraph (1)
or (2) but which is affected by a net operating loss (as
defined in section 172) or by a capital loss carryback or
carryover (as defined in section 1212), determined with
reference to taxable years with respect to which adjustments
under paragraph (1) or (2) are allocated.
(B) The increase or decrease in the tax for any taxable year
for which an assessment of any deficiency, or a credit or
refund of any overpayment, is prevented by any law or rule of
law, shall be determined by reference to the tax previously
determined (within the meaning of section 1314(a)) for such
year.
(C) In applying section 7807(b)(1), the provisions of chapter
1 (other than subchapter E, relating to self-employment income)
and chapter 2 of the Internal Revenue Code of 1939 shall be
treated as the corresponding provisions of the Internal Revenue
Code of 1939.
(c) Adjustments under regulations
In the case of any change described in subsection (a), the
taxpayer may, in such manner and subject to such conditions as the
Secretary may by regulations prescribe, take the adjustments
required by subsection (a)(2) into account in computing the tax
imposed by this chapter for the taxable year or years permitted
under such regulations.
Sources
(Aug. 16, 1954, ch. 736, 68A Stat. 160; Pub. L. 85-866, title I,
Sec. 29(a), (b), Sept. 2, 1958, 72 Stat. 1626-1628; Pub. L. 91-172,
title V, Sec. 512(f)(4), Dec. 30, 1969, 83 Stat. 641; Pub. L.
94-455, title XIX, Sec. 1901(a)(70), 1906(b)(13)(A), Oct. 4, 1976,
90 Stat. 1776, 1834; Pub. L. 96-471, Sec. 2(b)(3), Oct. 19, 1980,
94 Stat. 2254.)
References in Text
REFERENCES IN TEXT
The Internal Revenue Code of 1939, referred to in subsec.
(b)(3)(C), is act Feb. 10, 1939, ch. 2, 53 Stat. 1, as amended.
Prior to the enactment of the Internal Revenue Code of 1986
(formerly I.R.C. 1954), the 1939 Code was classified to former
Title 26, Internal Revenue Code. Chapters 1 and 2 of the Internal
Revenue Code of 1939 were comprised of sections 1 to 482 and 500 to
784, respectively, of former Title 26. Chapters 1 (except sections
143 and 144) and 2 were repealed by section 7851(a)(1) of this
title. For table of comparisons of the 1939 Code to the 1986 Code,
see Table I preceding section 1 of this title. See, also, section
7851(e) of this title for provision that references in the 1986
Code to a provision of the 1939 Code, not then applicable, shall be
deemed a reference to the corresponding provision of the 1986 Code,
which is then applicable.
Miscellaneous
AMENDMENTS
1980 - Subsec. (d). Pub. L. 96-471 struck out subsec. (d) which
provided that this section was not to apply to a change to which
section 453 of this title, relating to change to installment
method, applied.
1976 - Subsecs. (b)(1), (2). Pub. L. 94-455, Sec. 1901(a)(70)(B),
struck out '', other than the amount of such adjustments to which
paragraph (4) or (5) applies,'' after ''required by subsection
(a)(2)''.
Subsec. (b)(4), (5), (6). Pub. L. 94-455, Sec. 1901(a)(70)(A),
struck out par. (4) which related to special rule for pre-1954
general adjustments, par. (5) which related to special rule for
pre-1954 adjustments in case of certain decedents, and par. (6)
which related to the application of the special rule for pre-1954
general adjustments.
Subsec. (c). Pub. L. 94-455, Sec. 1906(b)(13)(A), struck out ''or
his delegate'' after ''Secretary''.
1969 - Subsec. (b)(3)(A). Pub. L. 91-172 substituted ''loss
carryback or carryover'' for ''loss carryover''.
1958 - Subsec. (a)(2). Pub. L. 85-866, Sec. 29(a)(1), inserted
''unless the adjustment is attributable to a change in the method
of accounting initiated by the taxpayer'', after ''does not
apply''.
Subsec. (b)(1). Pub. L. 85-866, Sec. 29(b)(1)-(3), inserted '',
other than the amount of such adjustments to which paragraph (4) or
(5) applies,'' after ''subsection (a)(2)'' and substituted ''the
aggregate increase in the taxes'' for ''the aggregate of the
taxes'' and ''which would result if one-third of such increase in
taxable income'' for ''which would result if one-third of such
increase''.
