§461 — General rule for taxable year of deduction
98 citing cases
Statute Text — 26 U.S.C. §461
The amount of any deduction or credit allowed by this subtitle shall be taken for the taxable year which is the proper taxable year under the method of accounting used in computing taxable income.
In the case of the death of a taxpayer whose taxable income is computed under an accrual method of accounting, any amount accrued as a deduction or credit only by reason of the death of the taxpayer shall not be allowed in computing taxable income for the period in which falls the date of the taxpayer’s death.
If the taxable income is computed under an accrual method of accounting, then, at the election of the taxpayer, any real property tax which is related to a definite period of time shall be accrued ratably over that period.
A taxpayer may, without the consent of the Secretary, make an election under this subsection for his first taxable year in which he incurs real property taxes. Such an election shall be made not later than the time prescribed by law for filing the return for such year (including extensions thereof).
A taxpayer may, with the consent of the Secretary, make an election under this subsection at any time.
In the case of a taxpayer whose taxable income is computed under an accrual method of accounting, to the extent that the time for accruing taxes is earlier than it would be but for any action of any taxing jurisdiction taken after December 31, 1960, then, under regulations prescribed by the Secretary, such taxes shall be treated as accruing at the time they would have accrued but for such action by such taxing jurisdiction.
Under regulations prescribed by the Secretary, paragraph (1) shall be inapplicable to any item of tax to the extent that its application would (but for this paragraph) prevent all persons (including successors in interest) from ever taking such item into account.
Except as provided in regulations prescribed by the Secretary, amounts paid to, or credited to the accounts of, depositors or holders of accounts as dividends or interest on their deposits or withdrawable accounts (if such amounts paid or credited are withdrawable on demand subject only to customary notice to withdraw) by a mutual savings bank not having capital stock represented by shares, a domestic building and loan association, or a cooperative bank shall not be allowed as a deduction for the taxable year to the extent such amounts are paid or credited for periods representing more than 12 months. Any such amount not allowed as a deduction as the result of the application of the preceding sentence shall be allowed as a deduction for such other taxable year as the Secretary determines to be consistent with the preceding sentence.
If—
the taxpayer contests an asserted liability,
the taxpayer transfers money or other property to provide for the satisfaction of the asserted liability,
the contest with respect to the asserted liability exists after the time of the transfer, and
but for the fact that the asserted liability is contested, a deduction would be allowed for the taxable year of the transfer (or for an earlier taxable year) determined after application of subsection (h),
then the deduction shall be allowed for the taxable year of the transfer. This subsection shall not apply in respect of the deduction for income, war profits, and excess profits taxes imposed by the authority of any foreign country or possession of the United States.
If the taxable income of the taxpayer is computed under the cash receipts and disbursements method of accounting, interest paid by the taxpayer which, under regulations prescribed by the Secretary, is properly allocable to any period—
with respect to which the interest represents a charge for the use or forbearance of money, and
which is after the close of the taxable year in which paid,
shall be charged to capital account and shall be treated as paid in the period to which so allocable.
This subsection shall not apply to points paid in respect of any indebtedness incurred in connection with the purchase or improvement of, and secured by, the principal residence of the taxpayer to the extent that, under regulations prescribed by the Secretary, such payment of points is an established business practice in the area in which such indebtedness is incurred, and the amount of such payment does not exceed the amount generally charged in such area.
For purposes of this title, in determining whether an amount has been incurred with respect to any item during any taxable year, the all events test shall not be treated as met any earlier than when economic performance with respect to such item occurs.
Except as provided in regulations prescribed by the Secretary, the time when economic performance occurs shall be determined under the following principles:
If the liability of the taxpayer arises out of—
the providing of services to the taxpayer by another person, economic performance occurs as such person provides such services,
the providing of property to the taxpayer by another person, economic performance occurs as the person provides such property, or
the use of property by the taxpayer, economic performance occurs as the taxpayer uses such property.
If the liability of the taxpayer requires the taxpayer to provide property or services, economic performance occurs as the taxpayer provides such property or services.
If the liability of the taxpayer requires a payment to another person and—
arises under any workers compensation act, or
arises out of any tort,
economic performance occurs as the payments to such person are made. Subparagraphs (A) and (B) shall not apply to any liability described in the preceding sentence.
In the case of any other liability of the taxpayer, economic performance occurs at the time determined under regulations prescribed by the Secretary.
Notwithstanding paragraph (1) an item shall be treated as incurred during any taxable year if—
the all events test with respect to such item is met during such taxable year (determined without regard to paragraph (1)),
economic performance with respect to such item occurs within the shorter of—
a reasonable period after the close of such taxable year, or
8½ months after the close of such taxable year,
such item is recurring in nature and the taxpayer consistently treats items of such kind as incurred in the taxable year in which the requirements of clause (i) are met, and
either—
such item is not a material item, or
the accrual of such item in the taxable year in which the requirements of clause (i) are met results in a more proper match against income than accruing such item in the taxable year in which economic performance occurs.
In making a determination under subparagraph (A)(iv), the treatment of such item on financial statements shall be taken into account.
This paragraph shall not apply to any item described in subparagraph (C) of paragraph (2).
For purposes of this subsection, the all events test is met with respect to any item if all events have occurred which determine the fact of liability and the amount of such liability can be determined with reasonable accuracy.
This subsection shall not apply to any item for which a deduction is allowable under a provision of this title which specifically provides for a deduction for a reserve for estimated expenses.
In the case of a tax shelter, economic performance shall be determined without regard to paragraph (3) of subsection (h).
In the case of a tax shelter, economic performance with respect to amounts paid during the taxable year for drilling an oil or gas well shall be treated as having occurred within a taxable year if drilling of the well commences before the close of the 90th day after the close of the taxable year.
In the case of a tax shelter which is a partnership, in applying section 704(d) to a deduction or loss for any taxable year attributable to an item which is deductible by reason of subparagraph (A), the term “cash basis” shall be substituted for the term “adjusted basis”.
Under regulations prescribed by the Secretary, in the case of a tax shelter other than a partnership, the aggregate amount of the deductions allowable by reason of subparagraph (A) for any taxable year shall be limited in a manner similar to the limitation under clause (i).
For purposes of subparagraph (B), a partner’s cash basis in a partnership shall be equal to the adjusted basis of such partner’s interest in the partnership, determined without regard to—
any liability of the partnership, and
any amount borrowed by the partner with respect to such partnership which—
was arranged by the partnership or by any person who participated in the organization, sale, or management of the partnership (or any person related to such person within the meaning of section 465(b)(3)(C)), or
was secured by any asset of the partnership.
For purposes of this subsection, the term “tax shelter” means—
any enterprise (other than a C corporation) if at any time interests in such enterprise have been offered for sale in any offering required to be registered with any Federal or State agency having the authority to regulate the offering of securities for sale,
any syndicate (within the meaning of section 1256(e)(3)(B)), and
any tax shelter (as defined in section 6662(d)(2)(C)(ii)).
In the case of the trade or business of farming (as defined in section 464(e)), in determining whether an entity is a tax shelter, the definition of farming syndicate in subsection (k) shall be substituted for subparagraphs (A) and (B) of paragraph (3).
For purposes of this subsection, the term “economic performance” has the meaning given such term by subsection (h).
If a taxpayer other than a C corporation receives any applicable subsidy for any taxable year, any excess farm loss of the taxpayer for the taxable year shall not be allowed.
Any loss which is disallowed under paragraph (1) shall be treated as a deduction of the taxpayer attributable to farming businesses in the next taxable year.
For purposes of this subsection, the term “applicable subsidy” means—
any direct or counter-cyclical payment under title I of the Food, Conservation, and Energy Act of 2008, or any payment elected to be received in lieu of any such payment, or
any Commodity Credit Corporation loan.
For purposes of this subsection—
The term “excess farm loss” means the excess of—
the aggregate deductions of the taxpayer for the taxable year which are attributable to farming businesses of such taxpayer (determined without regard to whether or not such deductions are disallowed for such taxable year under paragraph (1)), over
the sum of—
the aggregate gross income or gain of such taxpayer for the taxable year which is attributable to such farming businesses, plus
the threshold amount for the taxable year.
The term “threshold amount” means, with respect to any taxable year, the greater of—
$300,000 ($150,000 in the case of married individuals filing separately), or
the excess (if any) of the aggregate amounts described in subparagraph (A)(ii)(I) for the 5-consecutive taxable year period preceding the taxable year over the aggregate amounts described in subparagraph (A)(i) for such period.
For purposes of clause (i)(II)—
notwithstanding the disregard in subparagraph (A)(i) of any disallowance under paragraph (1), in the case of any loss which is carried forward under paragraph (2) from any taxable year, such loss (or any portion thereof) shall be taken into account for the first taxable year in which a deduction for such loss (or portion) is not disallowed by reason of this subsection, and
the Secretary shall prescribe rules for the computation of the aggregate amounts described in such clause in cases where the filing status of the taxpayer is not the same for the taxable year and each of the taxable years in the period described in such clause.
