IRS limits ability to adopt new accounting methods after a sec. 351 transfer.

• Author: Mackles, Glenn F.
• Position: Brief Article

For many years, clients wanting to adopt a new accounting method to which the IRS would not consent were advised to drop the business down to a new subsidiary in a Sec. 351 transaction and to adopt the desired accounting method in the new subsidiary. This approach worked because Sec. 381 (c) (4) does not apply to Sec. 351 transactions and, therefore, the new subsidiary did not have to use the transferor's accounting method. This technique was often used when a business wanted to adopt the cash method of accounting, when certain income deferral methods were desired (such as deferral of prepaid service revenue) or when certain inventory methods were used.

The Service, however, has now issued new regulations that will severely restrict the ability to use this approach in affiliated groups filing consolidated returns. New Regs. Sec. 1.1502-17(c) states that, if a member of a group acquires an activity with the principal purpose of giving the group an accounting method that would be unavailable (or unavailable without consent), the acquiring member must use the accounting method...