[Code of Federal Regulations]
[Title 26, Volume 4]
[Revised as of April 1, 2004]
From the U.S. Government Printing Office via GPO Access
[CITE: 26CFR1.381(c)(4)-1]

[Page 387-396]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 1_INCOME TAXES--Table of Contents
 
Sec. 1.381(c)(4)-1  Method of accounting.

    (a) Carryover requirement--(1) General rule. (i) Section 381(c)(4) 
provides that, in a transaction to which section 381(a) applies, an 
acquiring corporation shall use the same method of accounting used by 
the distributor or transferor corporation on the date of distribution or 
transfer unless different methods of accounting were used on that date 
by several distributor or transferor corporations or by a distributor or 
transferor corporation and the acquiring corporation. If different 
methods of accounting were used, the acquiring corporation shall use the 
method or combination of methods of accounting adopted pursuant to this 
section.

[[Page 388]]

    (ii) The acquiring corporation shall take into its accounts the 
dollar balances of those accounts of the distributor or transferor 
corporation representing items of income or deduction which, because of 
its method of accounting, were not required or permitted to be included 
or deducted by the distributor or transferor corporation in computing 
taxable income for taxable years ending on or before the date of 
distribution or transfer. The acquiring corporation shall similarly take 
into its accounts the dollar balances of those accounts of the 
distributor or transferor corporation which represents reserves in 
respect of which the distributor or transferor corporation has taken a 
deduction for taxable years ending on or before the date of distribution 
or transfer. The acquiring corporation shall also take into its accounts 
the dollar balance of that account of the distributor or transferor 
corporation which represents a suspense account established by the 
distributor or transferor corporation under section 166(f)(4) in taxable 
years ending on or before the date of distribution or transfer. Items of 
income and deduction shall have the same character in the hands of the 
acquiring corporation as they would have had in the hands of the 
distributor or transferor corporation or corporations if no distribution 
or transfer had occurred. This section shall have no application to 
items of income or deduction, or dollar balances, to the extent they are 
attributable to assets or liabilities not distributed or transferred, 
and shall have no application to items the tax treatment of which is 
specifically provided for in other paragraphs of section 381(c). In the 
case of an obligation of the distributor or transferor corporation which 
is assumed by the acquiring corporation and which gives rise to a 
liability (within the meaning of paragraph (a)(4) of Sec. 1.381(c)(16)-
1) after the date of distribution or transfer, the deductibility of such 
an item is determined under this section if it is not deductible under 
section 381(c)(16) and the regulations thereunder. The amount of the 
adjustments necessary to reflect a change in accounting method pursuant 
to this section, the manner in which they are to be taken into account, 
and the tax attributable thereto shall be determined and computed under 
section 481 and the regulations thereunder, subject to the rules 
provided in paragraphs (c) and (d) of this section. Where such change is 
a change from the accrual to the installment method by a dealer in 
personal property, section 453(c) and the regulations thereunder apply.
    (2) Rules of application. For purposes of section 381(c)(4) and this 
section, the term method of accounting shall have the same meaning as 
that provided under section 446 and the regulations thereunder. This 
section shall not be construed as preventing the exercise of any 
election which may be made by the acquiring corporation without consent 
of the Commissioner, or preventing the application of section 269 or 
482, or the regulations thereunder. For provisions defining the date of 
distribution or transfer, see paragraph (b) of Sec. 1.381(b)-1. See 
other paragraphs of section 381(c) and the regulations thereunder for 
other rules regarding the treatment of the carryover of certain items 
specifically enumerated therein. See Sec. 1.460-4(k) for rules relating 
to transfers of contracts accounted for using a long-term contract 
method of accounting in a transaction to which section 381 applies.
    (b) Conditions for continuation of methods of accounting--(1) No 
differences in methods of accounting. If all the parties to a section 
381(a) transaction used the same method of accounting on the date of 
distribution or transfer, the acquiring corporation shall continue to 
use such method of accounting, unless the acquiring corporation has 
obtained the consent of the Commissioner in accordance with paragraph 
(e) of Sec. 1.446-1 to use a different method of accounting. This 
subparagraph may be illustrated by the following examples:

