Extensions of Time to Make Elections

DEPARTMENT OF THE TREASURY

26 CFR Parts 301 and 602

[TD 8680]

RIN 1545-AU41

Extensions of Time to Make Elections

AGENCY: Internal Revenue Service (IRS), Treasury.

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ACTION: Temporary regulations.

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SUMMARY: This document contains temporary regulations concerning

extensions of time for making certain elections under the Internal

Revenue Code (Code). The regulations provide the standards that the

Commissioner will use to grant taxpayers extensions of time for making

these elections. The text of these temporary regulations also serves as

the text of the proposed regulations set forth in the notice of

proposed rulemaking on this subject in the Proposed Rules section of

this issue of the Federal Register.

DATES: These regulations are effective June 27, 1996.

For dates of applicability, see Sec. 301.9100-1T(h) of these

regulations.

FOR FURTHER INFORMATION CONTACT: Robert A. Testoff at (202) 622-4960

(not a toll-free number).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

These regulations are being issued without prior notice and public

procedure pursuant to the Administrative Procedure Act (5 U.S.C. 553).

For this reason, the collection of information contained in these

regulations has been reviewed and, pending receipt and evaluation of

public comments, approved by the Office of Management and Budget under

control number 1545-1488. Responses to this collection of information

are required to obtain an extension of time for making an election.

An agency may not conduct or sponsor, and a person is not required

to respond to, a collection of information unless the collection of

information displays a valid control number.

For further information concerning this collection of information,

where to submit comments on the collection of information and the

accuracy of the estimated burden, and suggestions for reducing this

burden, please refer to the preamble to the cross-referencing notice of

proposed rulemaking published in the Proposed Rules section of this

issue of the Federal Register.

Books or records relating to a collection of information must be

retained as long as their contents may become material in the

administration of any internal revenue law. Generally, tax returns and

tax return information are confidential, as required by 26 U.S.C. 6103.

Background

This document contains temporary regulations amending the

Regulations on Procedure and Administration (26 CFR part 301)

concerning extensions of time for making certain elections. The

regulations provide the standards that the Commissioner will use to

grant taxpayers extensions of time for making these elections. These

standards provide relief to taxpayers who reasonably and in good faith

fail to make a timely election when granting relief will not prejudice

the interests of the government. The regulations provide a means by

which taxpayers can be in the same position they would have been in had

they made their elections in a timely fashion.

Explanation of Provisions

These temporary regulations provide the standards the Commissioner

will use to determine whether to grant an extension of time to make an

election when the deadline for making the election is prescribed by

regulation, revenue ruling, revenue procedure, notice, or announcement

published in the Federal Register or the Internal Revenue Bulletin

(regulatory election). Under section 6081(a), these regulations also

provide an automatic extension of time to make an election when the

deadline for making the election is prescribed by statute (statutory

election) and the deadline for making the election is the due date of

the return or the due date of the return including extensions. These

regulations adopt and revise the standards for relief provided in Rev.

Proc. 92-85, 1992-2 C.B. 490.

Automatic Extensions

Rev. Proc. 92-85 provides an automatic 12-month extension for

certain regulatory elections listed in Appendix A of that revenue

procedure. The temporary regulations continue the automatic 12-month

extension and update the list of eligible regulatory elections.

Rev. Proc. 92-85 also provides an automatic 6-month extension for

statutory elections when the deadline for making the election is

prescribed as the due date of the return or the due date of the return

including extensions. The temporary regulations expand the automatic 6-

month extension to include regulatory elections.

Other Extensions

Rev. Proc. 92-85 provides relief for certain regulatory elections

that do not qualify for relief under the automatic extensions. Rev.

Proc. 92-85 requires a taxpayer to demonstrate that (1) it acted

reasonably and in good faith and (2) granting relief will not prejudice

the interests of the government. The temporary regulations continue to

provide extensions for such regulatory elections upon a showing of

reasonable action and good faith and no prejudice to the interests of

the government.

