Category: Accounting Periods & Methods;
Corporations
Subject: Section 481(a) Adjustment
Title: Effect of Conversion to S Corporation
IRC Sections: 481(a)
Filename: 1177.html
Date Produced: 9/96 Copyright 1998, The Tax Resource Group. All rights reserved.
Telephone 800-578-3498. Internet: www.taxresourcegroup.com A C corporation made a change in accounting method which produced
an adjustment under Section 481(a). Now the C corporation wishes
to elect S corporation status. It is assumed that the C corporation
does not use the LIFO inventory method. See Section 1363(d). Issue: Does the S election trigger the remaining Section 481(a)
adjustment into income? In other words, does the Section 481(a)
adjustment survive the S election? Answer: Election of S corporation status does not trigger the
unamortized Section 481(a) adjustment. See Rev. Proc. 92-20, Section
8.03(2)(b). See also PLR 8824012. The relevant portion of Rev. Proc. 92-20 is set forth below. (2) Ceasing to engage in the trade or business.
If a taxpayer that is taking a net section 481(a) adjustment
into account
pursuant to section 5, 6, or 7 ceases to engage in the trade
or business to
which the net section 481(a) adjustment relates, or if the taxpayer
operating
the trade or business terminates existence, any balance of the
net section
481(a) adjustment not previously taken into account must be taken
into account
in computing taxable income in the taxable year of such cessation
or
termination.
Except as provided in paragraphs 8.03(2)(c) or 8.03(2)(d) below,
a taxpayer
is treated as ceasing to engage in a trade or business if the
operations of
the trade or business cease, or substantially all of the assets
of the trade
or business are transferred to another taxpayer. For purposes
of this
paragraph 8.03(2), "substantially all" has the same
meaning as subsection 3.01
of Rev. Proc. 77-37, 1977-2 C.B. 568.
(a) The following is a nonexclusive list of transactions that
are treated as
the cessation of a trade or business for purposes of accelerating
the section
481(a) adjustment period under this paragraph 8.03(2).
(i) The trade or business to which the net section 481(a) adjustment
relates
is incorporated.
(ii) The trade or business to which the net section 481(a) adjustment
relates is purchased by another taxpayer in a transaction to
which section
1060 of the Code applies.
(iii) The trade or business to which the net section 481(a) adjustment
relates is terminated or transferred pursuant to a taxable liquidation.
(iv) A division of a corporation ceases to operate the trade
or business to
which the net section 481(a) adjustment relates.
(v) Assets of a trade or business to which the net section 481(a)
adjustment
relates are contributed to a partnership.
(b) No acceleration of the section 481(a) adjustment period
is required
under this paragraph 8.03(2) when a C corporation elects to be
treated as an S
corporation, or an S corporation terminates its S election and
is then treated
as a C corporation. However, acceleration is required if a sole
proprietor
incorporates and immediately elects to be treated as an S corporation.
[Emphasis added.]
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