    Example (1). X Corporation and Y Corporation use the accrual method 
as their overall method of accounting. Both corporations have 
established a reserve for bad debts under section 166(c). Pursuant to 
elections made by each corporation, they are amortizing trademark and 
trade name expenditures over a 60-month period under section 177, 
expensing intangible drilling and development costs under section 
263(c), and accruing real property taxes ratably under section 461(c). 
It is assumed that there are no other

[[Page 389]]

items to which paragraph (a) of this section might apply. Y Corporation 
acquires all of the assets of X Corporation in a transaction to which 
section 381(a) applies. On and after the date of distribution or 
transfer Y Corporation must continue, without further election, to use 
the same overall method of accounting and the same accounting treatment 
of the specified items, unless consent of the Commissioner is obtained 
in accordance with paragraph (e) of Sec. 1.446-1 to change the methods 
of accounting. Thus, Y Corporation shall carry over the balance in X 
Corporation's reserve for bad debts account, shall continue to amortize 
and deduct over the remaining portion of the 60-month period the 
unamortized portion of the trademark and trade name expenditures carried 
over from X Corporation, and shall continue the same treatment of 
intangible drilling and development costs and of real property taxes.
    Example (2). M Corporation and N Corporation use the cash receipts 
and disbursements method of accounting. N Corporation acquires all of 
the assets and assumes all the obligations of M Corporation in a 
transaction to which section 381(a) applies. M Corporation, immediately 
prior to the transaction, is entitled to receive $10,000 for unbilled 
services performed, and has billed but not received payment for services 
performed in an amount of $20,000. It has received but not paid invoices 
amounting to $18,000, and has received services in the amount of $5,000 
for which no invoices have been received. Since M Corporation and N 
Corporation are both on the cash receipts and disbursements method, N 
Corporation must continue to use that method, unless consent of the 
Commissioner is obtained in accordance with paragraph (e) of Sec. 
1.446-1 to change its method of accounting. Accordingly, N Corporation 
must include in income when received the unrealized receivables of M 
Corporation and may deduct the payment of those obligations of M 
Corporation which would have been deductible by such corporation if paid 
by it. Thus, N Corporation shall treat as ordinary income the receipt by 
it of M Corporation's $30,000 of receivables, and may deduct upon 
payment the amount of M Corporation's $23,000 of payables which would 
have been deductible by it.
    Example (3). S Corporation and T Corporation are both publishers and 
use the accrual method as their overall method of accounting. Both 
corporations have elected under section 455 to defer prepaid 
subscription income to the taxable years during which the liability to 
furnish the newspaper, magazine, or other periodical exists. T 
Corporation, in a transaction to which section 381(a) applies, acquires 
all the assets of S Corporation and assumes the liability of such 
corporation to furnish or deliver the newspaper, magazine, or other 
periodical. On and after the date of the transfer, T Corporation must 
continue, without further election, to use the accrual method as its 
over-all method of accounting and to defer prepaid subscription income 
under section 455, unless consent of the Commissioner is obtained in 
accordance with paragraph (e) of Sec. 1.446-1 to change the method of 
accounting. T Corporation shall carry over the closing balance of S 
Corporation's prepaid subscription income account. The principles in 
this example would be equally applicable if both corporations had been 
deferring prepaid subscription income under a method permitted by 
subsection (e) of section 455.

    (2) Separate businesses. If, after the date of distribution or 
transfer, the trades or businesses of the parties to a transaction 
described in section 381(a) are operated as separate and distinct trades 
or businesses within the meaning of paragraph (d) of Sec. 1.446-1, then 
the method of accounting employed by the parties to the transaction on 
the date of distribution or transfer with respect to each trade or 
business shall be used by the acquiring corporation, unless the 
acquiring corporation has obtained the consent of the Commissioner in 
accordance with paragraph (e) of Sec. 1.446-1 to use a different method 
of accounting, or unless the Commissioner prescribes a different method 
of accounting under paragraph (b)(1) of Sec. 1.446-1. However, if only 
a single method of accounting may be employed by a taxpayer with respect 
to a particular item regardless of the number of separate and distinct 
trades or businesses operated by such taxpayer, but different methods 
were employed by the several corporations on the date of distribution or 
transfer with respect to such item, then the acquiring corporation shall 
adopt the principal method of accounting determined under paragraph (c) 
of this section (see subparagraph (2)(iv) thereof) for such item, or the 
method of accounting determined in accordance with paragraph (d) of this 
section, whichever is applicable. This subparagraph may be illustrated 
by the following examples:

