26 USC 451 - General rule for taxable year of inclusion

U.S Code last checked for updates: Nov 22, 2024

§ 451.

General rule for taxable year of inclusion

(a)

General rule

(b)

Inclusion not later than for financial accounting purposes

(1)

Income taken into account in financial statement

(A)

In general

In the case of a taxpayer the taxable income of which is computed under an accrual method of accounting, the all events test with respect to any item of gross income (or portion thereof) shall not be treated as met any later than when such item (or portion thereof) is taken into account as revenue in—

(i)

an applicable financial statement of the taxpayer, or

(ii)

such other financial statement as the Secretary may specify for purposes of this subsection.

(B)

Exception

This paragraph shall not apply to—

(i)

a taxpayer which does not have a financial statement described in clause (i) or (ii) of subparagraph (A) for a taxable year, or

(ii)

any item of gross income in connection with a mortgage servicing contract.

(C)

All events test

(2)

Coordination with special methods of accounting

(3)

Applicable financial statement

For purposes of this subsection, the term “applicable financial statement” means—

(A)

a financial statement which is certified as being prepared in accordance with generally accepted accounting principles and which is—

(i)

a 10–K (or successor form), or annual statement to shareholders, required to be filed by the taxpayer with the United States Securities and Exchange Commission,

(ii)

an audited financial statement of the taxpayer which is used for—

(I)

credit purposes,

(II)

reporting to shareholders, partners, or other proprietors, or to beneficiaries, or

(III)

any other substantial nontax purpose,

but only if there is no statement of the taxpayer described in clause (i), or

(iii)

filed by the taxpayer with any other Federal agency for purposes other than Federal tax purposes, but only if there is no statement of the taxpayer described in clause (i) or (ii),

(B)

a financial statement which is made on the basis of international financial reporting standards and is filed by the taxpayer with an agency of a foreign government which is equivalent to the United States Securities and Exchange Commission and which has reporting standards not less stringent than the standards required by such Commission, but only if there is no statement of the taxpayer described in subparagraph (A), or

(C)

a financial statement filed by the taxpayer with any other regulatory or governmental body specified by the Secretary, but only if there is no statement of the taxpayer described in subparagraph (A) or (B).

(4)

Allocation of transaction price

(5)

Group of entities

(c)

Treatment of advance payments

(1)

In general

A taxpayer which computes taxable income under the accrual method of accounting, and receives any advance payment during the taxable year, shall—

(A)

except as provided in subparagraph (B), include such advance payment in gross income for such taxable year, or

(B)

if the taxpayer elects the application of this subparagraph with respect to the category of advance payments to which such advance payment belongs, the taxpayer shall—

(i)

to the extent that any portion of such advance payment is required under subsection (b) to be included in gross income in the taxable year in which such payment is received, so include such portion, and

(ii)

include the remaining portion of such advance payment in gross income in the taxable year following the taxable year in which such payment is received.

(2)

Election

(A)

In general

(B)

Period to which election applies

(3)

Taxpayers ceasing to exist

(4)

Advance payment

For purposes of this subsection—

(A)

In general

The term “advance payment” means any payment—

(i)

the full inclusion of which in the gross income of the taxpayer for the taxable year of receipt is a permissible method of accounting under this section (determined without regard to this subsection),

(ii)

any portion of which is included in revenue by the taxpayer in a financial statement described in clause (i) or (ii) of subsection (b)(1)(A) for a subsequent taxable year, and

(iii)

which is for goods, services, or such other items as may be identified by the Secretary for purposes of this clause.

(B)

Exclusions

Except as otherwise provided by the Secretary, such term shall not include—

(i)

rent,

(ii)

insurance premiums governed by subchapter L,

(iii)

payments with respect to financial instruments,

(iv)

payments with respect to warranty or guarantee contracts under which a third party is the primary obligor,

(v)

payments subject to section 871(a), 881, 1441, or 1442,

(vi)

payments in property to which section 83 applies, and

(vii)

any other payment identified by the Secretary for purposes of this subparagraph.

(C)

Receipt

(D)

Allocation of transaction price

(d)

Special rule in case of death

(e)

Special rule for employee tips

(f)

Special rule for crop insurance proceeds or disaster payments

(g)

Special rule for proceeds from livestock sold on account of drought, flood, or other weather-related conditions

(1)

In general

(2)

Limitation

(3)

Special election rules

(h)

Special rule for utility services

(1)

In general

(2)

Definition and special rule

For purposes of this subsection—

(A)

Utility services

The term “utility services” includes—

(i)

the providing of electrical energy, water, or sewage disposal,

(ii)

the furnishing of gas or steam through a local distribution system,

(iii)

telephone or other communication services, and

(iv)

the transporting of gas or steam by pipeline.

