§448 — Limitation on use of cash method of accounting

at 737, 751, was modified and superseded by Rev.

We find inapposite to the issue involved here the State law cases relied on by respondent.

We disagree with petitioner's overly restrictive definition of accounting services .

Sound Diagnostic proposes a narrow interpretation ofthe term "health".

Sound Diagnostic proposes a narrow interpretation ofthe term "health".

Petitioners next contend that, because Petersen's gross receipts exceed $5 million annually, section 448 requires that the companybe an accrual basis tax- payer.

Petitioners next contend that, because Petersen's gross receipts exceed $5 million annually, section 448 requires that the companybe an accrual basis tax- payer.

448 governs limitations on the use ofthe cash method ofaccounting.

We hold that it is not.

Conclusion We hold that section 1.448-1T(e)(4)(i), Temporary Income Tax Regs ., supra, is a reasonable interpretation of the statute, supported by the legislative history, by the ordinary meaning of the word "engineering" which encompasses surveying ; and by other indicia that surveying is regarded as within the fiel

First, section 448 requires only that the employees owning the stock perform services in connection with the qualifying field activities .

448 provides in pertinent part: SEC.

448 requires C corporations having average annual gross receipts of more than $5 million to switch to the accrual method of accounting for 1987 and later years. - 4 - resolved by a trial or obviated by agreement of the parties, before we can decide whether the rule of law we first expressed in Security Bank Minn. v. Commissioner, supra, and r

Petitioner points out that section 263A(b)(2)(C) requires gross receipts to be calculated for purposes ofthe small reseller exception using rules similar to those ofparagraphs (2) and (3) ofsection 448(c). Respondent disagrees because section 263A(b)(2)(C) provides that the section 448(c) rules apply for aggregation purposes only. Section 1.263A-3(b)(3), Income Tax Regs., discusses the aggregation of gross receipts for purposes ofthe small reseller exception. The aggregation concept embodied the

oss receipts of less than $5 million. See sec. 1.448-1T(f)(2)(iv), Temporary Income Tax Regs., 52 Fed. Reg. 22772 (June 16, 1987). Sec. 1.448-1T(f)(2)(iv), Temporary Income Tax Regs., supra, adjusts the calculation of gross receipts for purposes of sec. 448 specifically with respect to amounts attributable to the collection of taxes as follows: [Gjross receipts do not include amounts received by the taxpayer with respect to sales tax or other similar state and local taxes if, under the applicabl

e computed on the cash method used for tax reporting purposes. HCA's Tax Department retained the results of the computations made in arriving at cash method taxable income as shown on petitioners' Federal income tax returns and made those results 11 Sec. 448, which was added to the Code by sec. 801 of the Tax Reform Act of 1986, Pub. L. 99-514, 100 Stat. 2345, wherein Congress required certain corporations, including hospitals, to change prospectively beginning in 1987 to an overall accrual meth

e computed on the cash method used for tax reporting purposes. HCA's Tax Department retained the results of the computations made in arriving at cash method taxable income as shown on petitioners' Federal income tax returns and made those results 11 Sec. 448, which was added to the Code by sec. 801 of the Tax Reform Act of 1986, Pub. L. 99-514, 100 Stat. 2345, wherein Congress required certain corporations, including hospitals, to change prospectively beginning in 1987 to an overall accrual meth

Respondent contends, on the other hand, that the Amended Formula is taken directly from the legislative history of section 448 and is consistent with the statute's plain language, origin, and purposes.

Respondent contends, on the other hand, that the Amended Formula is taken directly from the legislative history of section 448 and is consistent with the statute's plain language, origin, and purposes.

Respondent contends, on the other hand, that the amended formula is taken directly from the legislative history of section 448 and is consistent with the statute’s plain language, origin, and purposes.

For purposes of section 448, such services consist of the performance of services in the field of accounting.

For the consolidated return filed for the year ended 1987, pursuant to section 448, petitioners not employing an overall accrual method for computing taxable income for the years ended prior to January 1, 1987, changed their method of accounting to that method.

Respondent argues that section 448 requires that the determination as to whether a corporation is a qualified personal service corporation is to be made at the entity level, not at the level of the affiliated group.

Specifically, the definition provided in Black’s Law Dictionary is undermined by the cited authorities, section 448 and section 1.448-lT(f)(2)(iv), Temporary Income Tax Regs., supra, from which the definition was purportedly derived.