    Example (1). M Corporation is engaged in a personal service business 
and uses the cash receipts and disbursements method of accounting. N 
Corporation is engaged in a retail furniture business and uses the 
accrual method of accounting. N Corporation acquires the assets of M 
Corporation in a transaction to which section 381(a) applies. In 
accordance with paragraph (d) of Sec. 1.446-1,

[[Page 390]]

N Corporation operates as a separate and distinct trade or business the 
personal service business formerly operated by M Corporation. Unless 
consent of the Commissioner is obtained in accordance with paragraph (e) 
of Sec. 1.446-1 to change the method of accounting, N Corporation shall 
continue to use the cash receipts and disbursements method of accounting 
with respect to the personal service business formerly operated by M 
Corporation, and shall use the accrual method of accounting with respect 
to the retail furniture business.
    Example (2). Assume the same facts as in Example (1), except that M 
Corporation has elected under section 171 to amortize bond premium with 
respect to fully taxable bonds. N Corporation has not made the election 
to amortize bond premium with respect to such bonds owned by it. N 
Corporation may not continue separate accounting methods as to 
amortizable bond premium but must consistently apply only a single 
method of accounting with respect to such bond premium since the 
election to amortize bond premium applies to all fully taxable bonds 
held by the taxpayer. N Corporation shall use the principal method of 
accounting determined under paragraph (c) of this section for such bond 
premium, unless it is determined in accordance with paragraph (d) of 
this section that a different method of accounting is to be used. 
However, if such principal or different method of accounting is not to 
amortize bond premium N Corporation is not precluded from making a new 
election to the extent permitted by section 171.

    (3) Integrated businesses. (i) If, after the date of distribution or 
transfer, any of the trades or business of the parties to a transaction 
in section 381(a) are not operated as separate and distinct trades or 
businesses within the meaning of paragraph (d) of Sec. 1.446-1, then, 
to the extent that the same methods of accounting were employed on the 
date of distribution or transfer by the parties to the transaction with 
respect to any trades or businesses which are integrated or are required 
to be integrated in accordance with section 446(d) and the regulations 
thereunder, the acquiring corporation shall continue to employ such 
methods of accounting, unless the acquiring corporation has obtained the 
consent of the Commissioner in accordance with paragraph (e) of Sec. 
1.446-1 to use a different method of accounting, or unless the 
Commissioner prescribes a different method of accounting under paragraph 
(b)(1) of Sec. 1.446-1.
    (ii) If, after the date of distribution or transfer, any of the 
trades or businesses of the parties to a transaction described in 
section 381(a) are not operated as separate and distinct trades or 
businesses within the meaning of paragraph (d) of Sec. 1.446-1, then, 
to the extent that different methods of accounting were employed on the 
date of distribution or transfer by the parties to the transaction with 
respect to any trades or businesses which are integrated or required to 
be integrated in accordance with section 446(d) and the regulations 
thereunder, this paragraph shall not apply and the acquiring corporation 
shall adopt the principal method of accounting determined under 
paragraph (c) of this section or the method of accounting determined in 
accordance with paragraph (d) of this section, whichever is applicable.
    (iii) The provisions of this subparagraph may be illustrated by the 
following examples:

    Example (1). M Corporation and N Corporation both use the accrual 
method as an overall method of accounting. M Corporation has established 
a reserve for bad debts while N Corporation uses the specific charge-off 
method with respect to its bad debts. N Corporation acquires all of the 
assets of M Corporation in a transaction to which section 381(a) applies 
and integrates the business formerly operated by M Corporation into the 
business operated by N Corporation before the date of distribution or 
transfer. N Corporation shall continue to use the accrual method as its 
overall method of accounting, unless consent of the Commissioner is 
obtained in accordance with paragraph (e) of Sec. 1.446-1 to change its 
method of accounting. N Corporation shall use the principal method of 
accounting determined under paragraph (c) of this section with respect 
to bad debts, or the method of accounting determined in accordance with 
paragraph (d) of this section, whichever is applicable.
    Example (2). X Corporation conducts two separate and distinct trades 
or businesses, a personal service business with respect to which the 
cash receipts and disbursements method of accounting is used and a 
manufacturing business with respect to which the accrual method of 
accounting is used. Y Corporation conducts a manufacturing business and 
uses the accrual method of accounting. Y Corporation acquires all of the 
assets of X

[[Page 391]]

Corporation in a transaction to which section 381(a) applies. After the 
date of distribution or transfer, Y integrates the manufacturing 
business formerly operated by X Corporation into the manufacturing 
business operated by it and continues to operate as a separate and 
distinct trade or business the personal service business formerly 
operated by X Corporation. Unless consent of the Commissioner is 
obtained in accordance with paragraph (e) of Sec. 1.446-1 to change the 
method of accounting, Y Corporation shall continue to use the accrual 
method of accounting with respect to the integrated manufacturing 
business and shall continue to use the cash receipts and disbursements 
method of accounting with respect to the personal service business.

    (4) Rules of application. In any case where the method of accounting 
employed on the date of distribution or transfer is continued, it will 
be unnecessary for the acquiring corporation to renew any election 
previously made by it or by any distributor or transferor corporation 
with respect to such method of accounting. Also, the acquiring 
corporation is bound by any election previously made by it or by any 
distributor or transferor corporation with respect to such method of 
accounting which is in effect on the date of distribution or transfer to 
the same extent as though the distribution or transfer had not occurred. 
If, on the date of distribution or transfer, any party to a section 
381(a) transaction had no established method of accounting for any item, 
or came into existence as a result of the transaction, such party shall 
not be considered to be using a method of accounting for such item or 
having an overall method of accounting different from that used by the 
other parties to the transaction. Where under other sections of the 
Internal Revenue Code or regulations thereunder a taxpayer is permitted 
to elect a method of accounting on a project-by-project, job-by-job, or 
other similar basis (such as the election to charge taxes and carrying 
charges to capital account under Sec. 1.266-1), that method elected 
with respect to each project or job shall be deemed to be an established 
method of accounting only for the project or job for which it is 
elected. Accordingly, unless two or more of the parties were working on 
the same project or job and were using different methods of accounting 
for such project or job before the date of distribution or transfer, the 
method of accounting previously elected for each project or job must be 
continued.
    (c) Change of method of accounting without consent of Commissioner--
(1) General rule. If the acquiring corporation may not continue to use, 
under the provisions of paragraph (b) of this section, the method of 
accounting used by it or the distributor or transferor corporation or 
corporations on the date of distribution or transfer, the acquiring 
corporation shall use the principal method of accounting of such 
corporation (as determined under subparagraph (2) of this paragraph), 
provided that (i) such method of accounting clearly reflects the income 
of the acquiring corporation, and (ii) the use of such method is not 
inconsistent with the provisions of any closing agreement entered into 
under section 7121 and the regulations thereunder. If the principal 
method of accounting does not meet these requirements, or if there is no 
principal method of accounting, see subdivision (i) of paragraph (d)(1) 
of this section. If the acquiring corporation wishes to use a method of 
accounting other than the principal method of accounting, see 
subdivision (ii) of paragraph (d)(1) of this section. Whenever this 
paragraph applies, the increase or decrease in tax resulting from the 
change from the method of accounting previously used by any of the 
corporations involved shall be taken into account by the acquiring 
corporation. The adjustments necessary to reflect such change and such 
increase or decrease in tax shall be determined and computed in the same 
manner as if on the date of distribution or transfer each of the several 
corporations whose method or methods of accounting are required to be 
changed in accordance with this section had initiated a change in 
accounting method. In addition, the acquiring corporation shall take 
into account the portion of such adjustments which is attributable to 
pre-1954 Code years to the extent not taken into account by any of the 
other corporations in accordance with the rules provided in section 
481(b)(4) and this paragraph. If the principal method of accounting is 
adopted under this paragraph, it will be

