Bases teóricas

Q-9: When is section 460 effective?

A-9: Section 460 (including the interest allocation requirements of section 460(c)(3)) and the rules set forth in this notice are, except as expressly provided to the contrary in this notice, effective for long-term contracts entered into after February 28, 1986, beginning with taxable years ending after February 28, 1986. For rules governing the accounting for costs allocable to contracts entered into after February 28, 1986, but incurred in taxable years ending before March 1, 1986, see Q&A-29 and Q&A-36. No inference is intended concerning the extent to which the rules applicable after the effective date of section 460 would apply to issues arising under the law

in effect before the enactment of section 460.

Q-10: Does section 460 apply to a contract that is entered into by the taxpayer before March 1, 1986, but is assigned by the taxpayer on or after that date to another person?

A-10: The assignee must account for such a contract under section 460 unless (i) none of the terms of the contract are changed in connection with the assignment, and (ii) the assignee agrees to perform all of the assignor's remaining obligations under the contract and becomes entitled to all remaining payments under the contract. If the conditions of the previous sentence are met, such a contract is not subject to section 460 even if the assignor does not remain liable to the customer after the assignment and even if the assignee becomes liable to the customer. This rule applies regardless of whether the assignor and assignee are related persons, and regardless of whether the assignment occurs in connection with a taxable sale or a nontaxable transaction. The assignee must account for contract income and costs using its "normal" method of accounting for long-term contracts (as defined in Q&A-18) as of the date of the transfer (which may or may not be the same as the normal method of accounting of the assignor), except as provided in section 381 of the Code, or any other applicable provision of the Code or regulations. If the assignee has not adopted a method of accounting for long-term contracts as of the time of the transfer (as may be the case if, for example, the assignee is a new taxpayer, or has never performed a long-term contract), the assignee generally may use any method of accounting for a long-term contract permitted under section 1.451-3 of the regulations (e.g., the completed contract method or the accrual method). If, however, such an assignee has a relationship to the assignor described in section 267(b) or 707(b) immediately after the assignment, then the assignee must use the

assignor's normal method. For this purpose, whether the assignee and assignor have a relationship described in section 267(b) shall be determined without regard to section 267(f)(1)(A) and by substituting "80 percent" for "50 percent" with regard to the ownership of the stock of a C corporation in subsections (b)(2), (b)(8), (b)(10)(A) and (b)(12) of section 267.

Example (1). On February 1, 1986 X Corporation enters into a construction contract with Y. On November 1,

1987, X sells the assets of its division that was performing the contract to Z corporation. As part of the asset sale, Z agrees to perform all of X's obligations under the contract, and X assigns to Z all of its rights under the contract, including the right to all remaining payments under the contract. Y agrees to release X from its obligations under the contract, and Z becomes legally obligated to Y. There is no change in the terms of the contract. Thus, Z does not agree to perform any additional work that X was not obligated to perform, and no adjustment is made in the contract price that Y is obligated to pay. Because X's contract with Y was entered into prior to March 1, 1986, Z is not subject to section 460 in accounting for contract income and costs.

Example (2). The facts are the same as in Example (1), except that the terms of the contract (e.g., the total price to be paid by Y) are changed in connection with the transaction. Z is subject to section 460 in accounting for contract income and costs.

Q-11: Does section 460 apply to revenues and expenses attributable to a change order or other similar agreement entered into by the taxpayer and the customer after February 28, 1986 but relating to a contract entered into on or before that date?

1 [NOTE: Rev. Proc. 97-27, 1997-21 I.R.B. 10, modified and superseded Q&A 13.]

2 [NOTE: Rev. Proc. 97-27, 1997-21 I.R.B. 10, modified and superseded Q&A 13.]

A-11: A change order or other similar agreement entered into by the taxpayer and the customer after February 28, 1986, is subject to section 460 if it is treated as a separate contract under the rules for severing contracts described in Q&A-37 and Q&A-38.

Example. Y enters into a contract on February 1, 1986, with an agency of the Federal

Government to build two submarines. On November 1, 1987, the customer and taxpayer agree to a change order providing for a third submarine of the same class to be built by Y. Because the change order is treated as a separate contract under the rules for severing contracts described in Q&A-37, Y must account for costs and income allocable to the third submarine in accordance with section 460.

Q-12: Is a contract considered to have been entered into even if the contract is subject to conditions that have not yet been met?

A-12: Yes. A contract is considered to have been entered into even if it is subject to conditions not within the control of the taxpayer that have not yet been met, so long as the contract is a binding contract under applicable law.

Example. On December 1, 1985, X, a builder, enters into a contract with Y to build a

home. Although the contract is contingent on Y's obtaining financing, it is a binding contract under applicable law. Y obtains financing on March 1, 1986. The contract is not subject to section 460, because it was entered into before March 1, 1986, even though it was subject to a condition that was met on or after that date.

Q-13 : If a taxpayer has failed to comply with section 460 with respect to one or more1

contracts entered into after February 28, 1986 for one or more tax years ending after that date, how should the taxpayer correct its method of accounting?

A-13 : A taxpayer that has failed to comply with section 460 must change its method of2

accounting for long-term contracts to conform to section 460 under the following procedures. These procedures are to be used rather than the procedures provided in Rev. Proc. 84-74, 1984-2 C.B. 736. Under this notice, the taxpayer is directed to and is granted consent to conform its method of accounting to a method required under section 460, provided that (1) section 6501 (the applicable statute of limitations) would permit assessment of tax for all years for which the

taxpayer has failed to report income and expenses in accordance with section 460, and (2) the taxpayer files amended returns for all such years.

If section 6501 would not permit assessment of tax for all tax years for which the taxpayer has failed to report income and expenses in accordance with section 460, then the taxpayer shall, pursuant to section 446, request the consent of the Commissioner to change its method of accounting for all contracts entered into after February 28, 1986 to a method required by section 460. Such change shall be effective for the earliest tax year for which section 6501 would permit assessment of tax. As a condition of such change, the taxpayer shall file amended returns for the year of change and all subsequent years. Any adjustment required under section 481 as a result of such change shall be taken into account under such terms as may be prescribed by the

Commissioner.

V. DETERMINATION OF WHETHER PERCENTAGE OF COMPLETION OR