§481 — Adjustments required by changes in method of accounting

at 737, 751, was modified and superseded by Rev.

Rather, petitioner urges that section 481 is inapplicable because respondent’s adjustments to GWA’s income allegedly do not constitute a “change in method of accounting” within 47 Although 2009 is the earliest year before us, we do not agree with petitioner that “[t]he applicable statute of limitations for each of GWA’s pre-2009 tax years is closed.” The

2022-124, at *15 (“Where a taxpayer’s accounting practice permanently avoids reporting of income and accordingly distorts its lifetime income, the practice is not a method of accounting and section 481(a) is inapplicable to a change of the accounting practice.” (citing Schuster’s Express, Inc.

But they contend that section 481 is inapplicable because respondent's adjustments to their reported depreciation do not constitute a "change in method ofaccounting" within the meaning ofsections 446 and 481.

Petitioners conclude that because the entities are precluded from taking the double benefit on account ofthe duty ofconsistency, the plain language ofsection 481(a) is inapplicable to them because it seeks to prevent a double benefit.

Petitioners conclude that because the entities are precluded from taking the double benefit on account ofthe duty ofconsistency, the plain language ofsection 481(a) is inapplicable to them because it seeks to prevent a double benefit.

Petitioners conclude that because the entities are precluded from taking the double benefit on account ofthe duty ofconsistency, the plain language ofsection 481(a) is inapplicable to them because it seeks to prevent a double benefit.

But the cases petitioners cite are readily distinguishable on their facts. In Saline Sewer Co. v. Commissioner, T.C. Memo. 1992-236, the taxpayer was a utility company that excluded customer connection fees from gross income on the theory that they were contributions to capital. We found that the mischaracterization caused a permanent distortion of Saline Sewer's taxable income, and accordingly respondent's recharacterization of these receipts as taxable income did not give rise to a section 481

The issues for decision are: (1) whether JFLP is entitled to use the section 453 installment method to report the mobile home sales or the land-only sales; we hold for mobile homes sales, it is not, and for land-only sales, it is; (2) whether respondent may change JFLP from the cash receipts and disbursements method of accounting (cash method) to the accrual method; we hold respondent may not; and (3) whether respondent abused his discretion by requiring JFLP

numbers) associated with the production of finished cement were: Depreciation 2 Mining depreciation $1,302,997 $826,479 Nonmining depreciation (960,855) 2,348,437 Allocable general depreciation 453,153 380,373 Total 795,294 3,555,289 These agreed-upon depreciation expenses reflect adjustments made pursuant to section 481.

We hold that section 481 adjustments are required, and we leave the application ofsection 481 in these cases to the parties' agreement or a Rule 155 computation.

We hold that section 481 adjustments are required, and we leave the application ofsection 481 in these cases to the parties' agreement or a Rule 155 computation.

(We hold that the expenses were in the nature ofloans.) (2) Was the IRS's determination that the advanced litigation expenses should be treated as loans a change in method ofaccounting, and therefore, was a section 481 adjustment proper?

, If we hold that respondent may make an adjustment for petitioners' 2004 tax year based on cost of goods sold adjustments for closed years,:then petitioners concede that they are liable for the full amount of-the deficiency and penalty.

After concessions by the parties, the issues for decision in these consolidated cases are whether petitioner’s accrual of income from furnishing utility services was in accordance with section 451(f) and whether the amount reported by petitioner pursuant to section 481 for 1986 adequately reflects the change in accounting method under section 451(f) (the unbilled revenue issues), and whether petitioner is entitled to relief under - 3 - section 1341 for its reduction in utility rates from 1987 t

§§ 1.481-1(a)(1), 1.446-1(e)(2)(ii). A material item is any item that involves the proper time for the inclusion of the item in income or the taking of a deduction. Treas. Reg. § 1.446-1(e)(2)(ii)(a). If a change leaves a taxpayer’s lifetime taxable income constant but affects when it is recognized, the change concerns an “item that involves the proper time for the inclusion of [an] item in income or the taking of a deduction” and implicates a change in method of accounting. See id. The Court ha

After SERVED NOV 2 9 20071 - 2 - concessions,' we must determine whether petitioners are required to include section 481 adjustments as recognized built-in gain for 2000 and 2001 (the years at issue) .2 We hold that they are .