The temporary regulations adopt the standards for reasonable action

and good faith in Rev. Proc. 92-85. The regulations provide that a

taxpayer is deemed to have acted reasonably and in good faith if: (1)

the taxpayer applies for relief before the failure to make the

regulatory election is discovered by the IRS; (2) the taxpayer

inadvertently failed to make the election because of intervening events

beyond its control; (3) the taxpayer failed to make the election

because after exercising reasonable diligence the taxpayer was unaware

of the necessity for the election; (4) the taxpayer reasonably relied

on written advice of the IRS; or (5) the taxpayer relied on a qualified

tax professional, including a professional employed by the taxpayer,

and the professional failed to make or advise the taxpayer to make the

election. However, a taxpayer is deemed to have not acted reasonably

and in good faith if: (1) the taxpayer is requesting relief for an

election to alter a return position for which an accuracy-related

penalty could have been imposed under section 6662; (2) the taxpayer

was fully informed of the required election and related tax

consequences and chose not to file the election; or (3) the taxpayer

uses hindsight in requesting relief.

The temporary regulations adopt the standards for prejudice to the

interests of the government in Rev. Proc. 92-85. The regulations

provide that the interests of the government are deemed to be

prejudiced if granting relief would result in a taxpayer having a lower

tax liability than the taxpayer would have had if the regulatory

election had been timely made. In addition, the interests of the

government are ordinarily deemed to be prejudiced if the tax year in

which the election should have been made or any affected tax years are

closed by the statute of limitations.

Accounting Method and Period Elections

Rev. Proc. 92-85 provides limited relief (ordinarily not to exceed

90 days from the deadline for filing Form 3115, Application for Change

in Accounting Method) for requests to change an accounting method

subject to the procedure described in Sec. 1.446-1(e)(3)(i) (requiring

the advance written consent of the Commissioner). The temporary

regulations continue this limited relief. Rev. Proc. 92-85 provides an

automatic 12-month extension for the election to use the last-in,

first-out (LIFO) inventory method under section 472 and also provides

relief for the section 472

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election beyond the automatic 12-month extension. Rev. Proc. 92-85 is

otherwise inapplicable to accounting method regulatory elections,

except for three specific elections listed in Appendix B of that

revenue procedure.

The temporary regulations provide relief for all accounting method

regulatory elections. For example, relief will now be available for

elections under sections 197 (amortization of goodwill and certain

other intangibles) and 468A (special rules for nuclear decommissioning

costs).

The temporary regulations provide additional rules regarding what

constitutes prejudice to the interests of the government for accounting

method regulatory elections. The temporary regulations provide that the

interests of the government are deemed to be prejudiced except in

unusual and compelling circumstances if: (1) the election requires an

adjustment under section 481(a); (2) the taxpayer is under examination,

requests relief to change from an impermissible method of accounting,

and granting relief will provide the taxpayer a more favorable method

of accounting or more favorable terms and conditions than the taxpayer

would receive if the change is made as part of the examination; or (3)

the election provides a more favorable method of accounting or more

favorable terms and conditions if the election is made by a certain

date or taxable year.

Rev. Proc. 92-85 provides an automatic 12-month extension for

elections to use other than the required taxable year under section

444. Rev. Proc. 92-85 also provides limited relief (ordinarily not to

exceed 90 days from the deadline for filing Form 1128, Application to

Adopt, Change, or Retain a Tax Year) for accounting period regulatory

elections subject to Rev. Proc. 87-32, 1987-2 C.B. 396. Rev. Proc. 92-

85 is otherwise inapplicable to accounting period regulatory elections.

The temporary regulations extend the limited relief for elections

subject to Rev. Proc. 87-32 to all other accounting period regulatory

elections except for the section 444 election, and provide relief for

the section 444 election beyond the automatic 12-month extension.

Effect on Other Documents

Rev. Proc. 92-85, 1992-2 C.B. 490, as modified and clarified by

Rev. Proc. 93-28, 1993-2 C.B. 344, is obsolete as of June 27, 1996.

Rev. Proc. 92-20, 1992-1 C.B. 685, is modified as of June 27, 1996

to the extent that the provisions of this regulation apply to

applications for relief with respect to requests to change an

accounting method subject to the procedures of Rev. Proc. 92-20.

Rev. Proc. 87-32, 1987-2 C.B. 396, is modified as of June 27, 1996

to the extent that the provisions of this regulation apply to

applications for relief with respect to requests to change an

accounting period subject to the procedures of Rev. Proc. 87-32.

