26 U.S.C. § 481 : US Code - Section 481: Adjustments required by changes in method of accounting

Search 26 U.S.C. § 481 : US Code - Section 481: Adjustments required by changes in method of accounting

(a) General rule
In computing the taxpayer's taxable income for any taxable year
(referred to in this section as the "year of the change") -
(1) if such computation is under a method of accounting
different from the method under which the taxpayer's taxable
income for the preceding taxable year was computed, then
(2) there shall be taken into account those adjustments which
are determined to be necessary solely by reason of the change in
order to prevent amounts from being duplicated or omitted, except
there shall not be taken into account any adjustment in respect
of any taxable year to which this section does not apply unless
the adjustment is attributable to a change in the method of
accounting initiated by the taxpayer.
(b) Limitation on tax where adjustments are substantial
(1) Three year allocation
If -
(A) the method of accounting from which the change is made
was used by the taxpayer in computing his taxable income for
the 2 taxable years preceding the year of the change, and
(B) the increase in taxable income for the year of the change
which results solely by reason of the adjustments required by
subsection (a)(2) exceeds $3,000,
then the tax under this chapter attributable to such increase in
taxable income shall not be greater than the aggregate increase
in the taxes under this chapter (or under the corresponding
provisions of prior revenue laws) which would result if one-third
of such increase in taxable income were included in taxable
income for the year of the change and one-third of such increase
were included for each of the 2 preceding taxable years.
(2) Allocation under new method of accounting
If -
(A) the increase in taxable income for the year of the change
which results solely by reason of the adjustments required by
subsection (a)(2) exceeds $3,000, and
(B) the taxpayer establishes his taxable income (under the
new method of accounting) for one or more taxable years
consecutively preceding the taxable year of the change for
which the taxpayer in computing taxable income used the method
of accounting from which the change is made,
then the tax under this chapter attributable to such increase in
taxable income shall not be greater than the net increase in the
taxes under this chapter (or under the corresponding provisions
of prior revenue laws) which would result if the adjustments
required by subsection (a)(2) were allocated to the taxable year
or years specified in subparagraph (B) to which they are properly
allocable under the new method of accounting and the balance of
the adjustments required by subsection (a)(2) was allocated to
the taxable year of the change.
(3) Special rules for computations under paragraphs (1) and (2)
For purposes of this subsection -
(A) There shall be taken into account the increase or
decrease in tax for any taxable year preceding the year of the
change to which no adjustment is allocated under paragraph (1)
or (2) but which is affected by a net operating loss (as
defined in section 172) or by a capital loss carryback or
carryover (as defined in section 1212), determined with
reference to taxable years with respect to which adjustments
under paragraph (1) or (2) are allocated.
(B) The increase or decrease in the tax for any taxable year
for which an assessment of any deficiency, or a credit or
refund of any overpayment, is prevented by any law or rule of
law, shall be determined by reference to the tax previously
determined (within the meaning of section 1314(a)) for such
year.
(C) In applying section 7807(b)(1), the provisions of chapter
1 (other than subchapter E, relating to self-employment income)
and chapter 2 of the Internal Revenue Code of 1939 shall be
treated as the corresponding provisions of the Internal Revenue
Code of 1939.
(c) Adjustments under regulations
In the case of any change described in subsection (a), the
taxpayer may, in such manner and subject to such conditions as the
Secretary may by regulations prescribe, take the adjustments
required by subsection (a)(2) into account in computing the tax
imposed by this chapter for the taxable year or years permitted
under such regulations.