- 11 - An example in the regulations further supports our interpretation. See sec. 1.1374-4(d)(2), Example (2), Income Tax Regs. In the example, the taxpayer, who elected to convert to S corporation status effective January 1, 1996, deducted workers’ compensation claims when they were filed, under its accounting method. The taxpayer then changed its accounting method in 1999, requiring a positive section 481 adjustment to include in income the previous deductions for filed claims that were still unpaid. The example states that the section 481 adjustment is recognized built-in gain insofar as it relates to items (the deductions for workers’ compensation claims filed, but unpaid) attributable to periods before the recognition period. Petitioners’ section 481 adjustment reverses petitioners’ 1997 deduction and includes the amount of the 1997 deduction ratably in petitioners’ income over 4 years. The 1997 deduction is the item to which the section 481 adjustment relates, and it arose before the beginning of the recognition period (i.e. the period beginning with the year petitioners elected S corporation status). See sec. 1.1374-4(d)(1), Income Tax Regs. The section 481 adjustment thus relates to an item attributable to a period before the beginning of the recognition period. Id. We accordingly hold that petitioners’ section 481 adjustment is recognized built-in gain.Page: Previous 1 2 3 4 5 6 7 8 9 10 11 12 NextLast modified: March 27, 2008