(B)

Year in which services provided

The taxable year in which services are treated as provided to customers shall not, in any manner, be determined by reference to—

(i)

the period in which the customers’ meters are read, or

(ii)

the period in which the taxpayer bills (or may bill) the customers for such service.

(i)

Treatment of interest on frozen deposits in certain financial institutions

(1)

In general

In the case of interest credited during any calendar year on a frozen deposit in a qualified financial institution, the amount of such interest includible in the gross income of a qualified individual shall not exceed the sum of—

(A)

the net amount withdrawn by such individual from such deposit during such calendar year, and

(B)

the amount of such deposit which is withdrawable as of the close of the taxable year (determined without regard to any penalty for premature withdrawals of a time deposit).

(2)

Interest tested each year

(3)

Deferral of interest deduction

(4)

Frozen deposit

For purposes of this subsection, the term “frozen deposit” means any deposit if, as of the close of the calendar year, any portion of such deposit may not be withdrawn because of—

(A)

the bankruptcy or insolvency of the qualified financial institution (or threat thereof), or

(B)

any requirement imposed by the State in which such institution is located by reason of the bankruptcy or insolvency (or threat thereof) of 1 or more financial institutions in the State.

(5)

Other definitions

(j)

Special rule for cash options for receipt of qualified prizes

(1)

In general

(2)

Qualified prize option; qualified prize

For purposes of this subsection—

(A)

In general

The term “qualified prize option” means an option which—

(i)

entitles an individual to receive a single cash payment in lieu of receiving a qualified prize (or remaining portion thereof), and

(ii)

is exercisable not later than 60 days after such individual becomes entitled to the qualified prize.

(B)

Qualified prize

The term “qualified prize” means any prize or award which—

(i)

is awarded as a part of a contest, lottery, jackpot, game, or other similar arrangement,

(ii)

does not relate to any past services performed by the recipient and does not require the recipient to perform any substantial future service, and

(iii)

is payable over a period of at least 10 years.

(3)

Partnership, etc.

(k)

Special rule for sales or dispositions to implement Federal Energy Regulatory Commission or State electric restructuring policy

(1)

In general

In the case of any qualifying electric transmission transaction for which the taxpayer elects the application of this section, qualified gain from such transaction shall be recognized—

(A)

in the taxable year which includes the date of such transaction to the extent the amount realized from such transaction exceeds—

(i)

the cost of exempt utility property which is purchased by the taxpayer during the 4-year period beginning on such date, reduced (but not below zero) by

(ii)

any portion of such cost previously taken into account under this subsection, and

(B)

ratably over the 8-taxable year period beginning with the taxable year which includes the date of such transaction, in the case of any such gain not recognized under subparagraph (A).

(2)

Qualified gain

For purposes of this subsection, the term “qualified gain” means, with respect to any qualifying electric transmission transaction in any taxable year—

(A)

any ordinary income derived from such transaction which would be required to be recognized under section 1245 or 1250 for such taxable year (determined without regard to this subsection), and

(B)

any income derived from such transaction in excess of the amount described in subparagraph (A) which is required to be included in gross income for such taxable year (determined without regard to this subsection).

(3)

Qualifying electric transmission transaction

For purposes of this subsection, the term “qualifying electric transmission transaction” means any sale or other disposition before January 1, 2008 (before January 1, 2021, in the case of a qualified electric utility), of—

(A)

property used in the trade or business of providing electric transmission services, or

(B)

any stock or partnership interest in a corporation or partnership, as the case may be, whose principal trade or business consists of providing electric transmission services,

but only if such sale or disposition is to an independent transmission company.