Special Analyses

It has been determined that this Treasury decision is not a

significant regulatory action as defined in EO 12866. Therefore, a

regulatory assessment is not required. It has also been determined that

section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5)

and the Regulatory Flexibility Act (5 U.S.C. chapter 6) do not apply to

these regulations, and, therefore, a Regulatory Flexibility Analysis is

not required. Pursuant to section 7805(f) of the Internal Revenue Code,

these temporary regulations will be submitted to the Chief Counsel for

Advocacy of the Small Business Administration for comment on their

impact on small businesses.

Drafting Information

The principal author of these regulations is Robert A. Testoff of

the Office of Assistant Chief Counsel (Income Tax and Accounting).

However, other personnel from the IRS and Treasury Department

participated in their development.

List of Subjects

26 CFR Part 301

Employment taxes, Estate taxes, Excise taxes, Gift taxes, Income

taxes, Penalties, Reporting and recordkeeping requirements.

26 CFR Part 602

Reporting and recordkeeping requirements.

Adoption of Amendments to the Regulations

Accordingly, 26 CFR parts 301 and 602 are amended as follows:

PART 301--PROCEDURE AND ADMINISTRATION

Paragraph 1. The authority citation for part 301 is amended by

adding entries in numerical order to read as follows:

Authority: 26 U.S.C. 7805 * * *

Section 301.9100-1T also issued under 26 U.S.C. 6081;

Section 301.9100-2T also issued under 26 U.S.C. 6081;

Section 301.9100-3T also issued under 26 U.S.C. 6081; * * *

Par. 2. Sections 301.9100-1T through 301.9100-3T are added to read

as follows:

Sec. 301.9100-1T Extensions of time to make elections (temporary).

(a)-(c) [Reserved].

(d) Introduction. The regulations under this section and

Secs. 301.9100-2T through 301.9100-3T provide the standards the

Commissioner will use to determine whether to grant an extension of

time to make a regulatory election. The regulations under this section

and Secs. 301.9100-2T through 301.9100-3T also provide an automatic

extension of time to make certain statutory elections. An extension of

time is available for elections that a taxpayer is otherwise eligible

to make and the granting of an extension of time is not a determination

that the taxpayer is otherwise eligible to make the election. Section

301.9100-2T provides automatic extensions of time for making regulatory

and statutory elections when the deadline for making the election is

the due date of the return or the due date of the return including

extensions. Section 301.9100-3T provides extensions of time for making

regulatory elections that do not meet the requirements of

Sec. 301.9100-2T.

(e) Terms. The following terms have the meanings provided below:

Election includes an application for relief in respect of tax; a

request to adopt, change, or retain an accounting method or accounting

period; but does not include an application for an extension of time

for filing a return under section 6081.

Regulatory election means an election whose deadline is prescribed

by a regulation published in the Federal Register, or a revenue ruling,

revenue procedure, notice, or announcement published in the Internal

Revenue Bulletin.

Statutory election means an election whose deadline is prescribed

by statute.

Taxpayer means any person within the meaning of section 7701(a)(1).

(f) General standards for relief. The Commissioner in the

Commissioner's discretion may grant a reasonable extension of time to

make a regulatory election, or a statutory election (but no more than 6

months except in the case of a taxpayer who is abroad), under all

subtitles of the Internal Revenue Code except subtitles E, G, H, and I,

provided the taxpayer demonstrates to the satisfaction of the

Commissioner that----

(1) The taxpayer acted reasonably and in good faith; and

(2) Granting relief will not prejudice the interests of the

government.

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(g) Exceptions. Notwithstanding the provisions of paragraph (f) of

this section, an extension of time will not be granted--

(1) For elections under section 4980A(f)(5);

(2) For elections required to be made prior to November 20, 1970,

in the case of an election----

(i) Required to be made in or with the taxpayer's original income

tax return;

(ii) Required to be exercised by filing a claim for credit or

refund, unless the election is required to be exercised on or before a

date that precedes the date of expiration of the period of limitations

provided in section 6511;

(iii) Required to be filed in a petition to the Tax Court;

(iv) To change a previous election;

(v) To change an accounting method as described in Secs. 1.77-1 of

this chapter and 1.446-1 of this chapter;

(vi) To change an accounting period as described in Sec. 1.442-1 of

this chapter; or

(vii) To change the method of treating bad debts as described in

Sec. 1.166-1 of this chapter; or

(3) For elections that are expressly excepted from relief or where

alternative relief is provided by a statute, a regulation published in

the Federal Register, or a revenue ruling, revenue procedure, notice,

or announcement published in the Internal Revenue Bulletin.

