rp-18-44.pdf

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26 CFR 601.204: Changes in accounting periods and in methods of accounting.
(Also Part 1, § 481)

Rev. Proc. 2018-44

SECTION 1. PURPOSE
Section 13543 of “An Act to provide for reconciliation pursuant to titles II and V of
the concurrent resolution on the budget for fiscal year 2018,” Pub. L. 115-97 (the Act)
added § 481(d) to the Internal Revenue Code (Code). Section 481(d) provides rules
relating to adjustments required by § 481(a)(2) that are attributable to certain
revocations of S corporation elections under § 1362(a). This revenue procedure
modifies Rev. Proc. 2018-31, 2018-22 I.R.B. 637, to reflect the statutory amendments
made by the Act. Specifically, this revenue procedure requires an eligible terminated S
corporation, as defined in § 481(d)(2), that is required to change from the overall cash
receipts and disbursements method of accounting (cash method) to an overall accrual
method of accounting (accrual method) as a result of a revocation of its S corporation
election, and that makes this change in method of accounting for the C corporation’s
first taxable year after such revocation, to take into account the resulting positive or
negative adjustment required by § 481(a)(2) ratably during the six-year period beginning
with the year of change. This revenue procedure also provides that an eligible
terminated S corporation that is permitted to continue to use the cash method after the

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revocation of its S corporation election and that changes to an overall accrual method
for the C corporation’s first taxable year after such revocation, may take into account the
resulting positive or negative adjustment required by § 481(a)(2) ratably during the six-
year period beginning with the year of change.
SECTION 2. BACKGROUND
.01 Section 13543 of the Act, added § 481(d) to the Code. Section 481(d)(1)
requires an eligible terminated S corporation, as defined in § 481(d)(2), to take into
account ratably during the six-year period beginning with the year of change any
adjustment required by § 481(a)(2) that is attributable to the corporation’s revocation of
its election under § 1362(a) (S corporation election). Section § 481(d)(2) provides that
an eligible terminated S corporation is any C corporation that: (1) was an S corporation
on December 21, 2017; (2) revokes its S corporation election after December 21, 2017,
but before December 22, 2019; and (3) has the same owners of stock in identical
proportions on December 22, 2017, and the revocation date.
.02 Section 448 generally prohibits the use of the cash method by a C corporation
(other than a farming business or a qualified personal service corporation) unless the C
corporation meets the $25,000,000 gross receipts test of § 448(c). Section 448 also
prohibits tax shelters from using the cash method.
.03 Section 1362(d)(1)(A) provides that a section 1362(a) election may be terminated
by revocation. Section 1362(d)(1)(B) provides that an election under section 1362(a)
may be terminated by revocation only if shareholders holding more than one-half of the
shares of stock of the corporation on the day on which the revocation is made consent

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to the revocation. Section 1362(d)(1)(C) provides that except as provided in section
1362(d)(1)(D), a revocation made during the taxable year and on or before the fifteenth
day of the third month thereof shall be effective on the first day of such taxable year,
and a revocation made during the taxable year but after such fifteenth day shall be
effective on the first day of the following taxable year. Section 1362(d)(1)(D) provides
that if the revocation specifies a date for revocation that is on or after the day on which
the revocation is made, the revocation shall be effective on and after the date so
specified.
.04 Section 1362(e)(1) provides that generally in the case of an S termination year,
the portion of such year ending before the first day for which the termination is effective
shall be treated as a short taxable year for which the corporation is an S corporation,
and the portion of such year beginning on such first day shall be treated as a short
taxable year for which the corporation is a C corporation. Section 1362(e)(4) generally
provides that an S termination year is any taxable year of a corporation (determined
without regard to section 1362(e)) in which a termination of a section 1362(a) election
takes effect (other than on the first day thereof).
.05 Section 481(a) requires those adjustments necessary to prevent amounts from
being duplicated or omitted to be taken into account when the taxpayer’s taxable
income is computed under a method of accounting different from the method of
accounting used to compute taxable income for the preceding taxable year.
.06 Under § 446(e) and § 1.446-1(e), except as otherwise provided, a taxpayer must
secure the consent of the Commissioner of Internal Revenue before changing a method