The term “farming business” has the meaning given such term in section 263A(e)(4).
If, without regard to this clause, a taxpayer is engaged in a farming business with respect to any agricultural or horticultural commodity—
the term “farming business” shall include any trade or business of the taxpayer of the processing of such commodity (without regard to whether the processing is incidental to the growing, raising, or harvesting of such commodity), and
if the taxpayer is a member of a cooperative to which subchapter T applies, any trade or business of the cooperative described in subclause (I) shall be treated as the trade or business of the taxpayer.
For purposes of subparagraph (A)(i), there shall not be taken into account any deduction for any loss arising by reason of fire, storm, or other casualty, or by reason of disease or drought, involving any farming business.
In the case of a partnership or S corporation—
this subsection shall be applied at the partner or shareholder level, and
each partner’s or shareholder’s proportionate share of the items of income, gain, or deduction of the partnership or S corporation for any taxable year from farming businesses attributable to the partnership or S corporation, and of any applicable subsidies received by the partnership or S corporation during the taxable year, shall be taken into account by the partner or shareholder in applying this subsection to the taxable year of such partner or shareholder with or within which the taxable year of the partnership or S corporation ends.
The Secretary may provide rules for the application of this paragraph to any other pass-thru entity to the extent necessary to carry out the provisions of this subsection.
The Secretary may prescribe such additional reporting requirements as the Secretary determines appropriate to carry out the purposes of this subsection.
This subsection shall be applied before the application of section 469.
For purposes of subsection (i)(4), the term “farming syndicate” means—
a partnership or any other enterprise other than a corporation which is not an S corporation engaged in the trade or business of farming, if at any time interests in such partnership or enterprise have been offered for sale in any offering required to be registered with any Federal or State agency having authority to regulate the offering of securities for sale, or
a partnership or any other enterprise other than a corporation which is not an S corporation engaged in the trade or business of farming, if more than 35 percent of the losses during any period are allocable to limited partners or limited entrepreneurs.
For purposes of paragraph (1)(B), the following shall be treated as an interest which is not held by a limited partner or a limited entrepreneur:
in the case of any individual who has actively participated (for a period of not less than 5 years) in the management of any trade or business of farming, any interest in a partnership or other enterprise which is attributable to such active participation,
in the case of any individual whose principal residence is on a farm, any partnership or other enterprise engaged in the trade or business of farming such farm,
in the case of any individual who is actively participating in the management of any trade or business of farming or who is an individual who is described in subparagraph (A) or (B), any participation in the further processing of livestock which was raised in such trade or business (or in the trade or business referred to in subparagraph (A) or (B)),
in the case of an individual whose principal business activity involves active participation in the management of a trade or business of farming, any interest in any other trade or business of farming, and,
any interest held by a member of the family (or a spouse of any such member) of a grandparent of an individual described in subparagraph (A), (B), (C), or (D) if the interest in the partnership or the enterprise is attributable to the active participation of the individual described in subparagraph (A), (B), (C), or (D).
For purposes of subparagraph (A), where one farm is substituted for or added to another farm, both farms shall be treated as one farm. For purposes of subparagraph (E), the term “family” has the meaning given to such term by section 267(c)(4).
For purposes of this subsection, the term “farming” has the meaning given to such term by section 464(e).
For purposes of this subsection, the term “limited entrepreneur” means a person who—
has an interest in an enterprise other than as a limited partner, and
does not actively participate in the management of such enterprise.
In the case of a taxpayer other than a corporation—
for any taxable year beginning after
December 31, 2017
, and before
January 1, 2027
, subsection (j) (relating to limitation on excess farm losses of certain taxpayers) shall not apply, and
for any taxable year beginning after
December 31, 2020
, and before
January 1, 2027
, any excess business loss of the taxpayer for the taxable year shall not be allowed.
Any loss which is disallowed under paragraph (1) shall be treated as a net operating loss for the taxable year for purposes of determining any net operating loss carryover under section 172(b) for subsequent taxable years.
For purposes of this subsection—
The term “excess business loss” means the excess (if any) of—
the aggregate deductions of the taxpayer for the taxable year which are attributable to trades or businesses of such taxpayer (determined without regard to whether or not such deductions are disallowed for such taxable year under paragraph (1) and without regard to any deduction allowable under section 172 or 199A), over
the sum of—
the aggregate gross income or gain of such taxpayer for the taxable year which is attributable to such trades or businesses, plus
$250,000 (200 percent of such amount in the case of a joint return).
Such excess shall be determined without regard to any deductions, gross income, or gains attributable to any trade or business of performing services as an employee.
Deductions for losses from sales or exchanges of capital assets shall not be taken into account under subparagraph (A)(i).
The amount of gains from sales or exchanges of capital assets taken into account under subparagraph (A)(ii) shall not exceed the lesser of—
the capital gain net income determined by taking into account only gains and losses attributable to a trade or business, or
the capital gain net income.
In the case of any taxable year beginning after
December 31, 2025
, the $250,000 amount in subparagraph (A)(ii)(II) shall be increased by an amount equal to—
such dollar amount, multiplied by
the cost-of-living adjustment determined under section 1(f)(3) for the calendar year in which the taxable year begins, determined by substituting “2024” for “2016” in subparagraph (A)(ii) thereof.
If any amount as increased under the preceding sentence is not a multiple of $1,000, such amount shall be rounded to the nearest multiple of $1,000.
In the case of a partnership or S corporation—
this subsection shall be applied at the partner or shareholder level, and
each partner’s or shareholder’s allocable share of the items of income, gain, deduction, or loss of the partnership or S corporation for any taxable year from trades or businesses attributable to the partnership or S corporation shall be taken into account by the partner or shareholder in applying this subsection to the taxable year of such partner or shareholder with or within which the taxable year of the partnership or S corporation ends.
For purposes of this paragraph, in the case of an S corporation, an allocable share shall be the shareholder’s pro rata share of an item.
The Secretary shall prescribe such additional reporting requirements as the Secretary determines necessary to carry out the purposes of this subsection.
This subsection shall be applied after the application of section 469.
Treasury Regulations
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Treas. Reg. §1.461-0Table of contents
This section lists the captions that appear in the regulations under section 461 of the Internal Revenue Code.
(a) General rule.
(1) Taxpayer using cash receipts and disbursements method.
(2) Taxpayer using an accrual method.
(3) Effect in current taxable year of improperly accounting for a liability in a prior taxable year.
(4) Deductions attributable to certain foreign income.
(b) Special rule in case of death.
(c) Accrual of real property taxes.
(1) In general.
(2) Special rules.
(3) When election may be made.
(4) Binding effect of election.
(5) Apportionment of taxes on real property between seller and purchaser.
(6) Examples.
(d) Limitation on acceleration of accrual of taxes.
(e) Dividends or interest paid by certain savings institutions on certain deposits or withdrawable accounts.
(1) Deduction not allowable.
(2) Computation of amounts not allowed as a deduction.
(3) When amounts allowable.
(a) General rule.
(1) Taxable year of deduction.
(2) Exception.
(3) Refunds includible in gross income.
(4) Examples.
(5) Liabilities described in paragraph (g) of § 1.461-4. [Reserved]
(b) Contest of asserted liability.
(1) Asserted liability.
(2) Definition of the term “contest.”
(3) Example.
(c) Transfer to provide for the satisfaction of an asserted liability.
(1) In general.
(2) Examples.
(d) Contest exists after transfer.
(e) Deduction otherwise allowed.
(1) In general.
(2) Example.
(f) Treatment of money or property transferred to an escrowee, trustee, or court and treatment of any income attributable thereto. [Reserved]
(g) Effective dates.
(a) Introduction.
(1) In general.
(2) Overview.
(b) Exceptions to the economic performance requirement.
(c) Definitions.
(1) Liability.
(2) Payment.
(d) Liabilities arising out of the provision of services, property, or the use of property.
(1) In general.
(2) Services or property provided to the taxpayer.
(3) Use of property provided to the taxpayer.
(4) Services or property provided by the taxpayer.
(5) Liabilities that are assumed in connection with the sale of a trade or business.
(6) Rules relating to the provision of services or property to a taxpayer.
(7) Examples.
(e) Interest.
(f) Timing of deductions from notional principal contracts.
(g) Certain liabilities for which payment is economic performance.
(1) In general.
(2) Liabilities arising under a workers compensation act or out of any tort, breach of contract, or violation of law.
(3) Rebates and refunds.
(4) Awards, prizes, and jackpots.
(5) Insurance, warranty, and service contracts.
(6) Taxes.
(7) Other liabilities.
(8) Examples.
(h) Liabilities arising under the Nuclear Waste Policy Act of 1982.
(i) [Reserved]
(j) Contingent liabilities. [Reserved]
(k) Special effective dates.
(1) In general.
(2) Long-term contracts.
(3) Payment liabilities.
(l) [Reserved]
(m) Change in method of accounting required by this section.
(1) In general.
(2) Change in method of accounting for long-term contracts and payment liabilities.
(a) In general.
(b) Requirements for use of the exception.
(1) General rule.