(h) Effective dates. In general, this section and Secs. 301.9100-2T

through 301.9100-3T are effective for all requests for relief being

considered by the IRS on June 27, 1996 and for all requests for relief

submitted on or after June 27, 1996. However, the automatic 12-month

extension and the automatic 6-month extension provided in

Sec. 301.9100-2T are effective for elections whose due dates are on or

after June 27, 1996.

Sec. 301.9100-2T Automatic extensions (temporary).

(a) Automatic 12-month extension--(1) In general. An automatic

extension of 12 months from the original deadline for making a

regulatory election is granted to make elections described in paragraph

(a)(2) of this section provided the taxpayer takes corrective action as

defined in paragraph (c) of this section within that 12-month extension

period.

(2) Elections eligible for automatic 12-month extension. The

following regulatory elections are eligible for the automatic 12-month

extension described in paragraph (a)(1) of this section----

(i) The election to use other than the required taxable year under

section 444;

(ii) The election to use the last-in, first-out (LIFO) inventory

method under section 472;

(iii) The 15-month rule for filing an exemption application for a

section 501(c)(9), 501(c)(17), or 501(c)(20) organization under section

505;

(iv) The 15-month rule for filing an exemption application for a

section 501(c)(3) organization under section 508;

(v) The election to be treated as a homeowners association under

section 528;

(vi) The election to adjust basis on partnership transfers and

distributions under section 754;

(vii) The estate tax election to specially value qualified real

property (where the IRS has not yet begun an examination of the filed

return) under section 2032A(d)(1);

(viii) The chapter 14 gift tax election to treat a qualified

payment right as other than a qualified payment under section

2701(c)(3)(C)(i); and

(ix) The chapter 14 gift tax election to treat any distribution

right as a qualified payment under section 2701(c)(3)(C)(ii).

(b) Automatic 6-month extension. An automatic extension of 6 months

from the due date of a return excluding extensions is granted to make

regulatory or statutory elections whose deadlines are prescribed as the

due date of the return or the due date of the return including

extensions in the case of a taxpayer that timely filed its return for

the year the election should have been made, provided the taxpayer

takes corrective action as defined in paragraph (c) of this section

within that 6-month extension period. This extension does not apply,

however, to regulatory or statutory elections that must be made by the

due date of the return excluding extensions.

(c) Corrective action. For purposes of this section, corrective

action means filing an original or an amended return for the year the

regulatory or statutory election should have been made and attaching

the appropriate form or statement for making the election. For those

elections not required to be filed with a return, corrective action

means taking the steps required to file the election in accordance with

the statute, the regulation published in the Federal Register, or the

revenue ruling, revenue procedure, notice, or announcement published in

the Internal Revenue Bulletin. Taxpayers who make an election under an

automatic extension (and all taxpayers whose tax liability would be

affected by the election) must report their income in a manner that is

consistent with the election and comply with all other requirements for

making the election for the year the election should have been made and

for all affected years; otherwise, the Service may invalidate the

election.

(d) Procedural requirements. Any return, statement of election, or

other form of filing that must be made to obtain an automatic extension

must provide the following statement at the top of the document:

``FILED PURSUANT TO Sec. 301.9100-2T''. Any filing made to obtain an

automatic extension must be sent to the same address that the filing to

make the election would have been sent had the filing been timely made.

No request for a letter ruling is required to obtain an automatic

extension. Accordingly, user fees do not apply to taxpayers taking

corrective action to obtain an automatic extension.

(e) The following example illustrates the rules of this section:

Example. Taxpayer A fails to make a certain election when filing

A's 1996 income tax return on March 17, 1997, the due date of the

return. This election does not affect the tax liability of any other

taxpayer. The applicable regulation requires that the election be

made by attaching the appropriate form to a timely filed return

including extensions. In accordance with paragraphs (b) and (c) of

this section, A may make the regulatory election by filing an

amended return with the appropriate form by September 15, 1997 (6

months from the March 17, 1997, due date).

Sec. 301.9100-3T Other extensions (temporary).

(a) In general. Requests for extensions of time for regulatory

elections that do not meet the requirements of Sec. 301.9100-2T must be

made under the rules of this section. Requests for relief subject to

this section will be granted when the taxpayer provides the evidence

(including affidavits described in paragraph (e) of this section) to

establish that the taxpayer acted reasonably and in good faith, and

granting relief will not prejudice the interests of the government.

