
From the U.S. Code Online via GPO Access
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[Laws in effect as of January 2, 2001]
[Document not affected by Public Laws enacted between
  January 2, 2001 and January 28, 2002]
[CITE: 26USC481]

 
                     TITLE 26--INTERNAL REVENUE CODE
 
                        Subtitle A--Income Taxes
 
                  CHAPTER 1--NORMAL TAXES AND SURTAXES
 
       Subchapter E--Accounting Periods and Methods of Accounting
 
                          PART III--ADJUSTMENTS
 
Sec. 481. Adjustments required by changes in method of 
        accounting
        

(a) General rule

    In computing the taxpayer's taxable income for any taxable year 
(referred to in this section as the ``year of the change'')--
        (1) if such computation is under a method of accounting 
    different from the method under which the taxpayer's taxable income 
    for the preceding taxable year was computed, then
        (2) there shall be taken into account those adjustments which 
    are determined to be necessary solely by reason of the change in 
    order to prevent amounts from being duplicated or omitted, except 
    there shall not be taken into account any adjustment in respect of 
    any taxable year to which this section does not apply unless the 
    adjustment is attributable to a change in the method of accounting 
    initiated by the taxpayer.

(b) Limitation on tax where adjustments are substantial

                      (1) Three year allocation

        If--
            (A) the method of accounting from which the change is made 
        was used by the taxpayer in computing his taxable income for the 
        2 taxable years preceding the year of the change, and
            (B) the increase in taxable income for the year of the 
        change which results solely by reason of the adjustments 
        required by subsection (a)(2) exceeds $3,000,

    then the tax under this chapter attributable to such increase in 
    taxable income shall not be greater than the aggregate increase in 
    the taxes under this chapter (or under the corresponding provisions 
    of prior revenue laws) which would result if one-third of such 
    increase in taxable income were included in taxable income for the 
    year of the change and one-third of such increase were included for 
    each of the 2 preceding taxable years.

            (2) Allocation under new method of accounting

        If--
            (A) the increase in taxable income for the year of the 
        change which results solely by reason of the adjustments 
        required by subsection (a)(2) exceeds $3,000, and
            (B) the taxpayer establishes his taxable income (under the 
        new method of accounting) for one or more taxable years 
        consecutively preceding the taxable year of the change for which 
        the taxpayer in computing taxable income used the method of 
        accounting from which the change is made,

    then the tax under this chapter attributable to such increase in 
    taxable income shall not be greater than the net increase in the 
    taxes under this chapter (or under the corresponding provisions of 
    prior revenue laws) which would result if the adjustments required 
    by subsection (a)(2) were allocated to the taxable year or years 
    specified in subparagraph (B) to which they are properly allocable 
    under the new method of accounting and the balance of the 
    adjustments required by subsection (a)(2) was allocated to the 
    taxable year of the change.

    (3) Special rules for computations under paragraphs (1) and 
                                     (2)

        For purposes of this subsection--
            (A) There shall be taken into account the increase or 
        decrease in tax for any taxable year preceding the year of the 
        change to which no adjustment is allocated under paragraph (1) 
        or (2) but which is affected by a net operating loss (as defined 
        in section 172) or by a capital loss carryback or carryover (as 
        defined in section 1212), determined with reference to taxable 
        years with respect to which adjustments under paragraph (1) or 
        (2) are allocated.
            (B) The increase or decrease in the tax for any taxable year 
        for which an assessment of any deficiency, or a credit or refund 
        of any overpayment, is prevented by any law or rule of law, 
        shall be determined by reference to the tax previously 
        determined (within the meaning of section 1314(a)) for such 
        year.
            (C) In applying section 7807(b)(1), the provisions of 
        chapter 1 (other than subchapter E, relating to self-employment 
        income) and chapter 2 of the Internal Revenue Code of 1939 shall 
        be treated as the corresponding provisions of the Internal 
        Revenue Code of 1939.