Subsec. (b)(2). Pub. L. 85-866, Sec. 29(b)(1), (4), inserted
''other than the amount of such adjustments to which paragraph (4)
or (5) applies,'' after ''subsection (a)(2)'', wherever appearing
and ''(or under the corresponding provisions of prior revenue
laws)'' after ''the net increase in the taxes under this Chapter''.
Subsec. (b)(3)(A). Pub. L. 85-866, Sec. 29(b)(5), substituted
''paragraph (1) or (2)'' for ''paragraph (2)'', wherever appearing.
Subsec. (b)(4) to (6). Pub. L. 85-866, Sec. 29(a)(2), added pars.
(4) to (6).
EFFECTIVE DATE OF 1980 AMENDMENT
For effective date of amendment by Pub. L. 96-471, see section
6(a)(1) of Pub. L. 96-471, set out as an Effective Date note under
section 453 of this title.
EFFECTIVE DATE OF 1976 AMENDMENT
Amendment by section 1901(a)(70) of Pub. L. 94-455 effective for
taxable years beginning after Dec. 31, 1976, see section 1901(d) of
Pub. L. 94-455, set out as a note under section 2 of this title.
EFFECTIVE DATE OF 1969 AMENDMENT
Amendment by Pub. L. 91-172 applicable with respect to net
capital losses sustained in taxable years beginning after Dec. 31,
1969, see section 512(g) of Pub. L. 91-172, set out as a note under
section 1212 of this title.
EFFECTIVE DATE OF 1958 AMENDMENT
Section 29(d) of Pub. L. 85-866, as amended by Pub. L. 99-514,
Sec. 2, Oct. 22, 1986, 100 Stat. 2095, provided that:
''(1) In general. - The amendments made by this section (amending
this section and section 381 of this title) shall apply with
respect to any change in a method of accounting where the year of
the change (within the meaning of section 481 of the Internal
Revenue Code of 1986 (formerly I.R.C. 1954)) is a taxable year
beginning after December 31, 1953, and ending after August 16,
1954.
''(2) Exception for certain agreements. - The amendments made by
subsections (a), (b)(I), and (c) (amending this section and section
381 of this title) shall not apply if before the date of the
enactment of this Act (Sept. 2, 1958) -
''(A) the taxpayer applied for a change in the method of
accounting in the manner provided by regulations prescribed by
the Secretary of the Treasury or his delegate, and
''(B) the taxpayer and the Secretary of the Treasury or his
delegate agreed to the terms and conditions for making the
change.''
CHANGES IN TREATMENT OF POLICYHOLDER DIVIDENDS BY QUALIFIED GROUP
SELF-INSURERS' FUNDS
Pub. L. 101-239, title VII, Sec. 7816(m), Dec. 19, 1989, 103
Stat. 2421, provided that: ''If, for the 1st taxable year beginning
on or after January 1, 1987, a qualified group self-insurers' fund
changes its treatment of policyholder dividends to take into
account such dividends no earlier than the date that the State
regulatory authority determines the amount of the policyholder
dividend that may be paid, then such change shall be treated as a
change in a method of accounting and no adjustment under section
481(a) of the Internal Revenue Code of 1986 shall be made with
respect to such change in method of accounting.''
TRANSITIONAL PROVISIONS FOR INCOME TAX TREATMENT OF DEALER RESERVE
INCOME
Pub. L. 86-459, May 13, 1960, 74 Stat. 124, authorized any person
who computed taxable income under the accrual method of accounting
for his most recent taxable year ending on or before June 22, 1959,
and who treated dealer reserve income for such taxable year as
accruable for a subsequent taxable year, to elect before Sept. 1,
1960, to have section 481 of this title apply to the treatment for
income tax purposes of dealer reserve income.
ELECTION TO RETURN TO FORMER METHOD OF ACCOUNTING
Section 29(e) of Pub. L. 85-866 authorized an election by certain
taxpayers, who, for any taxable years beginning after Dec. 31,
1953, and ending after Aug. 16, 1954, and before Sept. 2, 1958,
computed their taxable incomes using different accounting methods
in succeeding taxable years, to return to their first method of
accounting, where the election was made within six months after
Sept. 2, 1958. Claims for refunds of overpayments of tax resulting
from the election were to be filed within one year after the date
of the election. Such an election was to be considered a consent
to an assessment of a deficiency resulting from the election, where
the assessment is made within one year after the date of the
election.
References
SECTION REFERRED TO IN OTHER SECTIONS
This section is referred to in sections 404A, 447, 448, 458, 585,
593, 985 of this title; title 42 section 401.
