Rev. Rul. 59-285

The Internal Revenue Service has received numerous inquiries as to the proper application of Revenue Ruling 57-13, C.B. 1957-1, 552, and Revenue Ruling 58-24, C.B. 1958-1, 318, particularly whether those Revenue Rulings may properly be interpreted as meaning that, under facts similar to those involved therein, a taxpayer may, without obtaining the prior consent of the Commissioner of Internal Revenue, change his method of accounting.

Revenue Ruling 57-13 holds on the facts considered therein that the deduction for property taxes which accrue in 1952 is not a proper deduction for 1953 when paid and, therefore, is not allowable. However, since a credit or refund attributable to the deduction for such tax for 1952 was not barred by the statute of limitations, at the time such deduction was originally claimed in 1953, the wrong year, and since 1953 is not barred by the statute of limitations, an adjustment for 1952 is permissible under section 3801(b)(6) of the Internal Revenue Code of 1939, provided the provisions of section 3801 of the Code are otherwise complied with.

Revenue Ruling 58-24 holds, on the facts in that case and insofar as pertinent here, that the deduction for vacation pay which accrued in 1952 is not a proper deduction for 1953 when paid and, therefore, is not an allowable deduction for such year. However, since a credit or refund attributable to the deduction for vacation pay accrued in 1952 was not barred by the statute of limitations at the time such deduction was originally claimed in 1953, an adjustment for 1952 is permissible under section 1312(4) of the Internal Revenue Code of 1954, provided the provisions of section 1311 to 1315, inclusive, of the Code are otherwise complied with.

While Revenue Ruling 57-13 was published under the 1939 Code and Revenue Ruling 58-24 was published under the 1954 Code, nevertheless, in both cases, the year of the adjustment was a taxable year governed by the 1939 Code.

Section 41 of the 1939 Code provides, in part, as follows:

GENERAL RULE.-The net income shall be computed upon the basis of the taxpayer's annual accounting period (fiscal year or calendar year, as the case may be) in accordance with the method of accounting regularly employed in keeping the books of such taxpayer; * * *

Section 39.41-2(c) of Regulations 118 provides, in part, as follows:

A taxpayer who changes the method of accounting employed in keeping his books shall, before computing his income upon such new method for the purposes of taxation, secure the consent of the Commissioner. For the purposes of this section, a change in the method of accounting employed in keeping books means any change in the accounting treatment of items of income or deductions, * * *

The issue under consideration in Revenue Rulings 57-13 and 58-24 was the application of the `mitigation of effect of limitations' provisions of section 3801 of the 1939 Code and sections 1311-1315, inclusive, of the 1954 Code. Those rulings are to be considered only as illustrative of the application of section 3801 of the 1939 Code and sections 1311-1315, inclusive, of the 1954 Code and, therefore, should not be considered to imply that a taxpayer may, without the prior consent of the Commissioner, change from the cash method to the accrual method of accounting with respect to a material item.

Under the 1939 Code, the prior consent of the Commissioner is required in order for a taxpayer to change his method of accounting with respect to a material item. Prior consent must be secured from the Commissioner whether or not the taxpayer regards the method from which he desires to change to be proper. Thus, a taxpayer may not compute his net income under a method materially different from that previously used by him unless such prior consent is secured. See Advertisers Exchange, Inc. , 25 T.C. 1086, 1093, affirmed per curiam, 240 Fed.(2d) 958. The inconsistent decision in Beacon Publishing Company v. Commissioner , 218 Fed.(2d) 697, in which there was a dissenting opinion by Circuit Judge Bratton, is not being followed by the Service.

To the same effect, see section 446 of the 1954 Code and section 1.446-1(e)(2)(i) of the Income Tax Regulations thereunder.

Accordingly, under the 1939 Code as well as under the 1954 Code, taxpayers, employing the accrual method of accounting, who have consistently deducted a material item in the year paid rather than the year accrued, must obtain the prior consent of the Commissioner before changing such method of accounting, whether or not the taxpayer regards the method from which he desires to change to be proper.

Revenue Ruling 57-13, C.B. 1957-1, 552, and Revenue Ruling 58-24, C.B. 1958-1, 318, clarified.