Rev. Rul. 74-270

Advice has been requested whether permission to change the method of accounting will be granted, pursuant to section 446(e) of the Internal Revenue Code of 1954, under the circumstances described below.

The taxpayer, a national bank, keeps its books and records and files its Federal income tax returns using a hybrid method of accounting for its commercial banking activities. It keeps its books and records and files its Federal income tax returns using the cash receipts and disbursements method with respect to its trust department. The trust department, as required by Federal statute, is operated separately having its own management, offices, and employees. The business of the trust department is basically different from the commercial banking activities. The cash receipts and disbursements method of accounting clearly reflects taxable income of the trust department.

The taxpayer timely requested permission to change its method of accounting for its commercial banking activities, for Federal income tax purposes, from the hybrid method to the accrual method and to continue to employ the cash receipts and disbursements method for its trust department. If such permission is granted, taxpayer will continue to maintain a complete and separate set of books and records for its trust department. Further, if the requested change is approved there will be no creation or shifting of profits or losses between the trust department and the commercial banking activities so that the taxpayer's income is not clearly reflected.

Section 446(e) of the Code provides that a taxpayer who changes the method of accounting on the basis of which he regularly computes his income in keeping his books shall, before computing his taxable income under the new method, secure the consent of the Secretary of the Treasury or his delegate.

Section 1.446-1(e)(2)(i) of the Income Tax Regulations provides, in part, that a taxpayer may not compute his taxable income under a method of accounting different from that previously used by him unless the consent of the Commissioner is secured.

Section 1.446-1(e)(3) of the regulations provides, in part, that permission to change a taxpayer's method of accounting will not be granted unless the taxpayer and the Commissioner agree to the terms, conditions, and adjustments under which the change will be effected.

Section 481 of the Code and the regulations thereunder prescribe the rules to be followed in computing taxable income in cases where the taxable income of the taxpayer is computed under a method of accounting different from that under which the taxable income was previously computed. Certain adjustments that are determined to be necessary solely by reason of the change in order to prevent amounts from being duplicated or omitted shall be taken into account in computing the taxable income for the taxable year of the change.

Section 1.446-1(d) of the regulations provides, in general, that where a taxpayer has two or more separate and distinct trades or businesses a different method of accounting may be used for each trade or business, provided the method used for each trade or business clearly reflects the income of that particular trade or business. However, no trade or business will be considered separate and distinct for purposes of this paragraph unless a complete and separate set of books and records is kept for such trade or business. Further, that if, by reason of maintaining different methods of accounting, there is a creation or shifting of profits or losses between the trades or businesses of the taxpayer so that income of the taxpayer is not clearly reflected, the trades or businesses of the taxpayer will not be considered to be separate and distinct.

The right to operate a trust department is granted by the Comptroller of the Currency pursuant to law. Under such law all national banks exercising fiduciary powers are required to segregate their general assets from assets held in any fiduciary capacity and to keep separate books and records. The banking activities and fiduciary functions must be operated separately and the separate identity of the trust department must be preserved. The activities of a trust department of a national bank are governed by regulations under the law. The trust activities differ basically from the banking business in that banking is a mercantile business which consists of receiving deposits, making collections and loans, discounting commercial paper, and issuing notes. The trust business is a personal service business consisting of acting as trustee, executor or administrator, registering stocks and bonds, guarding estates, and acting in other fiduciary capacities. The trust department has its own management, staff of employees, and office space.

Accordingly, under the foregoing circumstances the taxpayer will be permitted to use different methods of accounting for its commercial banking activities and its trust department for Federal income tax purposes. Further, permission will be granted by the Commissioner to change its method of accounting for its commercial banking activities, for Federal income tax purposes, from the hybrid method to the accrual method provided that the taxpayer and the Commissioner of Internal Revenue agree to the terms, conditions, and adjustments under which the change will be effected.