(b) Reasonable action and good faith--(1) In general. Except as

provided in paragraphs (b)(3)(i) through (iii) of this section, a

taxpayer is deemed to have acted reasonably and in good faith if the

taxpayer--

(i) Requests relief under this section before the failure to make

the regulatory election is discovered by the IRS;

(ii) Inadvertently failed to make the election because of

intervening events beyond the taxpayer's control;

(iii) Failed to make the election because, after exercising

reasonable diligence (taking into account the taxpayer's experience and

the complexity of the return or issue), the

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taxpayer was unaware of the necessity for the election;

(iv) Reasonably relied on the written advice of the IRS; or

(v) Reasonably relied on a qualified tax professional, including a

tax professional employed by the taxpayer, and the tax professional

failed to make, or advise the taxpayer to make, the election.

(2) Reasonable reliance on a qualified tax professional. For

purposes of this paragraph (b), a taxpayer will not be considered to

have reasonably relied on a qualified tax professional if the taxpayer

knew or should have known that the professional was not--

(i) Competent to render advice on the regulatory election; or

(ii) Aware of all relevant facts.

(3) Taxpayer deemed to have not acted reasonably or in good faith.

For purposes of this paragraph (b), a taxpayer is deemed to have not

acted reasonably and in good faith if the taxpayer--

(i) Seeks to alter a return position for which an accuracy-related

penalty has been or could be imposed under section 6662 at the time the

taxpayer requests relief (taking into account any qualified amended

return filed within the meaning of Sec. 1.6664-2(c)(3)) of this chapter

and the new position requires or permits a regulatory election for

which relief is requested;

(ii) Was fully informed of the required election and related tax

consequences, but chose not to file the election; or

(iii) Uses hindsight in requesting relief. If specific facts have

changed since the original deadline for making the election that make

the election advantageous to a taxpayer, the IRS will not ordinarily

grant relief. In such a case, the IRS will grant relief only when the

taxpayer provides strong proof that the taxpayer's decision to seek

relief did not involve hindsight.

(c) Prejudice to the interests of the government--(1) In general--

(i) Lower tax liability. The interests of the government are prejudiced

if granting relief would result in a taxpayer having a lower tax

liability in the aggregate for all years to which the regulatory

election applies than the taxpayer would have had if the election had

been timely made (taking into account the time value of money).

Similarly, if the tax consequences of more than one taxpayer are

affected by the election, the government's interests are prejudiced if

extending the time for making the election may result in the affected

taxpayers, in the aggregate, having a lower tax liability than if the

election had been timely made.

(ii) Closed years. The interests of the government are ordinarily

prejudiced if the tax year in which the regulatory election should have

been made or any tax years that would have been affected by the

election had it been timely made are closed by the period of

limitations on assessment under section 6501(a) before the taxpayer's

receipt of a ruling granting relief under this section. The IRS may

condition a grant of relief on the taxpayer providing the IRS with a

statement from an independent auditor (other than an auditor providing

an affidavit pursuant to paragraph (e)(3) of this section) certifying

that the requirements of paragraph (c)(1)(i) of this section are

satisfied.

(2) Special rules for accounting method regulatory elections. The

interests of the government are deemed to be prejudiced except in

unusual and compelling circumstances if the accounting method

regulatory election is--

(i) Subject to the procedure described in Sec. 1.446-1(e)(3)(i) of

this chapter (requiring the advance written consent of the

Commissioner), and the request for relief under this section is filed

more than 90 days after the deadline for filing the Form 3115,

Application for Change in Accounting Method;

(ii) Not an election described in paragraph (c)(2)(i) of this

section and requires an adjustment under section 481(a) (or would

require an adjustment under section 481(a) if the taxpayer changed to

the method of accounting for which relief is requested in a taxable

year subsequent to the taxable year the election should have been

made);

(iii) Not an election described in paragraph (c)(2)(i) of this

section, the taxpayer is under examination and requests relief under

this section to change from an impermissible method of accounting, and

granting relief will provide the taxpayer a more favorable method of

accounting or more favorable terms and conditions than the taxpayer

would receive if the change from the impermissible method is made as

part of the examination; or

(iv) Not an election described in paragraph (c)(2)(i) of this

section and the election provides a more favorable method of accounting

or more favorable terms and conditions if the election is made by a

certain date or taxable year.