Introduction A notable feature of section 481 is that the adjustments called for by the section may be made notwithstanding that the period of limitations on assessment and collection of tax may have closed on the years (closed years) in which the events giving rise to the need for an adjustment occurred. See Superior Coach of Fla., Inc. v. Commissioner, 80 T.C. 895, 912 (1983). While section 14 Sec. 481(a) provides: SEC. 481. ADJUSTMENTS REQUIRED BY CHANGES IN METHOD OF ACCOUNTING. (a) General

ay 16, 2006. 2847-04, 2848-04. The sole issue for decision is whether a correction to the inventory method employed by S corporations owned by certain of the petitioners constitutes an accounting method change that requires an adjustment pursuant to sec. 481, I.R.C. For periods ranging from 10 to 20 years, the corporations’ accountant, in applying the link-chain, dollar-value method of valuing LIFO inventory, omitted a step required by that method. Held: R’s revaluations of the corporations’ inv

ay 16, 2006. 2847-04, 2848-04. The sole issue for decision is whether a correction to the inventory method employed by S corporations owned by certain of the petitioners constitutes an accounting method change that requires an adjustment pursuant to sec. 481, I.R.C. For periods ranging from 10 to 20 years, the corporations’ accountant, in applying the link-chain, dollar-value method of valuing LIFO inventory, omitted a step required by that method. Held: R’s revaluations of the corporations’ inv

(2) Whether recognition of the deposited amounts in the year of deposit constitutes a change in accounting method, requiring an adjustment to petitioner’s income under section 481.1 We hold a section 481 adjustment is required.

ng exhibits are incorporated herein by this reference. At the time the petition in this case was filed, petitioner's principal place of business was located in Stockton, California. IPetitioner conceded respondent's determination with respect to the sec. 481 adjustment for the taxable year ending June 30, 1995. Respondent conceded that the accuracy-related penalty under sec. 6662(a) does not apply to petitioner for the taxable year ending June 30, 1994. - 3 - Background Diesel Performance, Inc.

- 2 - differing computations filed pursuant to Rule 155.1 Respondent's computation contained a section 481 adjustment for AEI's 1992 taxable year.

her currently deduct these payments to offset income they are required to recognize with respect to the corresponding portions of the contract price or defer recognition of income until the offsetting deductions are allowable. 4. An adjustment under sec. 481, I.R.C., is sustained. Kenneth G. Kolmin, Francis J. Emmons, and Aaron E. Hoffman, for petitioners. Karen J. Goheen and Elsie Hall, for respondent. - 3 - BEGHE, Judge: Respondent determined deficiencies in petitioners' Federal income tax, ad

her currently deduct these payments to offset income they are required to recognize with respect to the corresponding portions of the contract price or defer recognition of income until the offsetting deductions are allowable. 4. An adjustment under sec. 481, I.R.C., is sustained. Kenneth G. Kolmin, Francis J. Emmons, and Aaron E. Hoffman, for petitioners. Karen J. Goheen and Elsie Hall, for respondent. - 3 - BEGHE, Judge: Respondent determined deficiencies in petitioners' Federal income tax, ad

In order to prevent items of income and expense from being included in taxable income either twice or not at all, an adjustment under section 481 is required to be made.

Section 481(a) Adjustment Section 481 mandates the imposition of an “adjustment” determined “to be necessary solely by reason of the change [in accounting method] in order to prevent amounts from being duplicated or omitted”.

(providing that a "change from an impermissible method ofcomputing depreciation" to a permissible method "results in a section 481 adjustment.")." When the change in method of accounting is involuntary (i.e., not initiated by the taxpayer), the entire amount of the adjustment is included in the taxpayer's income in the first taxable year in which taxable income is computed under a method ofaccounting that is different from the method that was used in the prior year

(providing that a "change from an impermissible method ofcomputing depreciation" to a permissible method "results in a section 481 adjustment.")." When the change in method of accounting is involuntary (i.e., not initiated by the taxpayer), the entire amount of the adjustment is included in the taxpayer's income in the first taxable year in which taxable income is computed under a method ofaccounting that is different from the method that was used in the prior year

Our conclusion is further supported by a line of cases under section 481 dealing with inventory.

