Relief From IRS-Initiated Accounting Method Change Applies in AMT System

Under the facts you presented, a Service-initiated change in method of accounting results in a net section 481(a) adjustment exceeding $3000. Because of NOL carryforwards, the adjustment does not result in any regular tax liability for the year of change. The net section 481(a) adjustment for AMT purposes also exceeds $3000. There is, moreover, AMT liability, because of the 90-percent limitation on use of NOLs set forth in section 56(d)(1)(A). The issue presented is whether the taxpayer is entitled to the benefits of section 481(b), which, in general terms, limits the increase in tax resulting from certain section 481(a) adjustments to the increase in tax that would have resulted had the adjustment been taken into account over varying periods preceding the year of change.

We have concluded that the taxpayer is entitled to section 481(b) relief in the computation of AMT. The AMT can be viewed as a "separate but parallel" tax system. In this system, certain "structural issues" are resolved in the same manner as for regular tax purposes. Staff of the Joint Committee on Taxation, 100th Cong., General Explanation of the Tax Reform Act of 1986 438 n. 8 (Comm. Print 1987). We consider a taxpayer's entitlement to section 481(b) relief one such issue. In your case, the taxpayer is entitled to section 481(b) relief for regular tax purposes, due to the fact that the Service-initiated change results in an adjustment exceeding $3000. The fact that NOL carryovers offset this adjustment does not change this. Accordingly, the taxpayer is also entitled to section 481(b) relief for AMT purposes.

If you have further questions regarding this matter, please contact John Aramburu (202) 622-4960.