(2) Amended returns.
(3) Liabilities that are recurring in nature.
(4) Materiality requirement.
(5) Matching requirement.
(c) Types of liabilities not eligible for treatment under the recurring item exception.
(d) Time and manner of adopting the recurring item exception.
(1) In general.
(2) Change to the recurring item exception method for the first taxable year beginning after December 31, 1991.
(3) Retroactive change to the recurring item exception method.
(e) Examples.
(a) Qualified assignments of certain personal injury liabilities under section 130.
(b) Section 468B.
(c) Payments to other funds or persons that constitute economic performance. [Reserved]
(d) Effective dates.
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Treas. Reg. §1.461-0(a)Qualified assignments of certain personal injury liabilities under section 130.
Qualified assignments of certain personal injury liabilities under section 130.
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Treas. Reg. §1.461-0(b)Section 468B.
Section 468B.
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Treas. Reg. §1.461-0(c)Payments to other funds or persons that constitute economic performance.
Payments to other funds or persons that constitute economic performance. [Reserved]
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Treas. Reg. §1.461-0(d)Effective dates.
Effective dates.
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Treas. Reg. §1.461-0(e)Examples.
Examples.
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Treas. Reg. §1.461-0(f)Timing of deductions from notional principal contracts.
Timing of deductions from notional principal contracts.
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Treas. Reg. §1.461-0(g)Certain liabilities for which payment is economic performance.
Certain liabilities for which payment is economic performance.
(1) In general.
(2) Liabilities arising under a workers compensation act or out of any tort, breach of contract, or violation of law.
(3) Rebates and refunds.
(4) Awards, prizes, and jackpots.
(5) Insurance, warranty, and service contracts.
(6) Taxes.
(7) Other liabilities.
(8) Examples.
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Treas. Reg. §1.461-0(h)Liabilities arising under the Nuclear Waste Policy Act of 1982.
Liabilities arising under the Nuclear Waste Policy Act of 1982.
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Treas. Reg. §1.461-0(i)§1.461-0(i)
[Reserved]
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Treas. Reg. §1.461-0(j)Contingent liabilities.
Contingent liabilities. [Reserved]
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Treas. Reg. §1.461-0(k)Special effective dates.
Special effective dates.
(1) In general.
(2) Long-term contracts.
(3) Payment liabilities.
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Treas. Reg. §1.461-0(l)§1.461-0(l)
[Reserved]
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Treas. Reg. §1.461-0(m)Change in method of accounting required by this section.
Change in method of accounting required by this section.
(1) In general.
(2) Change in method of accounting for long-term contracts and payment liabilities.
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Treas. Reg. §1.461-1General rule for taxable year of deduction
(a) General rule—(1) Taxpayer using cash receipts and disbursements method. Under the cash receipts and disbursements method of accounting, amounts representing allowable deductions shall, as a general rule, be taken into account for the taxable year in which paid. Further, a taxpayer using this method may also be entitled to certain deductions in the computation of taxable income which do not involve cash disbursements during the taxable year, such as the deductions for depreciation, depletion, and losses under sections 167, 611, and 165, respectively. If an expenditure results in the creation of an asset having a useful life which extends substantially beyond the close of the taxable year, such an expenditure may not be deductible, or may be deductible only in part, for the taxable year in which made. An example is an expenditure for the construction of improvements by the lessee on leased property where the estimated life of the improvements is in excess of the remaining period of the lease. In such a case, in lieu of the allowance for depreciation provided by section 167, the basis shall be amortized ratably over the remaining period of the lease. See section 178 and the regulations thereunder for rules governing the effect to be given renewal options in determining whether the useful life of the improvements exceeds the remaining term of the lease where a lessee begins improvements on leased property after July 28, 1958, other than improvements which on such date and at all times thereafter, the lessee was under a binding legal obligation to make. See section 263 and the regulations thereunder for rules relating to capital expenditures. See section 467 and the regulations thereunder for rules under which a liability arising out of the use of property pursuant to a section 467 rental agreement is taken into account.
(2) Taxpayer using an accrual method—(i) In general. Under an accrual method of accounting, a liability (as defined in § 1.446-1(c)(1)(ii)(B)) is incurred, and generally is taken into account for Federal income tax purposes, in the taxable year in which all the events have occurred that establish the fact of the liability, the amount of the liability can be determined with reasonable accuracy, and economic performance has occurred with respect to the liability. (See paragraph (a)(2)(iii)(A) of this section for examples of liabilities that may not be taken into account until a taxable year subsequent to the taxable year incurred, and see §§ 1.461-4 through 1.461-6 for rules relating to economic performance.) Applicable provisions of the Code, the Income Tax Regulations, and other guidance published by the Secretary prescribe the manner in which a liability that has been incurred is taken into account. For example, section 162 provides that the deductible liability generally is taken into account in the taxable year incurred through a deduction from gross income. As a further example, under section 263 or 263A, a liability that relates to the creation of an asset having a useful life extending substantially beyond the close of the taxable year is taken into account in the taxable year incurred through capitalization (within the meaning of § 1.263A-1(c)(3)), and may later affect the computation of taxable income through depreciation or otherwise over a period including subsequent taxable years, in accordance with applicable Internal Revenue Code sections and guidance published by the Secretary. The principles of this paragraph (a)(2) also apply in the calculation of earnings and profits and accumulated earnings and profits.
(ii) Uncertainty as to the amount of a liability. While no liability shall be taken into account before economic performance and all of the events that fix the liability have occurred, the fact that the exact amount of the liability cannot be determined does not prevent a taxpayer from taking into account that portion of the amount of the liability which can be computed with reasonable accuracy within the taxable year. For example, A renders services to B during the taxable year for which A charges $10,000. B admits a liability to A for $6,000 but contests the remainder. B may take into account only $6,000 as an expense for the taxable year in which the services were rendered.
(iii) Alternative timing rules. (A) If any provision of the Code requires a liability to be taken into account in a taxable year later than the taxable year provided in paragraph (a)(2)(i) of this section, the liability is taken into account as prescribed in that Code provision. See, for example, section 267 (transactions between related parties) and section 464 (farming syndicates).
(B) If the liability of a taxpayer is subject to section 170 (charitable contributions), section 192 (black lung benefit trusts), section 194A (employer liability trusts), section 468 (mining and solid waste disposal reclamation and closing costs), or section 468A (certain nuclear decommissioning costs), the liability is taken into account as determined under that section and not under section 461 or the regulations thereunder. For special rules relating to certain loss deductions, see sections 165(e), 165(i), and 165(l), relating to theft losses, disaster losses, and losses from certain deposits in qualified financial institutions.
(C) Section 461 and the regulations thereunder do not apply to any amount allowable under a provision of the Code as a deduction for a reserve for estimated expenses.
(D) Except as otherwise provided in any Internal Revenue regulations, revenue procedure, or revenue ruling, the economic performance requirement of section 461(h) and the regulations thereunder is satisfied to the extent that any amount is otherwise deductible under section 404 (employer contributions to a plan of deferred compensation), section 404A (certain foreign deferred compensation plans), or section 419 (welfare benefit funds). See § 1.461-4(d)(2)(iii).
(E) Except as otherwise provided by regulations or other published guidance issued by the Commissioner (See § 601.601(b)(2) of this chapter), in the case of a liability arising out of the use of property pursuant to a section 467 rental agreement, the all events test (including economic performance) is considered met in the taxable year in which the liability is to be taken into account under section 467 and the regulations thereunder.
(3) Effect in current taxable year of improperly accounting for a liability in a prior taxable year. Each year's return should be complete in itself, and taxpayers shall ascertain the facts necessary to make a correct return. The expenses, liabilities, or loss of one year generally cannot be used to reduce the income of a subsequent year. A taxpayer may not take into account in a return for a subsequent taxable year liabilities that, under the taxpayer's method of accounting, should have been taken into account in a prior taxable year. If a taxpayer ascertains that a liability should have been taken into account in a prior taxable year, the taxpayer should, if within the period of limitation, file a claim for credit or refund of any overpayment of tax arising therefrom. Similarly, if a taxpayer ascertains that a liability was improperly taken into account in a prior taxable year, the taxpayer should, if within the period of limitation, file an amended return and pay any additional tax due. However, except as provided in section 905(c) and the regulations thereunder, if a liability is properly taken into account in an amount based on a computation made with reasonable accuracy and the exact amount of the liability is subsequently determined in a later taxable year, the difference, if any, between such amounts shall be taken into account for the later taxable year.
(4) Deductions attributable to certain foreign income. In any case in which, owing to monetary, exchange, or other restrictions imposed by a foreign country, an amount otherwise constituting gross income for the taxable year from sources without the United States is not includible in gross income of the taxpayer for that year, the deductions and credits properly chargeable against the amount so restricted shall not be deductible in such year but shall be deductible proportionately in any subsequent taxable year in which such amount or portion thereof is includible in gross income. See paragraph (g) of § 1.905-1 for rules relating to credit for foreign income taxes when foreign income is subject to exchange controls.
