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Federal Register / Vol. 86, No. 2 / Tuesday, January 5, 2021 / Rules and Regulations
entrepreneurs or limited partners for applying the Section 448c Gross Receipts Test if certain conditions were met. For example, conditions of the rule could include that the entity had not been classified as a syndicate within the last three taxable years, and that the average taxable income of the entity for that period was greater than zero.
The final regulations do not adopt this recommendation. The Treasury Department and the IRS have determined that it would be inappropriate to provide an exception to the active participation rules in section 1256e3Cv by deeming active participation for small business taxpayers. The Treasury Department and the IRS believe that the deeming of active participation in this context would be overbroad and would run counter to Congressional intent.
Sections 448b3 and d3, 461i3
and 1256e3C were not modified by the TCJA, and the legislative history to section 13012 of the TCJA does not indicate any Congressional intent to modify the definition of tax shelter or syndicate. By not modifying those provisions, Congress presumably meant to exclude tax shelters, including syndicates, from being eligible to use the cash method of accounting and the small business taxpayer exemptions in section 13102 of the TCJA, even while otherwise expanding eligibility to meet the Section 448c Gross Receipts Test.
Other comments requested clarification generally of what active participation means and the circumstances, if any, under which a member of a limited liability company is treated as a limited partner or limited entrepreneur under section 461k4. The Treasury Department and the IRS have determined that such guidance is outside the scope of these final regulations, which are to implement the changes made by section 13102 of the TCJA.
The Treasury Department and the IRS
remain aware of the increased relevance of the definition of tax shelter under section 448d3 after enactment of the TCJA and the practical concerns regarding the determination of tax shelter status for the taxable year. To ameliorate these practical concerns, these final regulations modify the syndicate election provided in proposed 1.4482b2iiiB to provide additional relief by making the election an annual election. The Treasury Department and the IRS have determined that an annual election appropriately balances the statutory language with the consistency requirement for use of a method of accounting under section 446a and
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1.4461. A cash method taxpayer that is generally profitable year-to-year may experience an unforeseen taxable loss for an anomalous year but return to its profitable position in subsequent years.
If the taxpayer allocated more than 35
percent of the taxable loss to limited partners or limited entrepreneurs, the taxpayer would be required to change from the cash method to another method for the anomalous year in accordance with section 448a3.
However, that taxpayer would otherwise not be prohibited under section 448a3 to use the cash method in the next profitable taxable year. An annual election under 1.4482b2iiiB
allows a taxpayer to elect in the loss year to use the allocated taxable income or loss of the immediately preceding taxable year to determine whether the taxpayer is a syndicate under section 448d3 for the current taxable year.
The Treasury Department and the IRS
have determined that permitting taxpayers to continue to use the cash method, as well as other methods impacted by a determination under section 448d3, in such situations is consistent with the requirements under section 446a.
This election applies for all provisions of the Code that specifically refer to section 448a3 to define tax shelter, such as the small business exemptions under sections 163j3, 263Ai1, 460e1B and 471c1. A
taxpayer is required to file a statement with the original timely filed Federal income tax return, with extensions, to affirmatively make this election under 1.4482b2iiiB for such taxable year. The election is valid only for the taxable year for which it is made, and once made, cannot be revoked. The Treasury Department and the IRS intend to issue procedural guidance to address the revocation of an election made under proposed 1.4482b2iiiB as a result of the application of the final regulations.
Other commenters noted for some taxpayers who took advantage of the small business exception in section 448b3 to change to the cash method, the change in method of accounting resulted in a negative section 481a adjustment, which triggered an allocated loss and made the taxpayer a tax shelter under section 448a3. As a result, the taxpayers became ineligible to use the cash method for the year in which the negative section 481a adjustment was recognized but may be otherwise eligible to use the cash method for future years. Under proposed 1.4482g3, these taxpayers would be ineligible for the automatic change procedures to make a
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subsequent change back to the cash method once they are no longer tax shelters within a five-year period. The commenters recommend relief for taxpayers with this situation.
The commenters propose an exception to the tax shelter rules for a taxpayer that satisfies the Section 448
Gross Receipts Test if a negative section 481a adjustment from a change in method of accounting under the small business taxpayer exemptions for example, sections 263Ai, 471c, 448b results in the taxpayer being considered a tax shelter under section 448d3 and proposed 1.448
2b2iii. These final regulations do not adopt this suggestion. As described in the Preamble to the proposed regulations, the Treasury Department and the IRS have determined that no exception was provided in the TCJA to limit the definition of tax shelter in section 448d3 for taxpayers making method changes related to the small business taxpayer exemptions.
However, the Treasury Department and the IRS expect that the annual election under 1.4482b2iiiB, described earlier, will provide relief for many taxpayers in this situation.
Additionally, the Treasury Department and the IRS have reconsidered the 5-year restriction on automatic method changes in light of these comments. Section 446a, unmodified by the TCJA, provides that taxable income shall be computed under the method of accounting on the basis of which the taxpayer regularly computes his income in keeping his books. A taxpayer that changes its method of accounting for the same item with regular frequency for example, annually or every other taxable year is not adhering to the consistency requirement of section 446. The consistency requirement of section 446a is distinct from the authority granted the Commissioner under section 446b to determine whether the method of accounting used by a taxpayer clearly reflects income. See e.g., Advertisers Exchange, Inc. v. Commissioner, 25 T.C.
1086, 1092 1956 Consistency is the key and is required regardless of the method or system of accounting used.
citations omitted; Huntington Securities Corporation v. Busey, 112
F.2d 368, 370 1940 . . . whatever method the taxpayer adopts must be consistent from year to year unless the Commissioner authorizes a change.
The Treasury Department and the IRS
are aware that the 5-year restriction in proposed 1.4482g3 could be burdensome for a small business taxpayer that was required to change from the cash method as a result of
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