Adjustments Pursuant to Section 481 Section 481(a) provides for adjustments required by changes in a taxpayer’s method of accounting.

pondent. 6 Petitioner also notes that the Commissioner had previously examined some of Diehl's earlier returns and had not changed Diehl's use of the cash method on those returns. Petitioner suggests that the Commissioner is estopped from making the sec. 481 adjustment for the subject year. We find this suggestion unavailing. The fact that the Commissioner had the opportunity to, but did not, change an improper method of accounting in an earlier year does not mean that he is estopped from making

ibution of natural gas, electricity, and related services. In 1987, in response to the enactment of sec. 451(f), I.R.C., P modified its method of accounting for tax purposes to coincide with its financial and regulatory accounting method and made a sec. 481 adjustment. Federal income tax rates were reduced in 1986 pursuant to the Tax Reform Act of 1986, Pub. L. 99-514, sec. 821, 100 Stat. 2372, creating an excess in deferred Federal income tax. P was required to adjust utility rates from 1987 th

er’s income for the taxable year 1992 would be $433,862, which would result in a current year adjustment of $385,755 (after consideration of $48,107 in income reported on the cash basis) and adjustment required to be taken into account in 1992 under sec. 481 of $1,005,077. Thus, the total increase in petitioner’s taxable income for 1992 would be $1,390,832. - 10 - OPINION We must decide whether respondent’s determination that petitioner’s use of the cash method of accounting did not clearly refl

Petitioner, however, contests the $14,000 section 481 adjustment relating thereto that respondent made.

for its taxable year ended June 30, 1994. We decide primarily whether petitioner is subject to the uniform capitalization (UNICAP) rules of section 263A. We hold it is. We also decide whether the subject year is the “year of change” for purposes of section 481. We hold it is. Unless otherwise indicated, section references are to the Internal Revenue Code applicable to the subject year, and Rule references are to the Tax Court Rules of Practice and Procedure. Background All facts were stipulated

Section 481 Petitioners contend that they are entitled to a section 481 adjustment. Respondent did not respond to petitioners’ section 481 argument in posttrial brief. We agree that section 481 applies because respondent’s adjustments sustained herein alter the timing of certain of petitioners’ deductions, contrary to petitioners’ traditional treat

The notice of deficiency changed the method of accounting and implemented a - 2 - corresponding adjustment under section 481.1 At issue is whether the year of change, the first year the new accounting method is applied, is the first open year, 1990, or the year in which the IRS initiated the audit, 1993.

Section 481 Adjustment A taxpayer who changes his or her method of accounting, whether voluntarily or involuntarily, must compute an adjustment under section 481(a). Section 481(a) provides that a taxpayer's taxable income for the year of an accounting method change is computed by taking into account those adjustments that are necessary (solely due

The submitted form describes the donated property as “Building” without any further identifying information and describes the condition of the property as “Good used.” Because of the Johnsons’ improper depreciation deductions claimed between 2006 and 2013, respondent made a section 481 method of accounting adjustment for 2015 of $1,969,976.

udgment under Rule 121.1 The issues for decision are (1) whether petitioner’s failure to secure consent under section 446(e) precludes petitioner from implementing an accounting method change with respect to base acres rented to tenant farmers for taxable years 2009 through 2014 and (2) whether petitioner must include in income for 2013 a positive section 481 adjustment for section 197 amortization deductions claimed for base acres for 2009 through 2012.

Kuiper would then send the study to his senior director who completed a final review, and finally to a CPA for a section 481 adjustment review.3 Kuiper and BDO took all these steps for Pankratz’s cost-segregation studies.

Kuiper would then send the study to his senior director who completed a final review, and finally to a CPA for a section 481 adjustment review.3 Kuiper and BDO took all these steps for Pankratz’s cost-segregation studies.

Furthermore, there is nothing on petitioner's 2004, 2005, 2006, or 2007 return that indicates that the section 481 adjustment sometimes required in connection with a section 475(f) election has been made.

d the Commissioner may challenge in a succeeding year what was condoned or agreed to for a prior year. See Rose v. Commissioner, 55 T.C. 28, 31-32 (1970). 25At trial respondent conceded that two properties sold by contract for deed and included in a sec. 481 adjustment with respect to S. I. Securities' 2008 taxable year should not be included in that adjustment as those sales were specifically included in adjustments for prior years. The amount ofthe concession will be resolved in Rule 155 compu

d the Commissioner may challenge in a succeeding year what was condoned or agreed to for a prior year. See Rose v. Commissioner, 55 T.C. 28, 31-32 (1970). 25At trial respondent conceded that two properties sold by contract for deed and included in a sec. 481 adjustment with respect to S. I. Securities' 2008 taxable year should not be included in that adjustment as those sales were specifically included in adjustments for prior years. The amount ofthe concession will be resolved in Rule 155 compu

d the Commissioner may challenge in a succeeding year what was condoned or agreed to for a prior year. See Rose v. Commissioner, 55 T.C. 28, 31-32 (1970). 25At trial respondent conceded that two properties sold by contract for deed and included in a sec. 481 adjustment with respect to S. I. Securities' 2008 taxable year should not be included in that adjustment as those sales were specifically included in adjustments for prior years. The amount ofthe concession will be resolved in Rule 155 compu

' Section 481(a) for Taxable Year 200 0 Where there is a change of accounting method, section 481(a ) requires adjustments to prevent omission s or duplications and !

