IRS GIVES REAL ESTATE SUBDIVIDERS SOME RELIEF FROM ECONOMIC PERFORMANCE RULES.

Notice 91-4

On June 7, 1990, the Internal Revenue Service published proposed regulations under section 461(h) relating to the requirement that economic performance occur in order for an amount to be incurred by a taxpayer using an accrual method of accounting (55 Fed. Reg. 23,235 (1990)). The preamble to the proposed regulations notifies taxpayers that, because economic performance must occur in order for a liability to be taken into account, the estimated cost of future improvements to subdivided real estate may not be added to the basis of lots sold if economic performance has not occurred with respect to such cost.

Rev. Proc. 75-25, 1975-1 C.B. 720, enables subdividers of real estate to request permission from the District Director to add to the actual cost or other basis of property sold the estimated cost of future improvements for the purpose of determining gain or loss resulting from the sale. Section 461(h) and the proposed regulations thereunder override Rev. Proc. 75-25. Pursuant to section 7805(b), however, the preamble to the proposed regulations states that Rev. Proc. 75-25 is overridden only for taxable years beginning after December 31, 1989.

The Internal Revenue Service is studying ways in which to address the special circumstances of subdividers of real estate that are consistent with the purposes and principles of section 461(h). This notice is being issued to provide taxpayers with guidance concerning the treatment of the estimated cost of future improvements to subdivided real estate prior to the issuance of further rules applicable to such cost. In the interim, the following rules will apply.

The procedures of Rev. Proc. 75-25 will remain in effect until the issuance of further rules under section 461(h). Subdividers of real estate may, therefore, continue to request permission pursuant to Rev. Proc. 75-25 from the District Director to add to the cost or other basis of property sold the estimated cost of future improvements required by contract even though economic performance may not have occurred.

For sales of property after December 31, 1990, subdividers who do not obtain permission pursuant to Rev. Proc. 75-25 may not add to the cost or other basis of property sold the cost of future improvements required by contract until economic performance has occurred with respect to such improvements. For sales of property prior to January 1, 1991, the Service will not apply section 461(h) and the regulations thereunder to prevent the inclusion in the actual cost or other basis of property sold any estimated cost for future improvements (or other costs) to the extent those costs would have been includible in basis under the law as it existed prior to the enactment of section 461(h).

Pursuant to section 7805(b), any sales of subdivided real estate that are covered by explicit permission from the District Director obtained pursuant to Rev. Proc. 75-25 , whether before or after January 1, 1991, may be accounted for in accordance with Rev. Proc. 75-25 for all taxable years. In addition, subdividers who have not requested permission pursuant to Rev. Proc. 75-25 from the District Director to add to the cost or other basis of property sold the estimated cost of future improvements required by contract, may request such permission for sales of property occurring after December 31, 1990, regardless of the requirement in Rev. Proc. 75-25 that the request must be filed for the first year in which lots in a subdivision are sold. A copy of the request must be attached to the Federal income tax return for the first taxable year beginning after December 31, 1989.

The Internal Revenue Service requests comments concerning appropriate forms of relief for subdividers of real estate that is consistent with the purposes and principles of section 461(h). Comments may be submitted to Internal Revenue Service, Office of Chief Counsel, Attn: CC:Corp:T:R (IA-258-84), P.O. Box 7604, Ben Franklin Station, Washington, D.C. 20044. Comments received on or before March 1, 1991, can be assured of receiving complete consideration.