(c) Adjustments under regulations

    In the case of any change described in subsection (a), the taxpayer 
may, in such manner and subject to such conditions as the Secretary may 
by regulations prescribe, take the adjustments required by subsection 
(a)(2) into account in computing the tax imposed by this chapter for the 
taxable year or years permitted under such regulations.

(Aug. 16, 1954, ch. 736, 68A Stat. 160; Pub. L. 85-866, title I, 
Sec. 29(a), (b), Sept. 2, 1958, 72 Stat. 1626-1628; Pub. L. 91-172, 
title V, Sec. 512(f)(4), Dec. 30, 1969, 83 Stat. 641; Pub. L. 94-455, 
title XIX, Secs. 1901(a)(70), 1906(b)(13)(A), Oct. 4, 1976, 90 Stat. 
1776, 1834; Pub. L. 96-471, Sec. 2(b)(3), Oct. 19, 1980, 94 Stat. 2254.)

                       References in Text

    The Internal Revenue Code of 1939, referred to in subsec. (b)(3)(C), 
is act Feb. 10, 1939, ch. 2, 53 Stat. 1, as amended. Prior to the 
enactment of the Internal Revenue Code of 1986 [formerly I.R.C. 1954], 
the 1939 Code was classified to former Title 26, Internal Revenue Code. 
Chapters 1 and 2 of the Internal Revenue Code of 1939 were comprised of 
sections 1 to 482 and 500 to 784, respectively, of former Title 26. 
Chapters 1 (except sections 143 and 144) and 2 were repealed by section 
7851(a)(1) of this title. For table of comparisons of the 1939 Code to 
the 1986 Code, see Table I preceding section 1 of this title. See, also, 
section 7851(e) of this title for provision that references in the 1986 
Code to a provision of the 1939 Code, not then applicable, shall be 
deemed a reference to the corresponding provision of the 1986 Code, 
which is then applicable.


                               Amendments

    1980--Subsec. (d). Pub. L. 96-471 struck out subsec. (d) which 
provided that this section was not to apply to a change to which section 
453 of this title, relating to change to installment method, applied.
    1976--Subsecs. (b)(1), (2). Pub. L. 94-455, Sec. 1901(a)(70)(B), 
struck out ``, other than the amount of such adjustments to which 
paragraph (4) or (5) applies,'' after ``required by subsection (a)(2)''.
    Subsec. (b)(4), (5), (6). Pub. L. 94-455, Sec. 1901(a)(70)(A), 
struck out par. (4) which related to special rule for pre-1954 general 
adjustments, par. (5) which related to special rule for pre-1954 
adjustments in case of certain decedents, and par. (6) which related to 
the application of the special rule for pre-1954 general adjustments.
    Subsec. (c). Pub. L. 94-455, Sec. 1906(b)(13)(A), struck out ``or 
his delegate'' after ``Secretary''.
    1969--Subsec. (b)(3)(A). Pub. L. 91-172 substituted ``loss carryback 
or carryover'' for ``loss carryover''.
    1958--Subsec. (a)(2). Pub. L. 85-866, Sec. 29(a)(1), inserted 
``unless the adjustment is attributable to a change in the method of 
accounting initiated by the taxpayer'', after ``does not apply''.
    Subsec. (b)(1). Pub. L. 85-866, Sec. 29(b)(1)-(3), inserted ``, 
other than the amount of such adjustments to which paragraph (4) or (5) 
applies,'' after ``subsection (a)(2)'' and substituted ``the aggregate 
increase in the taxes'' for ``the aggregate of the taxes'' and ``which 
would result if one-third of such increase in taxable income'' for 
``which would result if one-third of such increase''.
    Subsec. (b)(2). Pub. L. 85-866, Sec. 29(b)(1), (4), inserted ``other 
than the amount of such adjustments to which paragraph (4) or (5) 
applies,'' after ``subsection (a)(2)'', wherever appearing and ``(or 
under the corresponding provisions of prior revenue laws)'' after ``the 
net increase in the taxes under this Chapter''.
    Subsec. (b)(3)(A). Pub. L. 85-866, Sec. 29(b)(5), substituted 
``paragraph (1) or (2)'' for ``paragraph (2)'', wherever appearing.
    Subsec. (b)(4) to (6). Pub. L. 85-866, Sec. 29(a)(2), added pars. 
(4) to (6).