' Section 481(a) for Taxable Year 200 0 Where there is a change of accounting method, section 481(a ) requires adjustments to prevent omission s or duplications and !

' Section 481(a) for Taxable Year 200 0 Where there is a change of accounting method, section 481(a ) requires adjustments to prevent omission s or duplications and !

(2) Eligible educational institution .--The term "eligible education institution" means an institution-- (A) which is described in section 481 of the Higher Education Act of 1965 (20 U .S .C .

Section 448(d)(7) provides : (7) Coordination with section 481 .-- In the case of any taxpayer required by this section to change its method of accounting for any taxable year-- (A) such change shall be treated as initiated by the taxpayer , (B) such change shall be treated as made with the consent of the Secretary, * * * -19- Nevertheless, a taxpayer forced to chang its method of accounting under

Section 448(d)(7) provides: (7) Coordination with section 481 — In the case of any taxpayer required by this section to change its method of accounting for any taxable year— (A) such change shall be treated as initiated by the taxpayer, (B) such change shall be treated as made with the consent of the Secretary, * * * Nevertheless, a taxpayer forced to change its method of accounting under section

" (5) Eligible educational institution .-- The term "eligible educational institution" means an institution-- (A) which is described in section 481 of the Higher Education Act of 1965 (20 U .S .C .

tool or equipment” and therefore is a qualified higher education expense. Notice 97-60 does not, 5 An eligible educational institution is any college, university, vocational school, or other postsecondary vocational institution that is described in sec. 481 of the Higher Education Amendments of 1986, Pub. L. 99-498, 100 Stat. 1476. Sec. 529(e)(5); Notice 97-60, sec. 4, 1997-2 C.B. 310, 317-318. Respondent does not question, and we assume for the purpose of this opinion, that Miami University is

Contentions we have not addressed are ir elevant, moot, or meritless. Decision will be entered under Rule 155.

nternal Revenue Code in effect for the years at issue, and all Rule references are to the Tax Court Rules of Practice and Procedure. 1 The parties stipulated that petitioners improperly omitted from income in 1995 and 1996 amounts attributable to a sec. 481 adjustment resulting from a prior audit. The parties further stipulated: (1) Petitioners are entitled to increased standard deductions for 1995 and 1996, and (2) respondent’s adjustments relating to a net operating loss deduction for 1995, se

write-downs claimed by ABC for its 1990 and 1992 tax years.2 In addition, respondent determined against petitioners accuracy-related penalties under section 6662(a). 2 Respondent’s notice of deficiency for 1990 issued to ABC also reflects a related sec. 481 adjustment that appears to be mechanical and not in dispute. - 8 - OPINION Bad Debt Deductions3 We review for an abuse of discretion respondent’s determinations under section 166(a)(2) to disallow deductions for debts claimed to be partially

The parties agree that the notice of deficiency contains a mathematical error in the computation of the section 481 tax amount and that the deficiency in dispute is $15,720 for the tax year ended June 30, 1996.

at 683, for purposes of a change in accounting method under section 481, respondent takes the position that any contact by respondent to schedule an - 11 - examination is sufficient to commence an examination.

For health insurance companies that for years prior to 1990 had reported unpaid losses gross of estimated recoveries, the above change in section 832(b)(5)(A) would constitute a change in method of accounting and for 1990 would give rise to section 481 adjustments to income.

Under respondent’s change in the accounting method contention, respondent would be entitled to rely on section 481 to make an adjustment(s) to prevent a distortion of taxable income.

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

For health insurance companies that for years prior to 1990 had reported unpaid losses gross of estimated recoveries, the above change in section 832(b)(5)(A) would constitute a change in method of accounting and for 1990 would give rise to section 481 adjustments to income.