[[Page 392]]

unnecessary for the acquiring corporation to renew any election 
previously made by it or by any distributor or transferor corporation 
with respect to such principal method of accounting. Also, in such 
event, the acquiring corporation is bound by any election previously 
made by it or by any distributor or transferor corporation with respect 
to such principal method of accounting which is in effect on the date of 
distribution or transfer to the same extent as though the distribution 
or transfer had not occurred.
    (2) Principal method of accounting. (i) The determination of the 
principal method of accounting shall be made with respect to each 
integrated trade or business operated by the acquiring corporation 
immediately after the date of distribution or transfer, except with 
respect to items for which only a single method of accounting may be 
used by any one taxpayer. See subdivision (iv) of this subparagraph. 
Such determination for an integrated trade or business shall be made by 
reference to the methods of accounting used immediately preceding the 
date of distribution or transfer by each of the component trades or 
businesses which now constitute the integrated trade or business of the 
acquiring corporation. The method of accounting for items other than 
those for which special methods of accounting are provided under chapter 
1 of the Code and the regulations thereunder (see Sec. 1.446-
1(c)(1)(iii)) shall be governed by the principal overall method 
determined for such trade or business under subdivision (ii) of this 
subparagraph. The method of accounting for items for which special 
methods of accounting are provided under chapter 1 of the Code and the 
regulations thereunder shall be determined under subdivision (iii) of 
this subparagraph.
    (ii) The principal overall method of accounting of an integrated 
trade or business is determined by making a comparison of--
    (a) The total of the adjusted bases of the assets (determined under 
section 1011 and the regulations thereunder) immediately preceding the 
date of distribution or transfer, and
    (b) The gross receipts for a representative period (ordinarily the 
most recent period of 12 consecutive calendar months ending on or prior 
to the date of distribution or transfer)

of the component trades or businesses which are integrated or are 
required to be integrated. If more than one component trade or business 
used the same overall method, then such total assets and gross receipts 
of each of the component trades or businesses shall be aggregated and 
compared with the aggregate of such total assets and gross receipts of 
other component trades or businesses which used a different overall 
method. If this comparison shows that the one or more component trades 
or businesses (using a common overall method of accounting) having the 
greatest total of the adjusted bases of assets also has the greatest 
amount of gross receipts, then the overall method of accounting of such 
one or more component trades or businesses shall be the principal 
overall method of accounting. If this comparison shows that the one or 
more component trades or businesses (using a common overall method of 
accounting) having the greatest total of the adjusted bases of assets 
does not also have the greatest amount of gross receipts, then there is 
no principal overall method of accounting, and the acquiring corporation 
shall request the Commissioner to determine the appropriate overall 
method of accounting for such integrated trade or business in accordance 
with paragraph (d) of this section.
    (iii) The principal method of accounting for an item for which a 
special method or methods of accounting are provided under chapter 1 of 
the Code and the regulations thereunder is determined by comparing the 
amounts of such item and related accounts for the component trades or 
businesses in accordance with the principles of subdivision (ii) of this 
subparagraph. Thus, for example, in the case of bad debts, trades or 
businesses which are components of the integrated trade or business and 
which had been using the reserve method of accounting will be compared 
with the other component trades or businesses which had been using the 
specific charge-off method of accounting. In such a case, the following 
factors would ordinarily be used in determining the principal method of 
accounting for bad debts: (a) Sales on