(b) Special rule in case of death. A taxpayer's taxable year ends on the date of his death. See section 443(a)(2) and paragraph (a)(2) of § 1.443-1. In computing taxable income for such year, there shall be deducted only amounts properly deductible under the method of accounting used by the taxpayer. However, if the taxpayer used an accrual method of accounting, no deduction shall be allowed for amounts accrued only by reason of his death. For rules relating to the inclusion of items of partnership deduction, loss, or credit in the return of a decedent partner, see subchapter K, chapter 1 of the Code, and the regulations thereunder.
(c) Accrual of real property taxes—(1) In general. If the accrual of real property taxes is proper in connection with one of the methods of accounting described in section 446(c), any taxpayer using such a method of accounting may elect to accrue any real property tax, which is related to a definite period of time, ratably over that period in the manner described in this paragraph. For example, assume that such an election is made by a calendar-year taxpayer whose real property taxes, applicable to the period from July 1, 1955, to June 30, 1956, amount to $1,200. Under section 461(c), $600 of such taxes accrue in the calendar year 1955, and the balance accrues in 1956. For special rule in the case of certain contested real property taxes in respect of which the taxpayer transfers money or other property to provide for the satisfaction of the contested tax, see § 1.461-2. For general rules relating to deductions for taxes, see section 164 and the regulations thereunder.
(2) Special rules—(i) Effective date. Section 461(c) and this paragraph do not apply to any real property tax allowable as a deduction under the Internal Revenue Code of 1939 for any taxable year beginning before January 1, 1954.
(ii) If real property taxes which relate to a period prior to the taxpayer's first taxable year beginning on or after January 1, 1954, would, but for section 461(c), be deductible in such first taxable year, the portion of such taxes which applies to the prior period is deductible in such first taxable year (in addition to the amount allowable under section 461(c)(1)).
(3) When election may be made—(i) Without consent. A taxpayer may elect to accrue real property taxes ratably in accordance with section 461(c) and this paragraph without the consent of the Commissioner for his first taxable year beginning after December 31, 1953, and ending after August 16, 1954, in which the taxpayer incurs real property taxes. Such election must be made not later than the time prescribed by law for filing the return for such year (including extensions thereof). An election may be made by the taxpayer for each separate trade or business (and for nonbusiness activities, if accounted for separately). Such an election shall apply to all real property taxes of the trade, business, or nonbusiness activity for which the election is made. The election shall be made in a statement submitted with the taxpayer's return for the first taxable year to which the election is applicable. The statement should set forth:
(a) The trades or businesses, or nonbusiness activity, to which the election is to apply, and the method of accounting used therein;
(b) The period of time to which the taxes are related; and
(c) The computation of the deduction for real property taxes for the first year of the election (or a summary of such computation).
(ii) With consent. A taxpayer may elect with the consent of the Commissioner to accrue real property taxes ratably in accordance with section 461 (c) and this paragraph. A written request for permission to make such an election shall be submitted to the Commissioner of Internal Revenue, Washington, D.C. 20224, within 90 days after the beginning of the taxable year to which the election is first applicable, or before March 26, 1958, whichever date is later. The request for permission shall state:
(a) The name and address of the taxpayer;
(b) The trades or businesses, or nonbusiness activity, to which the election is to apply, and the method of accounting used therein;
(c) The taxable year to which the election first applies;
(d) The period to which the real property tax relate;
(e) The computation of the deduction for real property taxes for the first year of election (or a summary of such computation); and
(f) An adequate description of the manner in which all real property taxes were deducted in the year prior to the year of election.
(4) Binding effect of election. An election to accrue real property taxes ratably under section 461(c) is binding upon the taxpayer unless the consent of the Commissioner is obtained under section 446(e) and paragraph (e) of § 1.446-1 to change such method of deducting real property taxes. If the last day prescribed by law for filing a return for any taxable year (including extensions thereof) to which section 461(c) is applicable falls before March 25, 1958, consent is hereby given for the taxpayer to revoke an election previously made to accrue real property taxes in the manner prescribed by section 461(c). If the taxpayer revokes his election under the preceding sentence, he must, on or before March 25, 1958, notify the district director for the district in which the return was filed of such revocation. For any taxable year for which such revocation is applicable, an amended return reflecting such revocation shall be filed on or before March 25, 1958.
(5) Apportionment of taxes on real property between seller and purchaser. For apportionment of taxes on real property between seller and purchaser, see section 164(d) and the regulations thereunder.
(6) Examples. The provisions of this paragraph are illustrated by the following examples:
(d) Limitation on acceleration of accrual of taxes. (1) Section 461(d)(1) provides that, in the case of a taxpayer whose taxable income is computed under an accrual method of accounting, to the extent that the time for accruing taxes is earlier than it would be but for any action of any taxing jurisdiction taken after December 31, 1960, such taxes are to be treated as accruing at the time they would have accrued but for such action. Any such action which, but for the provisions of section 461(d) and this paragraph, would accelerate the time for accruing a tax is to be disregarded in determining the time for accruing such tax for purposes of the deduction allowed for such tax. Such action is to be disregarded not only with respect to a taxpayer (whose taxable income is computed under an accrual method of accounting) upon whom the tax is imposed at the time of the action, but also with respect to such a taxpayer upon whom the tax is imposed at any time subsequent to such action. Thus, in the case of a tax imposed on property, the acceleration of the time for accruing taxes is to be disregarded not only with respect to the taxpayer who owned the property at the time of such acceleration, but also with respect to any subsequent owner of the property whose taxable income is computed under an accrual method of accounting. Similarly, such action is to be disregarded with respect to all property subject to such tax, even if such property is acquired after the action. Whenever the time for accruing taxes is to be disregarded in accordance with the provisions of this paragraph, the taxpayer shall accrue the tax at the time (original accrual date) the tax would have accrued but for such action, and shall, in the absence of any action of the taxing jurisdiction placing the time for accruing such tax at a time subsequent to the original accrual date, continue to accrue the tax as of the original accrual date for all future taxable years.
(2) For purposes of this paragraph—
(i) The term “a taxpayer whose taxable income is computed under an accrual method of accounting” means a taxpayer who, for Federal income tax purposes, accounts for any tax which is the subject of “any action” (as defined in subdivision (iii) of this subparagraph) under an accrual method of accounting. See section 446 and the regulations thereunder. If a taxpayer uses an accrual method as his overall method of accounting, it shall be presumed that he is “a taxpayer whose taxable income is computed under an accrual method of accounting.” However, if the taxpayer establishes to the satisfaction of the district director that he has, for Federal income tax purposes, consistently accounted for such tax under the cash method of accounting, he shall be considered not to be “a taxpayer whose taxable income is computed under an accrual method of accounting.”
(ii) The time for accruing taxes shall be determined under section 461 and the regulations in this section.
(iii) The term “any action” includes the enactment or reenactment of legislation, the adoption of an ordinance, the exercise of any taxing or administrative authority, or the taking of any other step, the result of which is an acceleration of the accrual event of any tax. The term also applies to the substitution of a substantially similar tax by either the original taxing jurisdiction or a substitute jurisdiction. However, the term does not include either a judicial interpretation, or an administrative determination by the Internal Revenue Service, as to the event which fixes the accrual date for the tax.
(iv) The term “any taxing jurisdiction” includes the District of Columbia, any State, possession of the United States, city, county, municipality, school district, or other political subdivision or authority, other than the United States, which imposes, assesses, or collects a tax.
(3) The provisions of this paragraph may be illustrated by the following examples:
(4) Section 461(d)(1) shall not be applicable to the extent that it would prevent the taxpayer and all other persons, including successors in interest, from ever taking into account, for Federal income tax purposes, any tax to which that section would otherwise apply. For example, assume that State Y imposes a personal property tax on tangible personal property used in a trade or business conducted in the State during a calendar year. The tax is assessed as of February 1 of the year following the personal property tax year, and becomes a lien as of that date. As a result of administrative and judicial decisions, February 1 of the following year is recognized as the proper date on which accrual method taxpayers may accrue the personal property tax for Federal income tax purposes. In 1962 State Y, by legislative action, changes the assessment and lien dates for the personal property tax year 1962 from February 1, 1963, to December 1, 1962, and to December 1 of the personal property tax year for all subsequent years. Corporation A, an accrual method taxpayer which uses the calendar year as its taxable year, pays the tax for 1962 on December 10, 1962. On December 15, 1962, the property which was taxed is completely destroyed and, on December 20, 1962, corporation A transfers all of its remaining assets to its shareholders, and is dissolved. Since corporation A is not in existence in 1963, and therefore could not take the personal property tax into account in computing its 1963 Federal income tax if February 1, 1963, is considered to be the time for accruing the tax, and no other person could ever take such tax into account in computing his Federal income tax, such tax shall be treated as accruing as of December 1, 1962. To the extent that any person other than the taxpayer may at any time take such tax into account in computing his taxable income, the provisions of section 461(d)(1) shall apply. Thus, upon the dissolution of a corporation or the termination of a partnership between the time which, but for the provisions of section 461(d)(1) and this paragraph, would be the time for accruing any tax which was the subject of “any action” (as defined in subdivision (iii) of subparagraph (2)), and the original accrual date, the corporation or the partnership would be entitled to a deduction for only that portion, if any, of such tax with respect to which it can establish, to the satisfaction of the district director, that no other taxpayer can properly take into account in computing his taxable income. However, to the extent that the corporation or partnership cannot establish, at the time of its dissolution or termination, as the case may be, that no other taxpayer would be entitled to take such tax into account in computing his taxable income, and it is subsequently determined that no other taxpayer is entitled to take such tax into account in computing his taxable income, the corporation or partnership may file a claim for refund for the year of its dissolution or termination (subject to the limitations prescribed in section 6511) and claim as a deduction therein the portion of such tax determined to be not deductible by any other taxpayer.
