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IRS Code Section 481(a)

Form 3115



This page has not been substantially updated since 2004. 

One important item since 2004 is that in 2010 the IRS web site, topic 429 made the following statement: "If you have made a valid election under section 475(f), the only way to stop using mark-to-market accounting for securities is to request and receive written permission from the Service to revoke the election. Non-filing of the Form 3115 mentioned above will not invalidate a timely and valid election. To request permission to revoke your election under section 475(f), you must file a second Form 3115 and pay a fee." IRS Tax Topic Page Last Reviewed or Updated: February 07, 2011.

http://www.traderstatus.com/trader.htm#3115


Form 3115 was last revised in December 2009.
Form 3115 was revised in December 2003.  IRS Announcement 2004-16 prohibits the use of the older version after May 30, 2004.

Several new IRS rulings were issued in 2002 that retroactively changed the year 2001 filing requirements for taxpayers filing under Trader Status and using the Mark-to-Market (M2M) method of accounting for trading losses.

The odds are that if you have filed using M2M for the first time in 2001 (and to a lesser extent for those using M2M for the first time after 2001) that your tax returns need to be amended as soon as possible.  (before the general three year statute of limitations has run out).

For first-time M2M filers, the new rules retroactively change the deduction for built-in "paper" losses at January 1, 2001 and may require form 3115 to be specially modified and filed no later than September 10, 2002.

The new rules retroactively change your 2001 Net Operating Loss (NOL) allowing you to re-file at this time no matter if you originally elected to forgo the 2-year carryback, or even if you already elected to carryback your losses.  It may be beneficial to file or re-file form 1045 (revised May 2002) or substitute using form 1040X.

 



IRS Code Sec. 481. Adjustments Required By Changes In Method Of Accounting

481(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")--

481(a)(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

481(a)(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.

481(b) Limitation On Tax Where Adjustments Are Substantial

481(b)(1) Three Year Allocation
If--
481(b)(1)(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
481(b)(1)(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.

481(b)(2) Allocation Under New Method Of Accounting
If--
481(b)(2)(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
481(b)(2)(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.

481(b)(3) Special Rules For Computations Under Paragraphs (1) And (2)
For purposes of this subsection--
481(b)(3)(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.

481(b)(3)(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.

481(b)(3)(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.

481(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.

(Aug. 16, 1954, ch. 736, 68A Stat. 160; Sept. 2, 1958, Pub. L. 85-866, title I, Sec. 29(a), (b), 72 Stat. 1626-1628; Dec. 30, 1969, Pub. L. 91-172, title V, Sec. 512(f)(4), 83 Stat. 641; Oct. 4, 1976, Pub. L. 94-455, title XIX, Sec. 1901(a)(70), 1906(b)(13)(A), 90 Stat. 1776, 1834; Oct. 19, 1980, Pub. L. 96-471, Sec. 2(b)(3), 94 Stat. 2254; Pub. L. 105-34, title IX, X, Sec. 961(b)(2), 1004(b)(2)(C), 1042(b)(1), 1088(b)(2), Aug. 5, 1997, 111 Stat 788.)


Little known facts regarding IRS Form 3115 and the Sec 481(a) adjustment:

(The following all assume that the taxpayer is not under IRS examination.  Special rules apply when an examination in ongoing)


¶3570.09b. Adjustments
Beginning with the year of change, a taxpayer changing its accounting method under Rev. Proc. 94-49 generally must take its required adjustment (282) into account ratably over four tax years, regardless of whether the adjustment is positive or negative. (283)  A de minimis rule is provided under which an adjustment of less than $25,000 may be taken into account in the year of change.  Additional exceptions to the general four-year adjustment period are provided by cross-reference to Rev. Proc. 92-20, e.g., if 90% or more of the adjustment is attributable to the tax year immediately preceding the change year, or if the taxpayer is a cooperative. Because the final uniform capitalization regulations only apply to costs incurred in tax years beginning after 1993, in the case of non-inventory property, no adjustment is required to comply with the final uniform capitalization rules, i.e., the changes are generally effected on a cut-off basis.

/Footnote/ 282 Pursuant to §481(a).
/Footnote/ 283 Rev. Proc. 94-49, §4.


Rev. Proc. 92-20, 1992-1 C.B. 685

SEC. 8. EXCEPTIONS TO THE GENERAL SECTION 481(a) ADJUSTMENT PERIOD.

.01 GENERAL.

In general, the section 481(a) adjustment periods are provided in sections 5, 6, and 7. The section 481(a) adjustment periods prescribed in sections 5, 6 and 7 will be shortened in the following situations.