[[Page 393]]

account for the most recent period of 12 consecutive calendar months 
ending on or prior to the date of distribution or transfer, (b) accounts 
receivable immediately before the date of distribution or transfer, and 
(c) the amount of debts which became worthless within the meaning of 
section 166(a) and the regulations thereunder during the most recent 
period of 12 consecutive calendar months ending on or prior to the date 
of distribution or transfer. If this comparison shows that the one or 
more component trades or businesses using the same method of accounting 
with respect to bad debts have the greater amounts of such sales, 
accounts receivable, and bad debts, then the method of accounting with 
respect to bad debts for such one or more component trades or businesses 
shall be the principal method of accounting. If such comparison shows 
that the one or more component trades or businesses using the same 
method of accounting with respect to bad debts do not have the greater 
amounts of all of such items, then there is no principal method of 
accounting with respect to bad debts, and the acquiring corporation 
shall request the Commissioner to determine the appropriate method of 
accounting for bad debts for such integrated trade or business in 
accordance with paragraph (d) of this section.
    (iv) If a single method of accounting must be employed by a taxpayer 
with respect to a particular item regardless of the number of separate 
and distinct trades or businesses operated by the taxpayer, the 
principal method of accounting for such item shall be determined by 
comparing the aggregate amount of the item and related accounts for all 
the parties to the transaction using a common method, with the aggregate 
amount of the item and related accounts for those parties to the 
transaction which use a different common method. The method of 
accounting of the party having the greatest aggregate amount of such 
item and related accounts shall be the principal method of accounting 
for such item.
    (3) Examples. The provisions of this paragraph may be illustrated by 
the following examples:

    Example (1). M Corporation, which commenced business in 1955, uses 
the cash receipts and disbursements method of accounting, while N 
Corporation uses the accrual method. On June 30, 1961, N Corporation 
acquires all of the assets of M Corporation in a transaction to which 
section 381(a) applies. N Corporation then integrates its own business 
with that of M Corporation. Immediately prior to the transfer the total 
of the adjusted bases of the assets of N Corporation was greater than 
that of M Corporation, and for the 12-month period ending on June 30, 
1961, the gross receipts of N Corporation were greater than that of M 
Corporation. Under such circumstances, the accrual method of accounting 
is the principal overall method of accounting and N Corporation shall 
use such method for the integrated business, provided it clearly 
reflects income, unless consent of the Commissioner is obtained in 
accordance with paragraph (d) of this section to use a different method 
of accounting. Except as to items for which N Corporation had no 
established method of accounting and items for which a special method of 
accounting is provided under chapter 1 of the Code and the regulations 
thereunder, all adjustments necessary to place the accounts of M 
Corporation on the accrual method shall be made in accordance with 
section 481. Any increase or decrease in tax resulting from such 
adjustments shall be taken into account by N Corporation. Such 
adjustments and such increase or decrease in tax shall be determined and 
computed in the same manner as if M Corporation had initiated a change 
in method of accounting on June 30, 1961.
    Example (2). Assume the same facts as in Example (1) except that the 
gross receipts of M Corporation were greater than those of N Corporation 
for the 12-month period ending on June 30, 1961. N Corporation must, 
under such circumstances, request the Commissioner to determine the 
appropriate overall method of accounting, in accordance with the 
provisions of paragraph (d) of this section. The necessary adjustments 
to be made by the corporation whose method of accounting is changed 
shall be made in accordance with section 481 to place the integrated 
business on the method so adopted. Any increase or decrease in tax 
resulting from such adjustments shall be taken into account by N 
Corporation. Such adjustments and such increase or decrease in tax shall 
be determined and computed in the same manner as if the corporation 
whose method is changed had initiated a change in method of accounting 
on June 30, 1961.
    Example (3). Assume the same facts as in Example (1). Assume further 
that M Corporation's deduction for wages and salaries for the 12 
calendar months ending on June 30, 1961, is larger than N Corporation's 
deduction for wages and salaries for such period. Since wages and 
salaries is not an item for

