Comments on economic performance and the accrual of state and local property taxes, February 27, 1990.

Comments on Economic Performance and the Accrual of State and Local Property Taxes

On February 27, 1990, Tax Executives Institute filed comments with the Internal Revenue Service concerning forthcoming regulations under section 461(h) of the Internal Revenue Code. Section 461(h), which was enacted in 1984, provides that a liability otherwise subject to accrual under the "all events" test may not be taken into account for tax purposes until "economic performance" in respect of that item occurs. (For example, with respect to a liability arising out of services provided to the taxpayer, economic performance occurs as the services are provided.) On February 13, 1990, Ralph J. Weiland of Abbott Laboratories and Timothy J. McCormally, TEI Tax Counsel, attended a meeting at the IRS on section 461(h). TEI's comments, prepared under the aegis of the Federal Tax Committee, are reprinted below.

Tax Executives Institute appreciates the opportunity it had to participate in your February 13, 1990, meeting on section 461(h) of the Internal Revenue Code. (TEI was represented at the meeting by Ralph Weiland and Timothy McCormally.) This letter follows up on one of the issues discussed during that meeting - the proper treatment of state and local property taxes under the economic performance standard.

Stated simply, TEI does not believe the statutory provision (or its legislative history) mandates an abandonment of published rulings providing that such expenses are accrued as of the lien (or personal liability) date or the assessment date. Consequently, we believe that the retroactive application of regulations overturning such rulings would not only be at odds with the general principles underlying section 7805(b) of the Code, but would also be inconsistent with the legislative history of section 461(h).

General Comments

In addressing this question, we believe it is important to keep in mind that the premature accrual provisions of the Deficit Reduction Act of 1984 were not promoted by general concern over the tax treatment of myriad routine, recurring business transactions under the accrual method of accounting. Rather, they were the result of congressional concern over the treatment of special expense items such as mine reclamation and nuclear decommissioning expenses, workers compensation claims, and tort liabilities. Ironically, under the final legislation, these items are governed not by the general rules of section 461(h) but by more targeted provisions of the Code.(*)

In discussions with representatives of the Internal Revenue Service (including Commissioner Roscoe Egger and then-Chief Counsel Fred Goldberg) shortly after the 1984 Act became law, it was acknowledged that section 461(h) should properly not affect the majority of routine business transactions. Although more than five years have elapsed since that time, we remain convinced that the IRS's forthcoming economic performance regulations should confirm...