(1) DE MINIMIS RULE.

If the entire net section 481(a) adjustment is less than $25,000 (either positive or negative), the taxpayer may elect to use a one- year adjustment period in lieu of the adjustment period otherwise provided by this revenue Procedure. The taxpayer must affirmatively state on an attachment to Form 3115 that it desires to elect this de minimis rule.

(2) ATTRIBUTABLE TO IMMEDIATELY PRECEDING TAXABLE YEAR.

If 90 percent or more of the net section 481(a) adjustment is attributable to the taxable year immediately preceding the year of change, the taxpayer must take the entire net section 481(a) adjustment into account in computing taxable income for the year of change. The amount attributable to the taxable year immediately preceding the year of change is the difference between the amount of the net adjustment determined under section 481(a) of the Code for the year of change and the amount of the net adjustment that would have been required under section 481(a) if the same change in method of accounting had been made in the preceding year.

Note - many security traders would be covered under this 90% exception and therefore would be required to recognize all their prior "on paper gains and losses" in the year of election to use M2M.

If the taxpayer's books and records do not contain sufficient information to compute the net section 481(a) adjustment attributable to the taxable year immediately preceding the year of change, the taxpayer may reasonably estimate this amount, attach to the Form 3115 the computations upon which the estimate is based, and attach the following signed statement to the Form 3115:

Under penalties of perjury, I hereby certify that:

(a) the books and records of [name of the taxpayer] do not contain sufficient information to permit a computation of the net section 481(a) adjustment attributable to the taxable year immediately preceding the year of change, and

(b) based on the information that is contained in such records, to the best of my knowledge and belief, 90 percent or more of the net section 481(a) adjustment [indicate "is" or "is not", as the case may be] attributable to the taxable year immediately preceding the year of change.

(i) EXAMPLE.

Y timely files an application to change its method of accounting for valuing inventory to a method that is in accord with the provisions of section 1.471-3 of the regulations, beginning with its 1992 taxable year. The information furnished shows that Y used its present method of valuing inventory for nine taxable years prior to the year of change and that the entire net adjustment required under section 481(a) of the Code for the year of change is $300,000. The information furnished further shows that the adjustment required under section 481(a) would have been $20,000 had the change been made for Y's 1991 taxable year. Thus, 93.3 percent (280,000/300,000=93.3%) of the amount of the adjustment is attributable to the taxable year immediately preceding the proposed year of change. Under these circumstances, Y will take the entire $300,000 net section 481(a) adjustment into account in computing its taxable income for its 1992 taxable year.


As then modified in 1997:


Rev. Proc. 97-27, 1997-1 C.B. 680

5.02 Terms and conditions of change.
(3) Section 481(a) adjustment period.
5.03(a) In general. Except as provided in sections 5.02(3)(b) and 7.03 of this revenue procedure, the section 481(a) adjustment period for positive and negative section 481(a) adjustments is four taxable years.

5.03(b) Changes within the LIFO method. Any change within the LIFO inventory method must be made using a cut-off method. However, Announcement 91-173, 1991-47 I.R.B. 29 (regarding LIFO taxpayers changing their method of accounting for certain bulk bargain purchases of inventory to comply with Hamilton Industries, Inc. v. Commissioner , 97 T.C. 120 (1991)) is an example of other published guidance that requires a section 481(a) adjustment.

7.03 Shortened or accelerated adjustment periods. The four-year section 481(a) adjustment period provided in sections 5.02(3) and 6.04 of this revenue procedure will be shortened or accelerated in the following situations:
(1) De minimis rule. A taxpayer may elect to use a one-year adjustment period in lieu of the section 481(a) adjustment period otherwise provided by this revenue procedure if the entire section 481(a) adjustment is less than $25,000 (either positive or negative). The taxpayer must complete the appropriate line on the Form 3115 to elect this de minimis rule.
(2)Cooperatives
(3) Ceasing to engage in the trade or business.

SECTION 13. EFFECTIVE DATE
.01 In general. Except as provided in section 13.02(1) of this revenue procedure, this revenue procedure is effective for Forms 3115 filed on or after May 15, 1997.
 


P.L. 105-34, §1001(d)(4), provides:

(4) ELECTION OF MARK TO MARKET BY SECURITIES TRADERS AND TRADERS AND DEALERS IN COMMODITIES. --

(A) IN GENERAL. --The amendments made by subsection (b) shall apply to taxable years ending after the date of the enactment of this Act.

