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Discussion
We are asked to determine whether petitioners are required
to include the section 481 adjustments as built-in gain for the
years at issue.3 Petitioners argue that they are not required to
include the section 481 adjustments as built-in gain because they
elected S corporation status before the end of the 4-year ratable
inclusion period of the RRA amendments. Respondent, on the other
hand, argues that petitioners are required to include the section
481 adjustments as built-in gain because the section 481
adjustments relate to items attributable to periods before
petitioners became S corporations. We agree with respondent.
Overview
We begin by outlining the general rules of section 481
adjustments. When a taxpayer changes its method of accounting,
section 481 requires the taxpayer to adjust its income to prevent
items from being duplicated or omitted. Sec. 481(a). The
Secretary is authorized to issue regulations indicating the
taxable years over which the taxpayer is authorized to take these
adjustments into account. Sec. 481(c). The Secretary has issued
guidance under certain circumstances allowing taxpayers to take
the adjustments into account ratably over several years. See,
3Petitioners have not asserted that they have any built-in
losses for the years at issue. Our determination whether the
sec. 481 adjustments are built-in gain therefore determines the
net recognized built-in gain because there are no built-in losses
to offset the built-in gain.
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Last modified: March 27, 2008