Under respondent’s change in accounting method contention, respondent would be entitled to rely on section 481 to make an adjustment(s) to prevent a distortion of taxable income.

ction 1.446- 1(c)(2)(ii), Income Tax Regs., leaves no doubt that the Secretary can so compel petitioner if purchases and sales of inventory are involved, nothing in section 446(b) prohibits the Secretary from 4 The notice of deficiency shows a $0.00 sec. 481 adjustment. - 43 - so compelling petitioner if purchases and sales of inventory are not involved. Section 446(c) specifically permits a taxpayer to compute taxable income under the cash method; nevertheless, that permission is made subject t

rsed to petitioner are deductible as ordinary and necessary business expenses or whether such payments are in the nature of nondeductible advances or loans; (2) whether respondent’s adjustment to petitioner’s reporting of litigation costs triggers a section 481 adjustment; (3) whether petitioner’s 1990 and 1991 net operating losses may be carried forward to the 1993 tax year, without first being applied to years prior to 1990 and 1991; and (4) whether petitioner is liable for an accuracy-related

ards determination of the taxpayer’s gross income from business operations.” Chirelstein, Federal Income Taxation, A Law Student’s Guide to the Leading Cases and Concepts, par. 12.03, at 269 (8th ed. rev. 1999). The notice of deficiency shows a zero sec. 481 adjustment. In Abbott Labs. v. Portland Retail Druggists Association, Inc., 425 U.S. 1 (1976), each of the hospitals in question operated a pharmacy, which was a separate department of the hospital, and whose operations produced revenue in e

garding banking and commercial practices. These questions must be 4 Petitioner has conceded that it is not entitled to its reporting position that the interest in issue that was received in 1987 should be spread ratably over the 4 years 1987-90 as a sec. 481 change in accounting method adjustment under sec. 448(d)(7), as enacted by the Tax Reform Act of 1986, Pub. L. 99- 514, sec. 801(a), 100 Stat. 2347 (TRA 1986). Sec. 448 requires C corporations having average annual gross receipts of more tha

ondent's method is misleading because it fails to recognize that respondent's adjustments for the year in issue are not isolated determinations, but, rather, reflect a method change. Indeed, in the petition, petitioner alleges, alternatively, that a sec. 481 adjustment would be required in the event that respondent's adjustments are sustained. At trial, however, petitioner's counsel acknowledged that no evidence was submitted on that issue and that petitioner intended to rely on defeating respon

The Application of Section 481 Even with the transition rule described above, P&C insurance companies remained subject to adverse tax consequences due to the application of section 481.

* * * Any adjustment required by section 481 as a result of such change * * * [from the cash method to the accrual method of accounting] generally shall be taken into account over a period not to exceed four years.

must be affirmatively pleaded. Rule 39. It is untimely for petitioner to raise it in its brief, and we need not consider it. Brown v. Commissioner, 24 T.C. 256, 264 (1955); Rule 34(b)(4) and (5); Rule 41. Additionally, adjustments in accordance with sec. 481, as these would be if respondent is correct in her position, are not precluded by the statute of limitations. Knight-Ridder Newspapers, Inc. v. United States, 743 F.2d 781, 797 (11th Cir. 1984); Graff Chevrolet Co. v. Campbell, 343 F.2d 568,

500, 510 (1989); Primo Pants Co. v. Commissioner, 78 T.C. at 722.16 Thus, we have held that a change in the method of determining both beginning and ending inventory 16 Although these cases deal with a change in method of accounting for purposes of sec. 481, they are relevant to our analysis herein because sec. 481 defers to sec. 446(e) for the definition of change in method of accounting. Pacific Enters. & Subs. v. Commissioner, 101 T.C. 1, 21 (1993); Primo Pants Co. v. Commissioner, 78 T.C. 7

* * * Any adjustment required by section 481 as a result of such change * * * [from the cash method to the accrual method of accounting] generally shall be taken into account over a period not to exceed four years.

* * * Any adjustment required by section 481 as a result of such change * * * [from the cash method to the accrual method of accounting] generally shall be taken into account over a period not to exceed four years.

must be affirmatively pleaded. Rule 39. It is untimely for petitioner to raise it in its brief, and we need not consider it. Brown v. Commissioner, 24 T.C. 256, 264 (1955); Rule 34(b)(4) and (5), Rule 41. Additionally, adjustments in accordance with sec. 481, as these would be if respondent is correct in her position, are not precluded by the statute of limitations. Knight-Ridder Newspapers, Inc. v. United States, 743 F.2d 781, 797 (11th Cir. 1984); Graff Chevrolet Co. v. Campbell, 343 F.2d 568,

* * * Any adjustment required by section 481 as a result of such change * * * [from the cash method to the accrual method of accounting] generally shall be taken into account over a period not to exceed four years.

1.1374-4(h), Income Tax Regs. The gross profit of the former C corporation constituted earnings and profits to Resthaven. Respondent determined that Resthaven had made expenditures for the personal benefit of petitioner and members of his family, and, therefore, petitioners realized dividend income in 1987, 1988, and 1989 in the amou