[[Page 394]]

which a special method of accounting is provided under chapter 1 of the 
Code or the regulations thereunder, the necessary adjustments shall be 
made in accordance with section 481 to place the wages and salary 
account of M Corporation on the accrual method of accounting, provided 
such accrual method clearly reflects income, unless consent of the 
Commissioner is obtained in accordance with paragraph (d) of this 
section to use a different method of accounting. Any increase or 
decrease in tax resulting from such adjustments shall be taken into 
account by N Corporation. Such adjustments and such increase or decrease 
in tax shall be determined and computed in the same manner as if M 
Corporation had initiated a change in method of accounting on June 30, 
1961.
    Example (4). Assume the same facts as in Example (1). Assume further 
that M Corporation used the specific charge-off method with respect to 
bad debts, and that N Corporation has established a reserve for bad 
debts. M Corporation's sales on account and bad debts for the 12 
calendar months ending June 30, 1961, were larger than those of N 
Corporation. Also M Corporation's accounts receivable immediately prior 
to June 30, 1961, were larger than those of N Corporation. Since the 
method of accounting for bad debts is a special method of accounting 
under section 166, M Corporation's method of accounting for bad debts is 
the principal method of accounting for such item. Assuming such method 
clearly reflects income, appropriate adjustments shall be made in 
accordance with section 481 to the accounts of N Corporation to place N 
Corporation on the specific charge-off method with respect to all of its 
bad debts, as if N Corporation had initiated a change in method of 
accounting on June 30, 1961, and N Corporation shall include the amount 
of its reserve for bad debts in gross income, unless consent of the 
Commissioner is obtained in accordance with paragraph (d) of this 
section to use a different method of accounting.
    Example (5). Assume the same facts as in Example (1) except that M 
Corporation commenced business in 1945. In addition assume that N 
Corporation is a calendar-year taxpayer and that of the total amount of 
the adjustments required by section 481 to place the accounts of M 
Corporation on the accrual method $40,000 is attributable to pre-1954 
Code years as described in section 481(b)(4) and the regulations 
thereunder. Assume further that M Corporation does not elect, under 
section 481(b)(6), to take the $40,000 portion of the adjustments into 
account in the manner described in section 481(b)(1) or (2). In 
computing the increase in tax of M Corporation attributable to the 
$40,000 portion of the adjustment for the fiscal year ended June 30, 
1961, only one-tenth, or $4,000, will be taken into account. The 
resulting increase in tax shall be taken into account by N Corporation. 
The remaining nine-tenths of the $40,000 portion of the adjustments, or 
$36,000, shall be taken into account by N Corporation in the amount of 
$4,000 in each of the calender years 1962 through 1970.

    (d) Change of method of accounting with consent of Commissioner--(1) 
General rule. (i) If the acquiring corporation may not continue to use, 
under paragraph (b), the method of accounting used by it or the 
distributor or transferor corporation or corporations on the date of 
distribution or transfer, and may not under paragraph (c) use the 
principal method of accounting, or, if there is no principal method of 
accounting, then the Commissioner shall determine the appropriate method 
or combination of methods of accounting to be used.
    (ii) If an acquiring corporation wishes to use a method or 
combination of methods of accounting other than the principal method of 
accounting which is required to be used by paragraph (c) of this 
section, it shall apply to the Commissioner for permission to use such 
other method or combination of methods of accounting. Permission to use 
such other method or combination of methods of accounting will not be 
granted unless the acquiring corporation and the Commissioner agree to 
the terms, conditions, and adjustments under which the change to such 
method or combination of methods will be effected.
    (iii) The increase or decrease in tax resulting from the change from 
the method of accounting previously used by any of the corporations 
involved shall be taken into account by the acquiring corporation. The 
adjustments necessary to reflect such change and such increase or 
decrease in tax shall be determined and computed in the same manner as 
if, on the date of distribution or transfer, each of the several 
corporations that were not using the method or combination of methods of 
accounting adopted pursuant to subdivision (i) or (ii) of this 
subparagraph had initiated a change in accounting method.
    (2) Time and manner of making application. Applications under 
subparagraph (1) of this paragraph for permission to use a method of 
accounting or requests