(3) Special rules for accounting period regulatory elections. The

interests of the government are deemed to be prejudiced except in

unusual and compelling circumstances if an election is an accounting

period regulatory election (other than the election to use other than

the required taxable year under section 444) and the request for relief

is filed more than 90 days after the deadline for filing the Form 1128,

Application to Adopt, Change, or Retain a Tax Year (or other required

statement).

(d) Effect of amended returns--(1) Second examination under section

7605(b). Taxpayers requesting and receiving an extension of time under

this section waive any objections to a second examination under section

7605(b) for the issue(s) that is the subject of the relief request and

any correlative adjustments.

(2) Suspension of the period of limitations under section 6501(a).

A request for relief under this section does not suspend the period of

limitations on assessment under section 6501(a). Thus, for relief to be

granted, the IRS may require the taxpayer to consent under section

6501(c)(4) to an extension of the period of limitations on assessment

for the tax year in which the regulatory election should have been made

and any tax years that would have been affected by the election had it

been timely made.

(e) Procedural requirements--(1) In general. Requests for relief

under this section must provide evidence that satisfies the

requirements in paragraphs (b) and (c) of this section, and must

provide additional information as required by this paragraph (e).

(2) Affidavit and declaration from taxpayer. The taxpayer, or the

individual who acts on behalf of the taxpayer with respect to tax

matters, must submit a detailed affidavit describing the events that

led to the failure to make a valid regulatory election and to the

discovery of the failure. When the taxpayer relied on a qualified tax

professional for advice, the taxpayer's affidavit must describe the

engagement and responsibilities of the professional as well as the

extent to which the taxpayer relied on the professional. The affidavit

must be accompanied by a dated declaration, signed by the taxpayer,

which states: ``Under penalties of perjury, I declare that, to the best

of my knowledge and belief, the facts presented herein are true,

correct, and complete.'' The individual who signs for an entity must

have personal knowledge of the facts and circumstances at issue.

(3) Affidavits and declarations from other parties. The taxpayer

must submit detailed affidavits from the individuals having knowledge

or information about the events that led to the failure to make a valid

regulatory election and to the discovery of the failure. These

individuals must include the taxpayer's income tax return preparer, any

individual (including an employee of the taxpayer) who made a

substantial

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contribution to the preparation of the return, and any accountant or

attorney, knowledgeable in tax matters, who advised the taxpayer with

regard to the election. An affidavit must describe the engagement and

responsibilities of the individual as well as the advice that the

individual provided to the taxpayer. Each affidavit must include the

name, current address, and taxpayer identification number of the

individual, and be accompanied by a dated declaration, signed by the

individual, which states: ``Under penalties of perjury, I declare that,

to the best of my knowledge and belief, the facts presented herein are

true, correct, and complete.''

(4) Other Information. The request for relief filed under this

section must also contain the following information--

(i) The taxpayer must state whether the taxpayer's return(s) for

the tax year in which the regulatory election should have been made or

any tax years that would have been affected by the election had it been

timely made is being examined by a district director, or is being

considered by an appeals office or a federal court. The taxpayer must

notify the IRS office considering the request for relief if the IRS

starts an examination of any such return while the taxpayer's request

for relief is pending;

(ii) The taxpayer must state when the applicable return, form, or

statement used to make the election was required to be filed and when

it was actually filed;

(iii) The taxpayer must submit a copy of any documents that refer

to the election;

(iv) When requested, the taxpayer must submit a copy of the

taxpayer's income tax return for any taxable year for which the

taxpayer requests an extension and any return affected by the election;

and

(v) When applicable, the taxpayer must submit a copy of the income

tax returns of other taxpayers affected by the election.

(5) Filing instructions. A request for relief under this section is

a request for a letter ruling. Requests for relief should be submitted

in accordance with the applicable procedures for requests for a letter

ruling and must be accompanied by the applicable user fee.

(f) Examples. The following examples illustrate the provisions of

this section:

Example 1. Taxpayer discovers own error. Taxpayer A prepares A's

1996 income tax return. A is unaware that a particular regulatory

election is available to report a transaction in a particular

manner. A files the 1996 return without making the election and

reporting the transaction in a different manner. In 1998, A hires a

qualified tax professional to prepare A's 1998 return. The

professional discovers that A did not make the election. A promptly

files for relief in accordance with this section. Assuming

paragraphs (b)(3)(i) through (iii) of this section do not apply, A

is deemed to have acted reasonably and in good faith.

