Research or experimental expen­ditures; accounting methods change. A taxpayer may not change without the consent of the Com­missioner its treatment of research or experimental expenditures from the deferred expense method to the expense method of accounting by fil­ing an amended federal income tax return.

Rev. Rul. 83-138


ISSUE

May a taxpayer change its treat­ment of research or experimental expenditures from the deferred ex­pense method to the expense method by filing an amended federal income tax return?

FACTS

The taxpayer, an electing small business corporation as defined in section 1371 of the Internal Revenue Code, uses the case receipts and dis­bursements method of accounting. The taxpayer, a calendar year tax­payer, is required to file its federal in­come tax return on or before the 15th day of March following the close of the calendar year. In 1980, the tax­payer paid research or experimental expenditures as described in section 1.174-2 of the Income Tax Regula­tions in connection with its trade or business. This was the first tax year in which the taxpayer paid this type of expenditure.

The taxpayer filed its original fed­eral income tax return that was due for 1980 on March 10, 1981. The tax­payer treated its research or ex­perimental expenditures as deferred expenses that are deducted ratably over a 60-month period under section 174(b) of the Code on its 1980 federal income tax return by making an af­firmative election that complied with section 1.174-4 of the regulations. On September 10, 1981, the taxpayer filed an amended federal income tax return in which it treated the research or experimental expenditures as ex­penses under section 174(a).

LAW AND ANALYSIS

Section 174(a) of the Code provides that a taxpayer may treat research and experimental expenditures paid or incurred in connection with the taxpayer’s trade or business as ex­penses that are not chargeable to a capital account. The expenditures are allowed as a deduction. The taxpayer may adopt this method without the consent of the Secretary for the tax­payer’s first tax year in which the ex­penditures are paid. The method adopted under section 174(a) must be adhered to in computing taxable in­come for the taxable year and for all subsequent taxable years unless, with the approval of the Secretary, a change to a different method is authorized with respect to part or all of these expenditures.

Section 174(b) of the Code pro­vides that, at the election of the tax­payer, research or experimental ex­penditures that are not treated as ex­penses under section 174(a) and are chargeable to a capital account, with certain exceptions, may be treated as deferred expenses. In computing tax­able income, these deferred expenses are allowed as a deduction ratably over a period of not less than 60 months. The election to treat research or experimental expenditures as de­ferred expenses must be made not later than the time prescribed by law for filing the return for the taxable year (including extensions thereof) for which this method is to be adopted. The method and period se­lected by the taxpayer must be ad­hered to in computing taxable income for the taxable year the election is made for all subsequent taxable years unless, with the approval of the Secretary, a change to a different method (or to a different period) is authorized with respect to part or all of this expenditure.

Section 1.174-3 of the regulations provides that a taxpayer may adopt the method of treating research or ex­perimental expenditures as expenses under section 174(a) of the Code by claiming in the first tax year in which these expenditures are paid or incurred a deduction on its federal in­come tax return for that year. If the taxpayer fails to adopt this method for the first tax year in which the tax­payer pays or incurs these ex­penditures, the taxpayer cannot adopt the expense method in a sub­sequent tax year unless the taxpayer obtains the consent of the Commis­sioner.

Section 174 contains specific rules regarding the manner in which a tax­payer may either adopt or elect one of the methods for treating research or experimental expenditures. One of the limitations imposed under section 174 requires that a taxpayer, in com­puting taxable income, adhere to the method that is either adopted or elected for that year and all sub­sequent taxable years unless, with the approval of the Secretary, a change is authorized with respect to part or all of such expenditure. Therefore, a tax­payer that has either adopted the ex­pense method or elected the deferred expense method for research or ex­perimental expenditures has made a binding election for purposes of sec­tion 174 that cannot be changed with­out the consent of the Commissioner as allowed by the regulations.

In the present situation, the tax­payer elected the deferred expense method under section 174(b) of the Code on the income tax return filed for 1980, the first year in which these expenses were paid. However, 6 months after that return was timely filed, the taxpayer filed an amended federal income tax return for 1980 to adopt the expense method under sec­tion 174(a). The section 174(b) elec­tion is clearly set forth in the Code and requires the election to be made in a timely filed return. Because this is a binding election, it may not be re­voked except with the consent of the Commissioner. This rule applies to the first year the election is made re­gardless of how long the taxpayer has used the deferred expense method of accounting under section 174(b).

HOLDING

A taxpayer may not change without the consent of the Commissioner its treatment of research or experi­mental expenditures from the de­ferred expense method to the expense method by filing an amended federal income tax return.

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