In the notice of deficiency, respondent determined that petitioner is a qualified personal service corporation under section 448 subject to a flat 35-per-cent income tax rate under section 11(b)(2).

However, petitioner argues that, when drafting section 448 (d)(2), Congress intended to limit the definition of a qualified personal service corporation to a corporation where substantially all activities were performed in only one of the qualifying fields .

e highest marginal corporate tax rate set forth in sec . 11(b)(1) for the years at issue . 6 - corporations under section 11(b)(1) . A qualified personal service corporation is any corporation that satisfies a function test and an ownership test .' Sec. 448 (d) (2) (A) and (B) (i) ; sec . 1 .448-1T(e)(3), (4), and (5), Temporary Income Tax Regs ., 52 Fed . Reg . 22768 (June 16, 1987), as amended by T .D . 8329, 56 Fed . Reg . 485 (Jan . 7, 1991), and T .D . 8514, 58 Fed. Reg . 68299 (Dec . 27, 1

Section 448–Whether Petitioner Is a “Farming Business” Section 448 provides that a C corporation shall not compute its taxable income using the cash method. Sec. 448(a)(1). An exception exists for C corporations engaged in a “farming business.” Sec. 448(b)(1). “Farming business” includes “the raising, harvesting, or growing” of timber. Secs. 448(d)

Section 448 Petitioner considers itself a small business that is a “mom-and-pop” operation. Petitioner has used the cash method - 15 - of accounting since its incorporation, and its owners claim that they do not understand the accrual method of accounting. Petitioner contends, based on section 448, that it is a small business with gross receipts o

asserts that the cash method is listed in section 446(c) as a permissible method of accounting and that a taxpayer who consistently uses the cash method may continue to use that method until it fails the $5 - 6 - million gross receipts exception of section 448. Petitioner claims that Diehl has consistently used the cash method since its inception and that Diehl met the $5 million gross receipts exception for the relevant year. Second, petitioner asserts that a taxpayer meeting the $5.million gro

448 provides in pertinent part: SEC. 448. LIMITATIONS ON USE OF CASH METHOD OF ACCOUNTING. (a) General Rule. — Except as otherwise provided in this section, in the case of a— (1) C corporation, (2) partnership which has a C corporation as a partner, or (3) tax shelter, taxable income shall not be computed under the cash receipts and disburseme

33 See Respondent’s First Amendment to Answer, at 1 (“Hyatt Corporation must report the Program income in the year received or accrued under IRC § 448 and IRC § 451, and the expenses of the Program are deductible per IRC § 162 and IRC § 461.”); Respondent’s Pretrial Memorandum, at 53 (“[I]f the Court were to determine that Hyatt Corporation must recognize the Program Revenue and Program expenses beginning in the taxable year 2009 but section 481 did not apply to this change in reporting, Hy

Specifically, the definition provided in Black's Law Dictionary is undermined by the cited authorities, section 448 and section 1.448-1T(f)(2)(iv), Temporary Income Tax Regs., supra, from which the definition was purportedly derived.

ending on the last day of any month other than Decembe r wise 4Sec 448 (a) provides ,that, except as other 'provided:ln.: sec .

If section 448 forces a taxpayer off the cash method, such as a C corporation that no longer meets the gross receipts test, the mandatory adoption of another method (presumably the accrual method) is a change in method of accounting generally requiring consent . Section 448(d)(7) provides : (7) Coordination with section 481 .-- In the case of any taxp

If section 448 forces a taxpayer off the cash method, such as a C corporation that no longer meets the gross receipts test, the mandatory adoption of another method (presumably the accrual method) is a change in method of accounting generally requiring consent. Section 448(d)(7) provides: (7) Coordination with section 481 — In the case of any taxpayer

ly reflected their income, irrespective of whether inventories were required by sec. 1.471-1, Income Tax Regs.; that an audit of Mid- Del’s 1993 Form 1120 resulted in an authorization for Mid-Del (and PC, by implication) to use the cash method; that sec. 448 permitted petitioners' continued use of the cash method, also irrespective of whether merchandise inventories were required; and finally, that computational errors were made in the sec. 481 adjustment.