(5) Section 461(d) and this paragraph shall apply to taxable years ending after December 31, 1960.
(e) Dividends or interest paid by certain savings institutions on certain deposits or withdrawable accounts—(1) Deduction not allowable—(i) In general. Except as otherwise provided in this paragraph, pursuant to section 461(e) amounts paid to, or credited to the accounts of, depositors or holders of accounts as dividends or interest on their deposits or withdrawable accounts (if such amounts paid or credited are withdrawable on demand subject only to customary notice to withdraw) by a mutual savings bank not having capital stock represented by shares, a domestic building and loan association, or a cooperative bank shall not be allowed as a deduction for the taxable year to the extent such amounts are paid or credited for periods representing more than 12 months. The provisions of section 461(e) are applicable with respect to taxable years ending after December 31, 1962. Whether amounts are paid or credited for periods representing more than 12 months depends upon all the facts and circumstances in each case. For example, payments or credits which under all the facts and circumstances are in the nature of bona fide bonus interest or dividends paid or credited because a shareholder or depositor maintained a certain balance for more than 12 months, will not be considered made for more than 12 months, providing the regular payments or credits represent a period of 12 months or less. The nonallowance of a deduction to the taxpayer under section 461(e) and this subparagraph has no effect either on the proper time for reporting dividends or interest by a depositor or holder of a withdrawable account, or on the obligation of the taxpayer to make a return setting forth, among other things, the aggregate amounts paid to a depositor or shareholder under section 6049 (relating to returns regarding payments of interest) and the regulations thereunder. With respect to a short period (a taxable year consisting of a period of less than 12 months), amounts of dividends or interest paid or credited shall not be allowed as a deduction to the extent that such amounts are paid or credited for a period representing more than the number of months in such short period. In such a case, the rules contained in section 461(e) and this paragraph apply to the short period in a manner consistent with the application of such rules to a 12-month taxable year. Subparagraph (2) of this paragraph provides rules for computing amounts not allowed in the taxable year and subparagraph (3) provides rules for determining when such amounts are allowed. See section 7701(a) (19) and (32) and the regulations thereunder for the definitions of domestic building and loan association and cooperative bank.
(ii) Exceptions. The rule of nonallowance set forth in subdivision (i) of this subparagraph is not applicable to a taxpayer in the year in which it liquidates (other than following, or as part of, an acquisition of its assets in which the acquiring corporation, pursuant to section 381(a), takes into account certain items of the taxpayer, which for purposes of this paragraph shall be referred to as an acquisition described in section 381(a)). In addition, such rule of nonallowance is not applicable to a taxpayer which pays or credits grace interest or dividends to terminating depositors or shareholders, provided the total amount of the grace interest or dividends paid or credited during the payment or crediting period (for example, a quarterly or semiannual period) does not exceed 10 percent of the total amount of the interest or dividends paid or credited during such period, computed without regard to the grace interest or dividends. For example, providing the 10 percent limitation is met, the rule of nonallowance does not apply in a case in which a calendar year taxpayer, with regular interest payment dates of January 1, April 1, July 1, and October 1, pays grace interest for the period beginning October 1 to a depositor who terminates his account on December 10.
(2) Computation of amounts not allowed as a deduction—(i) Method of computation. The amount of the dividends or interest to which subparagraph (1) of this paragraph applies, which is not allowed as a deduction, shall be computed under the rules of this subparagraph. The amount which is not allowed as a deduction is the difference between the total amount of dividends or interest paid or credited to that class of accounts with respect to which a deduction is not allowed under subparagraph (1) of this paragraph during the taxable year (or short period, if applicable) and an amount which bears the same ratio to such total as the number 12 (or number of months in the short period) bears to the number of months with respect to which such amounts of dividends or interest are paid or credited.
(ii) Examples. The provisions of subdivision (i) of this subparagraph may be illustrated by the following examples:
(3) When amounts allowable. The amount of dividends or interest not allowed as a deduction under subparagraph (1) of this paragraph shall be allowed as follows (subject to the limitation that the total of the amounts so allowed shall not exceed the amount not allowed under subparagraph (1)):
(i) Such amount shall be allowed as a deduction in a later taxable year or years subject to the limitation that, when taken together with the deductions otherwise allowable in the later taxable year or years, it does not bring the deductions for any later taxable year to a total representing a period of more than 12 months (or number of months in the short period, if applicable). However, in any event, an amount otherwise allowable under subdivision (ii) of this subparagraph shall be allowed notwithstanding the fact that it may bring the deductions allowable to a total representing a period of more than 12 months (or number of months in the short period, if applicable).
(ii) In any case in which it is established to the satisfaction of the Commissioner that the taxpayer does not intend to avoid taxes, one-tenth of such amount shall be allowed as a deduction in each of the 10 succeeding taxable years—
(a) Commencing with the taxable year for which such amount is not allowed as a deduction under subparagraph (1), or
(b) In the case of such amount not allowed for a taxable year ending before July 1, 1964, commencing with either the first or second taxable year after the taxable year for which such amount is not allowed as a deduction under subparagraph (1) if the taxpayer has not taken a deduction on his return, or filed a claim for credit or refund, in respect of such amount under (a).
Normally, if the deduction not allowed under subparagraph (1) is a result of a change, not requested by the taxpayer, in the taxpayer's annual accounting period or dividend or interest payment or crediting dates solely as a consequence of a requirement of a Federal or State regulatory authority, or if the deduction is not allowed solely as a result of the taxpayer being a party to an acquisition to which section 381(a) applies, the Commissioner will permit the allowance of the amount not allowed in the manner provided in this subdivision. Nothing set forth in this subdivision shall be construed as permitting the allowance of a credit or refund for any year which is barred by the limitations on credit or refund provided by section 6511.
(iii) If the total of the amounts, if any, allowed under subdivisions (i) and (ii) of this subparagraph before the taxable year in which the taxpayer liquidates or otherwise ceases to engage in trade or business is less than the amount not allowed under subparagraph (1), there shall be allowed a deduction in such taxable year for the difference between the amount not allowed under subparagraph (1) and the amounts allowed, if any, as deductions under subdivisions (i) and (ii) unless the circumstances under which the taxpayer ceased to do business constitute an acquisition described in section 381(a) (relating to carryovers in certain corporate acquisitions). If the circumstances under which the taxpayer ceased to do business constitute an acquisition described in section 381(a), the acquiring corporation shall succeed to and take into account the balance of the amounts not allowed on the same basis as the taxpayer, had it not ceased to engage in business.
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Treas. Reg. §1.461-1(a)§1.461-1(a)
Commencing with the taxable year for which such amount is not allowed as a deduction under subparagraph (1), or
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Treas. Reg. §1.461-1(b)In the case of such amount not allowed for a taxable year ending before July 1, 1964, commencing with either the first or second taxable year after the taxable year for which such amount is not allowed as a deduction under subparagraph (1) if the taxpayer has not taken a deduction on his return, or filed a claim for credit or refund, in respect of such amount under (a).
In the case of such amount not allowed for a taxable year ending before July 1, 1964, commencing with either the first or second taxable year after the taxable year for which such amount is not allowed as a deduction under subparagraph (1) if the taxpayer has not taken a deduction on his return, or filed a claim for credit or refund, in respect of such amount under (a).
Normally, if the deduction not allowed under subparagraph (1) is a result of a change, not requested by the taxpayer, in the taxpayer's annual accounting period or dividend or interest payment or crediting dates solely as a consequence of a requirement of a Federal or State regulatory authority, or if the deduction is not allowed solely as a result of the taxpayer being a party to an acquisition to which section 381(a) applies, the Commissioner will permit the allowance of the amount not allowed in the manner provided in this subdivision. Nothing set forth in this subdivision shall be construed as permitting the allowance of a credit or refund for any year which is barred by the limitations on credit or refund provided by section 6511.
(iii) If the total of the amounts, if any, allowed under subdivisions (i) and (ii) of this subparagraph before the taxable year in which the taxpayer liquidates or otherwise ceases to engage in trade or business is less than the amount not allowed under subparagraph (1), there shall be allowed a deduction in such taxable year for the difference between the amount not allowed under subparagraph (1) and the amounts allowed, if any, as deductions under subdivisions (i) and (ii) unless the circumstances under which the taxpayer ceased to do business constitute an acquisition described in section 381(a) (relating to carryovers in certain corporate acquisitions). If the circumstances under which the taxpayer ceased to do business constitute an acquisition described in section 381(a), the acquiring corporation shall succeed to and take into account the balance of the amounts not allowed on the same basis as the taxpayer, had it not ceased to engage in business.