Example 2. Reliance on qualified tax professional. Taxpayer B

hires a qualified tax professional to advise B on preparing B's 1996

income tax return and provides the professional with all the

information requested. The professional fails to advise B that a

regulatory election is necessary in order for B to report income on

B's 1996 return in a particular manner. Nevertheless, B reports this

income in a manner that is consistent with having made the election.

In 1999, during the examination of the 1996 return by the IRS, the

examining agent discovers that the election has not been filed. B

promptly files for relief in accordance with this section, including

attaching an affidavit from B's professional stating that the

professional failed to advise B that the election was necessary.

Assuming paragraphs (b)(3)(i) through (iii) of this section do not

apply, B is deemed to have acted reasonably and in good faith.

Example 3. Accuracy-related penalty. Taxpayer C reports income

on its 1996 income tax return in a manner that contravenes a

statutory provision. C was aware of the statutory provision that

prohibited the manner in which C reported this income, but did not

provide adequate disclosure of the return position within the

meaning of Sec. 1.6662-3(c) of this chapter. In 1999, during the

examination of the 1996 return, the IRS raises an issue regarding

the reporting of this income on C's return. C requests relief under

this section to elect an alternative method of reporting the income.

Under paragraph (b)(3)(i) of this section, C is deemed to have not

acted reasonably and in good faith because C seeks to alter a return

position for which an accuracy-related penalty could be imposed

under section 6662.

Example 4. Election not requiring adjustment under section

481(a). Taxpayer D prepares D's 1996 income tax return. D is unaware

that a particular accounting method regulatory election is

available. D files the 1996 return using another method of

accounting. In 1998, D hires a qualified tax professional to prepare

D's 1998 return. The professional discovers that D did not make the

election. D promptly files for relief in accordance with this

section. Assume the applicable regulation provides that the election

does not require an adjustment under section 481(a) and the election

is not subject to the procedure described in Sec. 1.446-1(e)(3)(i)

of this chapter. Further assume that if D were granted an extension

of time to make the election, D would pay no less tax than if the

election had been timely made. Under paragraph (c) of this section,

the interests of the government are not deemed to be prejudiced.

Example 5. Election requiring adjustment under section 481(a).

The facts are the same as in Example 4 of this paragraph (f) except

that the applicable regulation provides that the election requires

an adjustment under section 481(a). Under paragraph (c)(2)(ii) of

this section, the interests of the government are deemed to be

prejudiced except in unusual or compelling circumstances.

Example 6. Under examination. A regulation permits an automatic

change from an impermissible method of accounting on a cut-off

basis. Any change to this method made as part of an examination is

made with a section 481(a) adjustment. Taxpayer E reports income on

E's 1996 income tax return using the impermissible method of

accounting. In 1999, during the examination of the 1996 return by

the IRS, the examining agent questions the propriety of E's method

of accounting. E requests relief under this section to make the

change pursuant to the regulation for 1996. E will receive less

favorable terms and conditions if the change in method of accounting

is made with a section 481(a) adjustment by the examining agent than

if the change is made on a cut-off basis pursuant to the regulation.

Under paragraph (c)(2)(iii) of this section, the interests of the

government are deemed to be prejudiced except in unusual and

compelling circumstances

PART 602--OMB CONTROL NUMBERS UNDER THE PAPERWORK REDUCTION ACT

Par. 3. The authority citation for part 602 continues to read as

follows:

Authority: 26 U.S.C. 7805.

Par. 4. Section 602.101(c) is amended by adding the following

entries in numerical order to the table:

Sec. 602.101 OMB Control numbers

* * * * *

(c) * * *

------------------------------------------------------------------------

Current OMB

CFR part or section where identified and described control

number

------------------------------------------------------------------------

* * * * *

Sec. 301.9100-2T.......................................... 1545-1488

Sec. 301.9100-3T.......................................... 1545-1488

* * * * *

------------------------------------------------------------------------

Margaret Milner Richardson,

Commissioner of Internal Revenue.

Approved:

Donald C. Lubick,

Assistant Secretary of the Treasury.

[FR Doc. 96-16376 Filed 6-26-96; 8:45 am]

BILLING CODE 4830-01-U