Rev. Rul. 75-56

Advice has been requested whether a taxpayer, that for years has consistently capitalized certain expenses without having properly elected to do so, can amend its Federal income tax returns filed for the years 1971, 1972, and 1973, and deduct the expenses for such years.

X, a domestic corporation, that has been engaged in a manufacturing business for the past 10 years has capitalized in each of such years certain taxes and carrying charges incurred with respect to acquiring machinery, used in its business. Such taxes and charges are among those specified in section 1.266-1(b) of the Income Tax Regulations which, if the taxpayer properly elects, can be capitalized. Although X has incurred such taxes and charges and has consistently capitalized them over the 10 year period X never made a formal election to capitalize such expenses under section 266 of the Internal Revenue Code of 1954 and the regulations thereunder.

The question in the instant case is whether X may deduct the taxes and charges which it had capitalized in the prior years by filing amended returns for years for which the statute of limitations has not yet expired.

Section 266 of the Code provides, in part, that no deduction shall be allowed for amounts paid or accrued for taxes and carrying charges that, under regulations, are chargeable to a capital account with respect to property, if the taxpayer elects, in accordance with such regulations, to treat such taxes or charges as so chargeable.

Section 446(a) of the Code provides that taxable income shall be computed under the method of accounting on the basis of which the taxpayer regularly computes its income in keeping its books. Under section 1.446-1(a)(1) of the regulations, the term "method of accounting" includes not only the over-all method of accounting but also the accounting treatment of any item.

Section 1.446-1(e) of the regulations provides, in part, that a taxpayer must secure the consent of the Commissioner of Internal Revenue prior to changing the method of accounting used in keeping its books. Such consent must be obtained even if the method sought to be changed is improper under the Code and regulations. A change in method of accounting includes a change in the treatment of any material item used in an overall accounting plan.

The instant case is distinguishable from Rev. Rul. 70-539, 1970-2 C.B. 70, which holds, under different circumstances, that a taxpayer may amend its returns for open years and deduct previously capitalized expenses. The taxpayer in Rev. Rul. 70-539, in its fourth year of existence was allowed to amend its tax returns for its first three years and take deductions for expenses specified in section 1.266-1(b) of the regulations, which it had previously capitalized. The holding was based on a decision that such taxpayer had never made a valid binding election to capitalize the expenses involved. By amending its first return, the taxpayer in Rev. Rul. 70-539 was not changing a method of accounting used in previous years, since it had no previous existence. In effect, by timely amending of its first return, such taxpayer was adopting a method of accounting within the meaning of section 1.446-1(a) of the regulations.

X, on the other hand, by permitting the period for amending its first return to expire, has adopted a method of accounting within the meaning of section 1.446-1(a) of the regulations, to capitalize such expenses.

Accordingly, the taxpayer in the instant case, having adopted a method of accounting to capitalize the items in question, is precluded from changing that method for the years 1971, 1972, and 1973. However, with respect to a later year, X may request permission to change its method of accounting under the provisions of Rev. Proc. 70-27, 1970-2 C.B. 509, by filing Form 3115. Such a request would ordinarily be granted for expenses that may be capitalized under section 266 of the Code, if such expenses are paid or accrued for a year during which the request is filed.

Rev. Rul. 70-539 is distinguished.