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Treas. Reg. §1.461-1(c)§1.461-1(c)
The taxable year to which the election first applies;
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Treas. Reg. §1.461-1(d)Limitation on acceleration of accrual of taxes.
Limitation on acceleration of accrual of taxes. (1) Section 461(d)(1) provides that, in the case of a taxpayer whose taxable income is computed under an accrual method of accounting, to the extent that the time for accruing taxes is earlier than it would be but for any action of any taxing jurisdiction taken after December 31, 1960, such taxes are to be treated as accruing at the time they would have accrued but for such action. Any such action which, but for the provisions of section 461(d) and this paragraph, would accelerate the time for accruing a tax is to be disregarded in determining the time for accruing such tax for purposes of the deduction allowed for such tax. Such action is to be disregarded not only with respect to a taxpayer (whose taxable income is computed under an accrual method of accounting) upon whom the tax is imposed at the time of the action, but also with respect to such a taxpayer upon whom the tax is imposed at any time subsequent to such action. Thus, in the case of a tax imposed on property, the acceleration of the time for accruing taxes is to be disregarded not only with respect to the taxpayer who owned the property at the time of such acceleration, but also with respect to any subsequent owner of the property whose taxable income is computed under an accrual method of accounting. Similarly, such action is to be disregarded with respect to all property subject to such tax, even if such property is acquired after the action. Whenever the time for accruing taxes is to be disregarded in accordance with the provisions of this paragraph, the taxpayer shall accrue the tax at the time (original accrual date) the tax would have accrued but for such action, and shall, in the absence of any action of the taxing jurisdiction placing the time for accruing such tax at a time subsequent to the original accrual date, continue to accrue the tax as of the original accrual date for all future taxable years.
(2) For purposes of this paragraph—
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Treas. Reg. §1.461-1(e)Dividends or interest paid by certain savings institutions on certain deposits or withdrawable accounts—(1) Deduction not allowable—(i) In general.
Dividends or interest paid by certain savings institutions on certain deposits or withdrawable accounts—(1) Deduction not allowable—(i) In general. Except as otherwise provided in this paragraph, pursuant to section 461(e) amounts paid to, or credited to the accounts of, depositors or holders of accounts as dividends or interest on their deposits or withdrawable accounts (if such amounts paid or credited are withdrawable on demand subject only to customary notice to withdraw) by a mutual savings bank not having capital stock represented by shares, a domestic building and loan association, or a cooperative bank shall not be allowed as a deduction for the taxable year to the extent such amounts are paid or credited for periods representing more than 12 months. The provisions of section 461(e) are applicable with respect to taxable years ending after December 31, 1962. Whether amounts are paid or credited for periods representing more than 12 months depends upon all the facts and circumstances in each case. For example, payments or credits which under all the facts and circumstances are in the nature of bona fide bonus interest or dividends paid or credited because a shareholder or depositor maintained a certain balance for more than 12 months, will not be considered made for more than 12 months, providing the regular payments or credits represent a period of 12 months or less. The nonallowance of a deduction to the taxpayer under section 461(e) and this subparagraph has no effect either on the proper time for reporting dividends or interest by a depositor or holder of a withdrawable account, or on the obligation of the taxpayer to make a return setting forth, among other things, the aggregate amounts paid to a depositor or shareholder under section 6049 (relating to returns regarding payments of interest) and the regulations thereunder. With respect to a short period (a taxable year consisting of a period of less than 12 months), amounts of dividends or interest paid or credited shall not be allowed as a deduction to the extent that such amounts are paid or credited for a period representing more than the number of months in such short period. In such a case, the rules contained in section 461(e) and this paragraph apply to the short period in a manner consistent with the application of such rules to a 12-month taxable year. Subparagraph (2) of this paragraph provides rules for computing amounts not allowed in the taxable year and subparagraph (3) provides rules for determining when such amounts are allowed. See section 7701(a) (19) and (32) and the regulations thereunder for the definitions of domestic building and loan association and cooperative bank.
(ii) Exceptions. The rule of nonallowance set forth in subdivision (i) of this subparagraph is not applicable to a taxpayer in the year in which it liquidates (other than following, or as part of, an acquisition of its assets in which the acquiring corporation, pursuant to section 381(a), takes into account certain items of the taxpayer, which for purposes of this paragraph shall be referred to as an acquisition described in section 381(a)). In addition, such rule of nonallowance is not applicable to a taxpayer which pays or credits grace interest or dividends to terminating depositors or shareholders, provided the total amount of the grace interest or dividends paid or credited during the payment or crediting period (for example, a quarterly or semiannual period) does not exceed 10 percent of the total amount of the interest or dividends paid or credited during such period, computed without regard to the grace interest or dividends. For example, providing the 10 percent limitation is met, the rule of nonallowance does not apply in a case in which a calendar year taxpayer, with regular interest payment dates of January 1, April 1, July 1, and October 1, pays grace interest for the period beginning October 1 to a depositor who terminates his account on December 10.
(2) Computation of amounts not allowed as a deduction—(i) Method of computation. The amount of the dividends or interest to which subparagraph (1) of this paragraph applies, which is not allowed as a deduction, shall be computed under the rules of this subparagraph. The amount which is not allowed as a deduction is the difference between the total amount of dividends or interest paid or credited to that class of accounts with respect to which a deduction is not allowed under subparagraph (1) of this paragraph during the taxable year (or short period, if applicable) and an amount which bears the same ratio to such total as the number 12 (or number of months in the short period) bears to the number of months with respect to which such amounts of dividends or interest are paid or credited.
(ii) Examples. The provisions of subdivision (i) of this subparagraph may be illustrated by the following examples:
(3) When amounts allowable. The amount of dividends or interest not allowed as a deduction under subparagraph (1) of this paragraph shall be allowed as follows (subject to the limitation that the total of the amounts so allowed shall not exceed the amount not allowed under subparagraph (1)):
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Treas. Reg. §1.461-1(f)An adequate description of the manner in which all real property taxes were deducted in the year prior to the year of election.
An adequate description of the manner in which all real property taxes were deducted in the year prior to the year of election.
(4) Binding effect of election. An election to accrue real property taxes ratably under section 461(c) is binding upon the taxpayer unless the consent of the Commissioner is obtained under section 446(e) and paragraph (e) of § 1.446-1 to change such method of deducting real property taxes. If the last day prescribed by law for filing a return for any taxable year (including extensions thereof) to which section 461(c) is applicable falls before March 25, 1958, consent is hereby given for the taxpayer to revoke an election previously made to accrue real property taxes in the manner prescribed by section 461(c). If the taxpayer revokes his election under the preceding sentence, he must, on or before March 25, 1958, notify the district director for the district in which the return was filed of such revocation. For any taxable year for which such revocation is applicable, an amended return reflecting such revocation shall be filed on or before March 25, 1958.
(5) Apportionment of taxes on real property between seller and purchaser. For apportionment of taxes on real property between seller and purchaser, see section 164(d) and the regulations thereunder.
(6) Examples. The provisions of this paragraph are illustrated by the following examples:
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Treas. Reg. §1.461-1(i)Such amount shall be allowed as a deduction in a later taxable year or years subject to the limitation that, when taken together with the deductions otherwise allowable in the later taxable year or years, it does not bring the deductions for any later taxable year to a total representing a period of more than 12 months (or number of months in the short period, if applicable).
Such amount shall be allowed as a deduction in a later taxable year or years subject to the limitation that, when taken together with the deductions otherwise allowable in the later taxable year or years, it does not bring the deductions for any later taxable year to a total representing a period of more than 12 months (or number of months in the short period, if applicable). However, in any event, an amount otherwise allowable under subdivision (ii) of this subparagraph shall be allowed notwithstanding the fact that it may bring the deductions allowable to a total representing a period of more than 12 months (or number of months in the short period, if applicable).
(ii) In any case in which it is established to the satisfaction of the Commissioner that the taxpayer does not intend to avoid taxes, one-tenth of such amount shall be allowed as a deduction in each of the 10 succeeding taxable years—
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Treas. Reg. §1.461-2Contested liabilities
(a) General rule—(1) Taxable year of deduction. If—
(i) The taxpayer contests an asserted liability,
(ii) The taxpayer transfers money or other property to provide for the satisfaction of the asserted liability,
(iii) The contest with respect to the asserted liability exists after the time of the transfer, and
(iv) But for the fact that the asserted liability is contested, a deduction would be allowed for the taxable year of the transfer (or, in the case of an accrual method taxpayer, for an earlier taxable year for which such amount would be accruable),
then the deduction with respect to the contested amount shall be allowed for the taxable year of the transfer.
