Section 461: a code section whose time has gone - d

Tax Executive, The, Jan-Feb, 1994 by Larry J. Lisses, Russell C. Nissen

Other States Taxes and Section 461(d)

What can be applied to California taxes can also applied to taxes imposed by other States. In fact, it already has--to a taxpayer that applied for a change in its method of accounting for the Maryland Gross Receipts Tax. Specifically, in General Counsel Memorandum 39590 (Dec. 4, 1986), the IRS Office of Chief Counsel opined:

We agree with the position of the Corporate Tax Division that under section 461 and the all events test of Treas. Reg. Sec. 1.461-1(a)(2), the taxpayer should properly accrue and deduct the gross receipts tax imposed by the State of Maryland in the calendar year following the end of the income year. We reach this conclusion, because section 461(d) requires that, in the case of accrual basis taxpayer, to the extent any action of a taxing jurisdiction taken after December 31, 1960, accelerates the time for accruing a tax liability, then such taxes shall be treated as accruing at the time they would have accrued but for such action of the taxing jurisdiction.

In reaching this conclusion, the IRS discussed how the Maryland Gross Receipts Tax had been amended several times since December 31, 1960, but that prior to that date the tax had been calculated on the basis of gross receipts for the preceding calendar year and payable in the then-current taxable year.

Thus, in Maryland (as in California) a situation exists under which the deductibility of a state tax must be based on an extinct law. Were the timing of the deduction to be based on current law, it is clear that the Maryland Gross Receipts would be deductible as accrued in the current (income) year.

Like Judge Halpern's decision in Hitachi, General Counsel Memorandum 39590 implicitly recognized that the result was at odds with, or at least went beyond, what Congress intended in enacting section 461(d)--the double dip:

Furthermore, although section 461(d) was aimed at the problem of accruing two years' tax in one year, the language of the section itself is broader in that it applies to any action that will accelerate tax...Thus, by its language...section 461(d) applies to any acceleration of the time for accruing state tax, even if there is...no potential problem of taxpayer claiming two years' state tax in one year.

Therefore, because we have concluded that section 461(d) is applicable to any action causing an acceleration of the time for accruing state taxes regardless of the motivation for the action and regardless whether a section 481 adjustment would be made, we conclude that...section 461(d) bars the accrual of the Maryland gross receipts tax until the calendar year following the income year.

The Relevance of Section 461(h)

Section 461(h) adds a new dimension to the deductibility of accrued liabilities, and it underscores the superfluity of section 461(d). Paragraph (1) of section 461(h) pronounces a general rule that "the all events test shall not be treated as met any earlier than when economic performance with respect to such item occurs."(4) Paragraph (2) sets forth several principles governing when economic performance occurs but also contains a broad (and overriding) grant of regulatory authority to the Secretary of the Treasury. Thus, under section 461(h), a liability is deductible if it meets the above described all-events test and economic performance has occurred as defined in the regulations.