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of accounting for federal income tax purposes. Section 1.446-1(e)(3)(ii) authorizes the
Commissioner to prescribe administrative procedures setting forth the terms and
conditions necessary for a taxpayer to obtain consent to a change in method of
accounting in accordance with § 446(e).
.07 Rev. Proc. 2015-13, 2015-5 I.R.B. 419, as clarified and modified by Rev. Proc.
2015-33, 2015-24 I.R.B. 1067, as modified by Rev. Proc. 2016-1, 2016-1 I.R.B. 1, and
as modified by Rev. Proc. 2017-59, 2017-48 I.R.B. 543, provides the general
procedures by which a taxpayer may obtain automatic consent of the Commissioner to
a change in method of accounting described in the List of Automatic Changes. Rev.
Proc. 2018-31 contains the current List of Automatic Changes.
.08 Section 15.01 of Rev. Proc. 2018-31 provides automatic changes for certain
taxpayers that want to change their overall method of accounting from the cash method
to an accrual method, including taxpayers required to make this change by § 448.
.09 This revenue procedure provides that an eligible terminated S corporation
required to change from the cash method to an accrual method as a result of a
revocation of its S corporation election, and that makes this change in method of
accounting under section 15.01 of Rev. Proc. 2018-31 for the first taxable year that it is
a C corporation, must take the resulting positive or negative adjustment required by
§ 481(a)(2) into account ratably during the six-year period beginning with the year of
change. See § 481(d)(1). This revenue procedure also allows an eligible terminated
S corporation that is permitted to continue to use the cash method after the revocation
of its S corporation election and that changes to an accrual method under section 15.01

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of Rev. Proc. 2018-31 for the first taxable year that it is a C corporation, to take the
resulting positive or negative adjustment required by § 481(a)(2) into account ratably
during the six-year period beginning with the year of change. See § 1.446-1(e)(3)(ii).
.10 In addition to the change to an accrual method described in section 15.01 of Rev.
Proc. 2018-31, an eligible terminated S corporation may have other changes in method
of accounting that result in adjustments required by § 481(a) that are attributable to
such corporation’s revocation of its S corporation election as described in § 481(d)(2).
Any such change is not within the scope of this revenue procedure.
SECTION 3. MODIFICATION TO REV. PROC. 2018-31
.01 Section 15.01(3) of Rev. Proc. 2018-31 is modified to read as follows:
(3) Manner of making change.
(a) Section 481(a) adjustment.
(i) In general. A taxpayer changing its method of accounting under
this section 15.01 must compute a § 481(a) adjustment. This adjustment must reflect
the account receivables, account payables, inventory, and any other item determined
to be necessary in order to prevent items from being duplicated or omitted. However,
the adjustment does not include any item of income accrued but not received that was
worthless or partially worthless (within the meaning of § 166(a)) on the last day of the
year immediately prior to the year of change.
(ii) Temporary rule for certain S corporation revocations. The rules in
this section 15.01(3)(a)(ii) apply to an eligible terminated S corporation, as defined in
§ 481(d)(2), that changes to an overall accrual method of accounting in the C

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corporation’s first taxable year after its revocation of its election under § 1362(a), and
such revocation occurs during the two-year period beginning on December 22, 2017.
(A) Required spread period. Pursuant to § 481(d)(1), an eligible
terminated S corporation required to change to an overall accrual method as a result of a
revocation of its S corporation election that changes its method of accounting under this
section 15.01 in the C corporation’s first taxable year after such revocation, takes into
account the resulting positive or negative adjustment required by § 481(a)(2) ratably
during the six-year period beginning with the year of change.
(B) Optional six-year spread period. An eligible terminated S
corporation that is permitted to continue to use the overall cash method after the
revocation of its S corporation election, and that changes to an overall accrual method
under this section 15.01 in the C corporation’s first taxable year after such revocation,
may take into account the resulting positive or negative adjustment required by
§ 481(a)(2) ratably during the six-year period beginning with the year of change instead of
using the adjustment periods provided in section 7.03(1) of Rev. Proc. 2015-13. An
eligible terminated S corporation that wants to use this six-year spread period must
indicate in the statement required by Line 26 of Form 3115 (Rev. December 2015) that it
is making the change in method of accounting with the spread period permitted under this
section 15.01(3)(a)(ii)(B) on its timely filed Form 3115.
SECTION 4. EFFECT ON OTHER DOCUMENTS
Rev. Proc. 2018-31 is modified.
SECTION 5. APPLICABILITY DATE

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This revenue procedure is applicable to adjustments under § 481(a)(2) that result
from an eligible terminated S corporation’s change to an overall accrual method of
accounting in the C corporation’s first taxable year after the revocation of its election
under § 1362(a), when such revocation occurs during the two-year period beginning on
December 22, 2017.
DRAFTING INFORMATION
The principal author of this revenue procedure is Natasha Mulleneaux of the
Office of Associate Chief Counsel (Income Tax and Accounting). For further
information regarding this revenue procedure, contact Ms. Mulleneaux at (202) 317-
7007 (not a toll-free call).