(2) Exception. Subparagraph (1) of this paragraph shall not apply in respect of the deduction for income, war profits, and excess profits taxes imposed by the authority of any foreign country or possession of the United States, including a tax paid in lieu of a tax on income, war profits, or excess profits otherwise generally imposed by any foreign country or by any possession of the United States.
(3) Refunds includible in gross income. If any portion of the contested amount which is deducted under subparagraph (1) of this paragraph for the taxable year of transfer is refunded when the contest is settled, such portion is includible in gross income except as provided in § 1.111-1, relating to recovery of certain items previously deducted or credited. Such refunded amount is includible in gross income for the taxable year of receipt, or for an earlier taxable year if properly accruable for such earlier year.
(4) Examples. The provisions of this paragraph are illustrated by the following examples:
(b) Production costs—(1) In general; asserted liability. For purposes of paragraph (a)(1) of this section, the term “asserted liability” means an item with respect to which, but for the existence of any contest in respect of such item, a deduction would be allowable under an accrual method of accounting. For example, a notice of a local real estate tax assessment and a bill received for services may represent asserted liabilities.
(2) Definition of the term “contest”. Any contest which would prevent accrual of a liability under section 461(a) shall be considered to be a contest in determining whether the taxpayer satisfies paragraph (a)(1)(i) of this section. A contest arises when there is a bona fide dispute as to the proper evaluation of the law or the facts necessary to determine the existence or correctness of the amount of an asserted liability. It is not necessary to institute suit in a court of law in order to contest an asserted liability. An affirmative act denying the validity or accuracy, or both, of an asserted liability to the person who is asserting such liability, such as including a written protest with payment of the asserted liability, is sufficient to commence a contest. Thus, lodging a protest in accordance with local law is sufficient to contest an asserted liability for taxes. It is not necessary that the affirmative act denying the validity or accuracy, or both, of an asserted liability be in writing if, upon examination of all the facts and circumstances, it can be established to the satisfaction of the Commissioner that a liability has been asserted and contested.
(3) Example. The provisions of this paragraph are illustrated by the following example:
(c) Transfer to provide for the satisfaction of an asserted liability—(1) In general. (i) A taxpayer may provide for the satisfaction of an asserted liability by transferring money or other property beyond his control to—
(A) The person who is asserting the liability;
(B) An escrowee or trustee pursuant to a written agreement (among the escrowee or trustee, the taxpayer, and the person who is asserting the liability) that the money or other property be delivered in accordance with the settlement of the contest;
(C) An escrowee or trustee pursuant to an order of the United States or of any State or political subdivision thereof or any agency or instrumentality of the foregoing, or of a court, that the money or other property be delivered in accordance with the settlement of the contest; or
(D) A court with jurisdiction over the contest.
(ii) In order for money or other property to be beyond the control of a taxpayer, the taxpayer must relinquish all authority over the money or other property.
(iii) The following are not transfers to provide for the satisfaction of an asserted liability—
(A) Purchasing a bond to guarantee payment of the asserted liability;
(B) An entry on the taxpayer's books of account;
(C) A transfer to an account that is within the control of the taxpayer;
(D) A transfer of any indebtedness of the taxpayer or of any promise by the taxpayer to provide services or property in the future; and
(E) A transfer to a person (other than the person asserting the liability) of any stock of the taxpayer or of any stock or indebtedness of a person related to the taxpayer (as defined in section 267(b)).
(2) Examples. The provisions of this paragraph are illustrated by the following examples:
(d) Contest exists after transfer. In order for a contest with respect to an asserted liability to exist after the time of transfer, such contest must be pursued subsequent to such time. Thus, the contest must have been neither settled nor abandoned at the time of the transfer. A contest may be settled by a decision, judgment, decree, or other order of any court of competent jurisdiction which has become final, or by written or oral agreement between the parties. For example, Z Corporation, which uses an accrual method of accounting, in 1964 contests a $100 asserted liability. In 1967 the contested liability is settled as being $80 which Z accrues and deducts for such year. In 1968 Z pays the $80. Section 461(f) does not apply to Z with respect to the transfer because a contest did not exist after the time of such transfer.
(e) Deduction otherwise allowed—(1) In general. The existence of the contest with respect to an asserted liability must prevent (without regard to section 461(f)) and be the only factor preventing a deduction for the taxable year of the transfer (or, in the case of an accrual method taxpayer, for an earlier taxable year for which such amount would be accruable) to provide for the satisfaction of such liability. Nothing in section 461(f) or this section shall be construed to give rise to a deduction since section 461(f) and this section relate only to the timing of deductions which are otherwise allowable under the Code.
(2) Application of economic performance rules to transfers under section 461(f). (i) A taxpayer using an accrual method of accounting is not allowed a deduction under section 461(f) in the taxable year of the transfer unless economic performance has occurred.
(ii) Economic performance occurs for liabilities requiring payment to another person arising out of any workers compensation act or any tort, or any other liability designated in § 1.461-4(g), as payments are made to the person to which the liability is owed. Except as provided in section 468B or the regulations thereunder, economic performance does not occur when a taxpayer transfers money or other property to a trust, an escrow account, or a court to provide for the satisfaction of an asserted workers compensation, tort, or other liability designated under § 1.461-4(g) that the taxpayer is contesting unless the trust, escrow account, or court is the person to which the liability is owed or the taxpayer's payment to the trust, escrow account, or court discharges the taxpayer's liability to the claimant. Rather, economic performance occurs in the taxable year the taxpayer transfers money or other property to the person that is asserting the workers compensation, tort, or other liability designated under § 1.461-4(g) that the taxpayer is contesting or in the taxable year that payment is made from a trust, an escrow account, or a court registry funded by the taxpayer to the person to which the liability is owed.
(3) Examples. The provisions of this paragraph are illustrated by the following examples:
(f) Treatment of money or property transferred to an escrowee, trustee, or court and treatment of any income attributable thereto. [Reserved]
(g) Effective dates. (1) Except as otherwise provided, this section applies to transfers of money or other property in taxable years beginning after December 31, 1953, and ending after August 16, 1954.
(2) Paragraph (c)(1)(iii)(E) of this section applies to transfers of any stock of the taxpayer or any stock or indebtedness of a person related to the taxpayer on or after November 19, 2003.
(3) Paragraph (e)(2)(i) of this section applies to transfers of money or other property after July 18, 1984.
(4) Paragraph (e)(2)(ii) and paragraph (e)(3) Example 2 of this section apply to—
(i) Transfers after July 18, 1984, of money or other property to provide for the satisfaction of an asserted workers compensation or tort liability; and
(ii) Transfers in taxable years beginning after December 31, 1991, of money or other property to provide for the satisfaction of asserted liabilities designated in § 1.461-4(g) (other than liabilities for workers compensation or tort).
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Treas. Reg. §1.461-2(a)General rule—(1) Taxable year of deduction.
General rule—(1) Taxable year of deduction. If—
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Treas. Reg. §1.461-2(b)Production costs—(1) In general; asserted liability.
Production costs—(1) In general; asserted liability. For purposes of paragraph (a)(1) of this section, the term “asserted liability” means an item with respect to which, but for the existence of any contest in respect of such item, a deduction would be allowable under an accrual method of accounting. For example, a notice of a local real estate tax assessment and a bill received for services may represent asserted liabilities.
(2) Definition of the term “contest”. Any contest which would prevent accrual of a liability under section 461(a) shall be considered to be a contest in determining whether the taxpayer satisfies paragraph (a)(1)(i) of this section. A contest arises when there is a bona fide dispute as to the proper evaluation of the law or the facts necessary to determine the existence or correctness of the amount of an asserted liability. It is not necessary to institute suit in a court of law in order to contest an asserted liability. An affirmative act denying the validity or accuracy, or both, of an asserted liability to the person who is asserting such liability, such as including a written protest with payment of the asserted liability, is sufficient to commence a contest. Thus, lodging a protest in accordance with local law is sufficient to contest an asserted liability for taxes. It is not necessary that the affirmative act denying the validity or accuracy, or both, of an asserted liability be in writing if, upon examination of all the facts and circumstances, it can be established to the satisfaction of the Commissioner that a liability has been asserted and contested.
(3) Example. The provisions of this paragraph are illustrated by the following example:
98 Citing Cases
Respondent further disputes the Spiezios’ claimed Pension Liabilities since neither the requirements of section 404(a)(1) nor the all events test found in section 461 has been satisfied.6 Respondent also argues the Spiezios were not liable under the district court’s judgment in the CBA litigation nor did they personally make any payments toward this liability.
Under section 461, in general, an accrual basis taxpayer may deduct an expense only “in the taxable year in which all events have occurred that establish the fact of the liability, the amount of the liability can be determined with reasonable accuracy, and economic performance has occurred with respect to the liability.” Treas. Reg. § 1.461-1(a)(2). Howe
Section 1.482-1T(f)(2)(iii) provides that if the restriction meets the definition of an applicable foreign legal restriction and the taxpayer has elected the deferred income method of accounting, any section 482 allocation connected with the transaction will be deferrable until the restriction is removed.