                    Effective Date of 1980 Amendment

    For effective date of amendment by Pub. L. 96-471, see section 
6(a)(1) of Pub. L. 96-471, set out as an Effective Date note under 
section 453 of this title.


                    Effective Date of 1976 Amendment

    Amendment by section 1901(a)(70) of Pub. L. 94-455 effective for 
taxable years beginning after Dec. 31, 1976, see section 1901(d) of Pub. 
L. 94-455, set out as a note under section 2 of this title.


                    Effective Date of 1969 Amendment

    Amendment by Pub. L. 91-172 applicable with respect to net capital 
losses sustained in taxable years beginning after Dec. 31, 1969, see 
section 512(g) of Pub. L. 91-172, set out as a note under section 1212 
of this title.


                    Effective Date of 1958 Amendment

    Section 29(d) of Pub. L. 85-866, as amended by Pub. L. 99-514, 
Sec. 2, Oct. 22, 1986, 100 Stat. 2095, provided that:
    ``(1) In general.--The amendments made by this section [amending 
this section and section 381 of this title] shall apply with respect to 
any change in a method of accounting where the year of the change 
(within the meaning of section 481 of the Internal Revenue Code of 1986 
[formerly I.R.C. 1954]) is a taxable year beginning after December 31, 
1953, and ending after August 16, 1954.
    ``(2) Exception for certain agreements.--The amendments made by 
subsections (a), (b)(I), and (c) [amending this section and section 381 
of this title] shall not apply if before the date of the enactment of 
this Act [Sept. 2, 1958]--
        ``(A) the taxpayer applied for a change in the method of 
    accounting in the manner provided by regulations prescribed by the 
    Secretary of the Treasury or his delegate, and
        ``(B) the taxpayer and the Secretary of the Treasury or his 
    delegate agreed to the terms and conditions for making the change.''


 Changes in Treatment of Policyholder Dividends by Qualified Group Self-
                             Insurers' Funds

    Pub. L. 101-239, title VII, Sec. 7816(m), Dec. 19, 1989, 103 Stat. 
2421, provided that: ``If, for the 1st taxable year beginning on or 
after January 1, 1987, a qualified group self-insurers' fund changes its 
treatment of policyholder dividends to take into account such dividends 
no earlier than the date that the State regulatory authority determines 
the amount of the policyholder dividend that may be paid, then such 
change shall be treated as a change in a method of accounting and no 
adjustment under section 481(a) of the Internal Revenue Code of 1986 
shall be made with respect to such change in method of accounting.''


   Transitional Provisions for Income Tax Treatment of Dealer Reserve 
                                 Income

    Pub. L. 86-459, May 13, 1960, 74 Stat. 124, authorized any person 
who computed taxable income under the accrual method of accounting for 
his most recent taxable year ending on or before June 22, 1959, and who 
treated dealer reserve income for such taxable year as accruable for a 
subsequent taxable year, to elect before Sept. 1, 1960, to have section 
481 of this title apply to the treatment for income tax purposes of 
dealer reserve income.


            Election To Return to Former Method of Accounting

    Section 29(e) of Pub. L. 85-866 authorized an election by certain 
taxpayers, who, for any taxable years beginning after Dec. 31, 1953, and 
ending after Aug. 16, 1954, and before Sept. 2, 1958, computed their 
taxable incomes using different accounting methods in succeeding taxable 
years, to return to their first method of accounting, where the election 
was made within six months after Sept. 2, 1958. Claims for refunds of 
overpayments of tax resulting from the election were to be filed within 
one year after the date of the election. Such an election was to be 
considered a consent to an assessment of a deficiency resulting from the 
election, where the assessment is made within one year after the date of 
the election.

                  Section Referred to in Other Sections

    This section is referred to in sections 404A, 447, 448, 458, 585, 
593, 985 of this title; title 42 section 401.