(B) 4-YEAR SPREAD OF ADJUSTMENTS. --In the case of a taxpayer who elects under subsection (e) or (f) of section 475 of the Internal Revenue Code of 1986 (as added by this section) to change its method of accounting for the taxable year which includes the date of the enactment of this Act --

(i) any identification required under such subsection with respect to securities and commodities held on the date of the enactment of this Act shall be treated as timely made if made on or before the 30th day after such date of enactment, and

(ii) the net amount of the adjustments required to be taken into account by the taxpayer under section 481 of such Code shall be taken into account ratably over the 4-taxable year period beginning with such first taxable year.


As then modified in 2002:


Rev. Proc. 2002-19, 2002-13 I.R.B. 696 (4/1/2002)

SECTION 2. CHANGES

.01 Changes to BACKGROUND Sections. Section 2.01(3) in each of Rev. Proc. 97-27 and Rev. Proc. 2002-9 is deleted.

.02 Changes to section 481(a) Spread Period for Negative section 481(a) Adjustments.

(1) Section 5.02(3)(a) of Rev. Proc. 97-27 is modified to read as follows:

"(a) In general. Except as otherwise provided in sections 5.02(3)(b) and 7.03 of this revenue procedure, the section 481(a) adjustment period is four taxable years for a net positive adjustment for an accounting method change, and one taxable year for a net negative adjustment for an accounting method change."

SECTION 4. EFFECTIVE DATE
4.01 In General. Except as otherwise provided in section 4.02 and 4.03 of this revenue procedure, this revenue procedure is effective for taxable years ending on or after December 31, 2001.

4.02 Changes to Scope Restrictions of Rev. Proc. 97-27. Notwithstanding section 4.01 of this revenue procedure, the changes to the scope restrictions of Rev. Proc. 97-27 provided in section 2.03(1)(a) and (b), 2.03(2)(a) and (b), and 2.03(3)(a) and (b) of this revenue procedure are effective for taxable years ending on or after March 14, 2002.

4.03 Notional Principal Contracts. Notwithstanding section 4.01 of this revenue procedure, the deletion of section 14.02 of Rev. Proc. 97-27 is effective for Forms 3115 pending with the national office on March 14, 2002.
 


As then modified in 2011: (PDF)


Rev. Proc. 2011-14, 2011-4 I.R.B. 330 (1/24/2011)

SECTION 5. TERMS AND CONDITIONS OF CHANGE

.03 Section 481(a) adjustment. Unless otherwise provided in this revenue procedure, a taxpayer making a change in method of accounting under this revenue procedure must apply § 481(a) and take into account a § 481(a) adjustment in the manner provided in section 5.04 of this revenue procedure.

.04 Section 481(a) adjustment period.
(1) In general. Except as otherwise provided in section 5.04(3) or the APPENDIX of this revenue procedure, or in other guidance published in the IRB, the § 481(a) adjustment period for a change in method of accounting is one taxable year (year of change) for a net negative § 481(a) adjustment and four taxable years (year of change and next three taxable years) for a net positive § 481(a) adjustment. A net positive § 481(a) adjustment is taken into account ratably over the § 481(a) adjustment period.

(2) Short period as a separate taxable year. ...

(3) Shortened or accelerated § 481(a) adjustment periods.
(a) De minimis rule. A taxpayer may elect to use a one-year § 481(a) adjustment period (the year of change) in lieu of the § 481(a) adjustment period otherwise provided by this revenue procedure for a positive § 481(a) adjustment if the net § 481(a) adjustment for the change is less than $25,000. To make this election, the taxpayer must complete the appropriate line on Form 3115 and take the entire § 481(a) adjustment into account in the year of change.

(c) Ceasing to engage in the trade or business or terminating existence. ...

05 NOL carryback limitation for taxpayer subject to criminal investigation ...

SECTION 6. GENERAL APPLICATION PROCEDURES
(3) Timely duplicate filing requirements.
(7) Where to file copy. (b) Ogden copy of application in lieu of the national office copy. The Ogden copy of the application, when applicable, must be addressed to: Internal Revenue Service, 1973 North Rulon White Blvd., Mail Stop 4917, Ogden, UT 84404. This Ogden copy is in lieu of the national office copy. See section 6.02(3)(a)(ii)(B) of this revenue procedure.

SECTION 13. EFFECTIVE DATE
.01 In general. (1) Rev. Proc. 2011-14. Except as provided in section 13.02 of this revenue procedure, this revenue procedure is effective for applications filed on or after January 10, 2011, for a year of change ending on or after April 30, 2010.



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