[[Page 395]]

for determination of the method of accounting to be used shall be filed 
with the Commissioner of Internal Revenue, Attention: T:R, Washington, 
DC, 20224, not later than 90 days after the date of distribution or 
transfer, except that in cases where the date of distribution or 
transfer occurs before August 5, 1964, such applications or requests 
shall be filed not later than November 3, 1964. The application shall be 
accompanied by a copy of the statement described in paragraph (b)(3) of 
Sec. 1.381(b)-1, and by a statement specifying the nature of the 
transaction which causes section 381 to apply; the difference in 
accounting methods used by the corporations concerned; the method or 
methods of accounting proposed to be used by the acquiring corporation; 
and the various amounts, if any, of items of income or deduction which 
will be duplicated or omitted in the computation of taxable income under 
such proposed method or methods. The Commissioner may also require such 
other information as may be necessary in order to determine the 
appropriate method or combination of methods of accounting to be used by 
the acquiring corporation.
    (e) Special rules applicable to distributions or transfers before 
August 5, 1964--(1) Statute of limitations bars assessment or refund. If 
the date of distribution or transfer was before August 5, 1964, and if 
the assessment of any deficiency or the refund or credit of any 
overpayment for the taxable year of the acquiring corporation which 
includes the date of distribution or transfer or any subsequent taxable 
year is prevented by the operation of any law or rule of law, then this 
section does not authorize the Commissioner or the acquiring corporation 
to change any method or methods of accounting in any taxable year of the 
acquiring corporation. However, the Commissioner or the acquiring 
corporation may change such method or methods of accounting under the 
provisions of section 446 and the regulations thereunder or, where 
applicable, any section of the Internal Revenue Code (other than section 
381(c)(4)), or the regulations thereunder, in accordance with which such 
changes may be made without the consent of the Commissioner.
    (2) Statute of limitations does not bar assessment and refund. 
Except as provided in subparagraph (1) of this paragraph--
    (i) If the date of distribution or transfer was before August 5, 
1964, and the acquiring corporation has, for the taxable year which 
includes the date of distribution or transfer, (a) adopted or continued 
a method of accounting consistent with the rules of this section, (b) 
been granted permission by the Commissioner in accordance with paragraph 
(e) of Sec. 1.446-1 to use a method or combination of methods of 
accounting, or (c) adopted a method of accounting that under other 
sections of the Internal Revenue Code, or regulations thereunder, may be 
adopted without the consent of the Commissioner, then the method or 
methods of accounting adopted or continued in the manner described in 
(a), (b), and (c) shall not be changed, by reason of the rules contained 
in this section, by the Commissioner or the acquiring corporation for 
any taxable year ending after the date of distribution or transfer. 
However, the Commissioner or the acquiring corporation may change such 
methods of accounting for any such taxable year under the provisions of, 
and to the extent permitted by, section 446 and the regulations 
thereunder or, where applicable, any section of the Internal Revenue 
Code (other than section 381(c)(4)), or regulations thereunder, in 
accordance with which such change may be made without the consent of the 
Commissioner.
    (ii) If the date of distribution or transfer was before August 5, 
1964, and the acquiring corporation has, for the taxable year which 
includes the date of distribution or transfer, adopted or continued a 
method or methods of accounting other than in the manner described in 
(a), (b), and (c) of subdivision (i) of this subparagraph, then the 
acquiring corporation may--
    (a) Continue to use the method or methods of accounting so adopted 
or continued if such method or methods clearly reflect income and if 
proper adjustments were made to reflect the adoption of such method or 
methods, or
    (b) Adopt the method or methods of accounting prescribed by this 
section.

[[Page 396]]

Such method or methods of accounting shall be adopted by filing an 
amended return (which includes the proper adjustments required by this 
section) for the taxable year of the acquiring corporation which 
includes the date of distribution or transfer, and by filing amended 
returns for all subsequent taxable years of the acquiring corporation 
for which returns have previously been filed. Such amended return or 
returns shall be accompanied by a copy of the statement described in 
paragraph (b)(3) of Sec. 1.381(b)-1, and by a statement specifying the 
nature of the transaction which causes section 381 to apply; the 
difference in accounting methods used by the corporations concerned; the 
method or methods of accounting originally adopted by the acquiring 
corporation; the method or methods of accounting adopted on the amended 
return or returns; and the computation of the amount of the adjustments 
and the resulting increase or decrease in tax.

[T.D. 6750, 29 FR 11263, Aug. 5, 1964, as amended by T.D. 8071, 51 FR 
2481, Jan. 17, 1986; T.D. 8995, 67 FR 34605, May 15, 2002]