§ 1.461-1(a)(2)(i); see § 461(h). The economic performance requirement does not apply “to any item for which a deduction is allowable under a provision of this title which specifically provides for a deduction for a reserve for estimated expenses.” § 461(h)(5).
Section 461 provides general rules with respect to the proper year for taking deductions, which in turn rest in part on the taxpayer’s method of accounting under section 446.
First, respondent argues that the undisputed facts show that economic performance under section 461(h)(1) did not occur with respect to the reported costs of goods sold during the years in issue. In the alternative respondent argues that the reported costs of goods sold should be disallowed because they were derived from Bluescape’s use of a method of accounting that failed to clearly reflect income. Petitioners object. Petitioners’ motion for partial summary judgment asks us to rule that the ec
First, respondent argues that the undisputed facts show that economic performance under section 461(h)(1) did not occur with respect to the reported costs of goods sold during the years in issue. In the alternative respondent argues that the reported costs of goods sold should be disallowed because they were derived from Bluescape’s use of a method of accounting that failed to clearly reflect income. Petitioners object. Petitioners’ motion for partial summary judgment asks us to rule that the ec
Section 461 gives them the general rules too. An expense is incurred under the "all events test." Sec. 1.461-1(a)(2), Income Tax Regs.; see a_lso sec. 461(h)(1), (4). The all-events test has three requirements: (1) there must -8- be a liability; (2) the amount ofthe liability can be determined with reasonable accuracy; and (3) there has been econo
Section 461 gives them the general rules too. An expense is incurred under the "all events test." Sec. 1.461-1(a)(2), Income Tax Regs.; see a_lso sec. 461(h)(1), (4). The all-events test has three requirements: (1) there must -8- be a liability; (2) the amount ofthe liability can be determined with reasonable accuracy; and (3) there has been econo
1.446-1(c)(1)(ii)(A), Income Tax Regs. When such expenses are owed to a related cash basis taxpayer, how- ever, section 267(a)(2) provides that the payor may deduct the expenses only for the taxable year for which the amounts are includible in the payee's gross income. -10- S_e_e Tate & Lyle, Inc. v. Commissioner, 103 T.C. 656, 659
1.446-1(c)(1)(ii)(A), Income Tax Regs. When such expenses are owed to a related cash basis taxpayer, how- ever, section 267(a)(2) provides that the payor may deduct the expenses only for the taxable year for which the amounts are includible in the payee's gross income. -10- S_e_e Tate & Lyle, Inc. v. Commissioner, 103 T.C. 656, 659
Accordingly, we hold that petitioner may not use the recurring item exceptionto accrue and deduct its liabilities under the Aspen, Primavera, Surveyor's, Invensys, and Otis Elevator agreements, or its liability under the Bay Street lease, for periods after March 31, 2005, on petitioner's income tax return for TYE March
Petitioner contends it was entitled to accelerate its deductions for these expenses under the “all events” test of section 461 and/or the recurring item exception to the economic performance rules under section 461(h)(3).
We hold that s mmaryjudgment is not appropriate as to the precise amount (s_ee section V ofthe argument below), but we hold in favor ofthe IRS on the interpretation and application ofthe economic performance requirement.
“All events test” Section 461 of the Code and its accompanying regulations provide general rules that govern the timing of deductions.
if we were to agree with petitioner that the withheld payments represented transfers of funds to Flowers or Florida Marine, we would conclude that the transfers occurred in 2003 and 2004, so that petitioner would not be entitled to the claimed deduction under section 461(f) .14 More fundamentally, we disagree with petitioner's contention that the withholding of the deferred payments by Flowers and Florida Marine represented a transfer by petitioner within the meaning of section 461(f) .
the ratable' portions (except certain "points" deductible pursuant to section 461'(g)(2)).
.Martin is entitled to additional deductions for employee business expenses ; and (3) whether additional employment taxes accrued to the corporation pursuant to section 461(h)(4)1 and are deductible by the corporation during the taxable year in which the wages giving rise to the employment taxes were paid to Mr .
Section 461 provides general rules with respect to the proper year for taking deductions, which in turn rest in part on the taxpayer’s method of accounting under section 446. An accrual method taxpayer, such as KareMor and Mayor in these cases, is typically entitled to a deduction “in the taxable year in which all the events have occurred that esta
estate until additional guidance from respondent was provided. On April 9, 1992, the above regulations under section 461(h) were finalized, but the referenced language in the preamble to the proposed regulations was eliminated. See regulations under sec. 461. Also, on April 9, 1992, respondent issued Rev. Proc. 92-29, 1992-1 C.B. 748, in which a limited version of the alternative cost method was provided. Under the alternative cost method provided in Rev. Proc. 92-29, a real estate developer was
estate until additional guidance from respondent was provided. On April 9, 1992, the above regulations under section 461(h) were finalized, but the referenced language in the preamble to the proposed regulations was eliminated. See regulations under sec. 461. Also, on April 9, 1992, respondent issued Rev. Proc. 92-29, 1992-1 C.B. 748, in which a limited version of the alternative cost method was provided. Under the alternative cost method provided in Rev. Proc. 92-29, a real estate developer was
estate until additional guidance from respondent was provided. On April 9, 1992, the above regulations under section 461(h) were finalized, but the referenced language in the preamble to the proposed regulations was eliminated. See regulations under sec. 461. Also, on April 9, 1992, respondent issued Rev. Proc. 92-29, 1992-1 C.B. 748, in which a limited version of the alternative cost method was provided. Under the alternative cost method provided in Rev. Proc. 92-29, a real estate developer was
- 32 - OPINION Accrual of DRR Costs Under the All-Events Test of Section 461 For Federal income tax purposes during the years in issue, an accrual basis taxpayer generally may accrue costs not yet paid in the year in which the costs satisfy the two- pronged all-events test of the accrual method of tax accounting; i.e., in the year in which all the events occur that establish the fact of the taxpayer’s liability
The taxpayer argued that the obligation to refund was a liability satisfying the all events test of section 461 and that it was entitled to a current deduction for the full amount of the refunds it expected to make during the next 30 years.
The taxpayer argued that the obligation to refund was a liability satisfying the all events test of section 461 and that it was entitled to a current deduction for the full amount of the refunds it expected to make during the next 30 years.
Because petitioner does not owe this amount, and because it does not - 12 - anticipate that a royalty will be paid for such amount, petitioner fails to satisfy the section 461 "all events test" with respect to the reserve amount as of the end of the taxable year.
Because petitioner does not owe this amount, and because it does not - 12 - anticipate that a royalty will be paid for such amount, petitioner fails to satisfy the section 461 "all events test" with respect to the reserve amount as of the end of the taxable year.
OPINION Accrual of DRR Costs Under the All-Events Test of Section 461 For Federal income tax purposes during the years in issue, an accrual basis taxpayer generally may accrue costs not yet paid in the year in which the costs satisfy the two-pronged all-events test of the accrual method of tax accounting; i.e., in the year in which all the events occur that establish the fact of the taxpayer’s liability f
MEMORANDUM FINDINGS OF FACT AND OPINION SWIFT, Judge: The issue for decision is the proper accrual, under the all-events test of section 461, of approximately $900 million in interest expense relating to increases in - 2 - - petitioners' Federal income taxes for the years 1972 through 1978.1 Unless otherwise indicated, all section references are to the Internal Revenue Code in effect for the years in issue.
In a similar vein, we reject petitioners' attempt to remove a capital expenditure from the impact of section 461, notwithstanding the fact that that section speaks in terms of a "deduction".
ther transfers not applicable in this case], section 83(h) and this section do not apply. However, should another section require that petitioner not use its usual method of accounting, sec. 1.461-1(a)(2)(iii)(A), Income Tax Regs., provides that the sec. 461 rules will defer to that other provision. - 7 - Section 1.83-6(a)(3)(second sentence), Income Tax Regs., provides that section 83(h) and the regulations thereunder do not apply to "a transfer to an employee benefit plan described in § 1.162-
1.461-1(a)(1), Income Tax Regs. Because he has not shown that the $50,000 was paid in 1979, he is not entitled to the deduction claimed. D. Management Fees For the years 1977, 1978, and 1979 respondent disallowed management fees in the amounts of $96,396, $72,609, and $67,943, respectively. For the year 1980 respondent disallowed the
1.461-1(a)(1), Income Tax Regs. Because he has not shown that the $50,000 was paid in 1979, he is not entitled to the deduction claimed. D. Management Fees For the years 1977, 1978, and 1979 respondent disallowed management fees in the amounts of $96,396, $72,609, and $67,943, respectively. For the year 1980 respondent disallowed the
ther transfers not applicable in this case], section 83(h) and this section do not apply. However, should another section require that petitioner not use its usual method of accounting, sec. 1.461-l(a)(2)(iii)(A), Income Tax Regs., provides that the sec. 461 rules will defer to that other provision. Sec. 1.162~10(a), Income Tax Regs., provides: Certain employee benefits. (a) In General. Amounts paid or accrued by a taxpayer on account of injuries received by employees and lump-sum amounts paid o