448 generally precludes corporations with more than $5 million in gross receipts from using the cash method of accounting. Thus, our holdings appear to have application only to small banks. - 8 - business was based on our interpretation of section 1281 as originally enacted in 1984. As originally enacted, section 1281(a) applied only to acqui

448 generally precludes corporations with more than $5 million in gross receipts from using the cash method of accounting. Thus, our holdings appear to have application only to small banks. Because of our legal conclusion, there is no need to decide whether respondent is correct in characterizing the loans in issue as generating original issue

9,960. On its partnership return for 1987, MIT 83 reported partnership taxable income of $797,976. This amount included one-fourth of the $2,437,470 deferred income that MIT 83 allocated over 4 years due to the change in accounting method imposed by section 448. To this amount was added “fee income” of $231,253. This fee income included accrued interest payable from MPC and an item of “portfolio income” in the amount of $42,645. The partnership’s taxable income further reflects a deduction of ma

9,960. On its partnership return for 1987, MIT 83 reported partnership taxable income of $797,976. This amount included one-fourth of the $2,437,470 deferred income that MIT 83 allocated over 4 years due to the change in accounting method imposed by section 448. To this amount was added “fee income” of $231,253. This fee income included accrued interest payable from MPC and an item of “portfolio income” in the amount of $42,645. The partnership’s taxable income further reflects a deduction of ma

9,960. On its partnership return for 1987, MIT 83 reported partnership taxable income of $797,976. This amount included one-fourth of the $2,437,470 deferred income that MIT 83 allocated over 4 years due to the change in accounting method imposed by section 448. To this amount was added “fee income” of $231,253. This fee income included accrued interest payable from MPC and an item of “portfolio income” in the amount of $42,645. The partnership’s taxable income further reflects a deduction of ma

ent of the 10-year spread of a sec. 481(a) adjustment resulting from certain petitioners' changing their methods of accounting from the cash or hybrid methods to an overall accrual method for the tax year ended 1987 to conform to the requirements of sec. 448. We addressed petitioners' challenge to respondent's interpretation of sec. 448(d)(7), which specifies the applicable spread period, in an Opinion issued Sept. 12, 1996. See Hospital Corp. of Am. v. Commissioner, 107 T.C. 73 (1996). - 32 - r

9,960. On its partnership return for 1987, MIT 83 reported partnership taxable income of $797,976. This amount included one-fourth of the $2,437,470 deferred income that MIT 83 allocated over 4 years due to the change in accounting method imposed by section 448. To this amount was added “fee income” of $231,253. This fee income included accrued interest payable from MPC and an item of “portfolio income” in the amount of $42,645. The partnership’s taxable income further reflects a deduction of ma

9,960. On its partnership return for 1987, MIT 83 reported partnership taxable income of $797,976. This amount included one-fourth of the $2,437,470 deferred income that MIT 83 allocated over 4 years due to the change in accounting method imposed by section 448. To this amount was added “fee income” of $231,253. This fee income included accrued interest payable from MPC and an item of “portfolio income” in the amount of $42,645. The partnership’s taxable income further reflects a deduction of ma

9,960. On its partnership return for 1987, MIT 83 reported partnership taxable income of $797,976. This amount included one-fourth of the $2,437,470 deferred income that MIT 83 allocated over 4 years due to the change in accounting method imposed by section 448. To this amount was added “fee income” of $231,253. This fee income included accrued interest payable from MPC and an item of “portfolio income” in the amount of $42,645. The partnership’s taxable income further reflects a deduction of ma

9,960. On its partnership return for 1987, MIT 83 reported partnership taxable income of $797,976. This amount included one-fourth of the $2,437,470 deferred income that MIT 83 allocated over 4 years due to the change in accounting method imposed by section 448. To this amount was added “fee income” of $231,253. This fee income included accrued interest payable from MPC and an item of “portfolio income” in the amount of $42,645. The partnership’s taxable income further reflects a deduction of ma

9,960. On its partnership return for 1987, MIT 83 reported partnership taxable income of $797,976. This amount included one-fourth of the $2,437,470 deferred income that MIT 83 allocated over 4 years due to the change in accounting method imposed by section 448. To this amount was added “fee income” of $231,253. This fee income included accrued interest payable from MPC and an item of “portfolio income” in the amount of $42,645. The partnership’s taxable income further reflects a deduction of ma

9,960. On its partnership return for 1987, MIT 83 reported partnership taxable income of $797,976. This amount included one-fourth of the $2,437,470 deferred income that MIT 83 allocated over 4 years due to the change in accounting method imposed by section 448. To this amount was added “fee income” of $231,253. This fee income included accrued interest payable from MPC and an item of “portfolio income” in the amount of $42,645. The partnership’s taxable income further reflects a deduction of ma