(4)

Independent transmission company

For purposes of this subsection, the term “independent transmission company” means—

(A)

an independent transmission provider approved by the Federal Energy Regulatory Commission,

(B)

a person—

(i)

who the Federal Energy Regulatory Commission determines in its authorization of the transaction under section 203 of the Federal Power Act (16 U.S.C. 824b) or by declaratory order is not a market participant within the meaning of such Commission’s rules applicable to independent transmission providers, and

(ii)

whose transmission facilities to which the election under this subsection applies are under the operational control of a Federal Energy Regulatory Commission-approved independent transmission provider before the close of the period specified in such authorization, but not later than the date which is 4 years after the close of the taxable year in which the transaction occurs, or

(C)

in the case of facilities subject to the jurisdiction of the Public Utility Commission of Texas—

(i)

a person which is approved by that Commission as consistent with Texas State law regarding an independent transmission provider, or

(ii)

a political subdivision or affiliate thereof whose transmission facilities are under the operational control of a person described in clause (i).

(5)

Exempt utility property

For purposes of this subsection:

(A)

In general

The term “exempt utility property” means property used in the trade or business of—

(i)

generating, transmitting, distributing, or selling electricity, or

(ii)

producing, transmitting, distributing, or selling natural gas.

(B)

Nonrecognition of gain by reason of acquisition of stock

(C)

Exception for property located outside the United States

(6)

Qualified electric utility

For purposes of this subsection, the term “qualified electric utility” means a person that, as of the date of the qualifying electric transmission transaction, is vertically integrated, in that it is both—

(A)

a transmitting utility (as defined in section 3(23) of the Federal Power Act (16 U.S.C. 796(23))) with respect to the transmission facilities to which the election under this subsection applies, and

(B)

an electric utility (as defined in section 3(22) of the Federal Power Act (16 U.S.C. 796(22))).

(7)

Special rule for consolidated groups

(8)

Time for assessment of deficiencies

If the taxpayer has made the election under paragraph (1) and any gain is recognized by such taxpayer as provided in paragraph (1)(B), then—

(A)

the statutory period for the assessment of any deficiency, for any taxable year in which any part of the gain on the transaction is realized, attributable to such gain shall not expire prior to the expiration of 3 years from the date the Secretary is notified by the taxpayer (in such manner as the Secretary may by regulations prescribe) of the purchase of exempt utility property or of an intention not to purchase such property, and

(B)

such deficiency may be assessed before the expiration of such 3-year period notwithstanding any law or rule of law which would otherwise prevent such assessment.

(9)

Purchase

(10)

Election

(11)

Nonapplication of installment sales treatment

(Aug. 16, 1954, ch. 736, 68A Stat. 152; Pub. L. 89–97, title III, § 313(b), July 30, 1965, 79 Stat. 382; Pub. L. 91–172, title II, § 215(a), Dec. 30, 1969, 83 Stat. 573; Pub. L. 94–455, title XIX, § 1906(b)(13)(A), title XXI, §§ 2102(a), (b), 2141(a), Oct. 4, 1976, 90 Stat. 1834, 1900, 1933; Pub. L. 99–514, title VIII, § 821(a), title IX, § 905(b), Oct. 22, 1986, 100 Stat. 2372, 2386; Pub. L. 100–647, title I, § 1009(d)(3), title VI, §§ 6030(a), 6033(a), Nov. 10, 1988, 102 Stat. 3450, 3694, 3695; Pub. L. 105–34, title IX, § 913(a), Aug. 5, 1997, 111 Stat. 878; Pub. L. 105–277, div. J, title V, § 5301(a), Oct. 21, 1998, 112 Stat. 2681–918; Pub. L. 108–357, title III, § 311(c), title VIII, § 909(a), Oct. 22, 2004, 118 Stat. 1467, 1657; Pub. L. 109–58, title XIII, § 1305(a), (b), Aug. 8, 2005, 119 Stat. 997; Pub. L. 110–343, div. B, title I, § 109(a)–(c), Oct. 3, 2008, 122 Stat. 3821; Pub. L. 111–312, title VII, § 705(a), Dec. 17, 2010, 124 Stat. 3311; Pub. L. 112–240, title IV, § 411(a), Jan. 2, 2013, 126 Stat. 2343; Pub. L. 113–295, div. A, title I, § 159(a), Dec. 19, 2014, 128 Stat. 4022; Pub. L. 114–113, div. Q, title I, § 191(a), Dec. 18, 2015, 129 Stat. 3075; Pub. L. 115–97, title I, § 13221(a), (b), Dec. 22, 2017, 131 Stat. 2113, 2115; Pub. L. 115–123, div. D, title I, § 40414(a), Feb. 9, 2018, 132 Stat. 152; Pub. L. 116–94, div. Q, title I, § 132(a), Dec. 20, 2019, 133 Stat. 3233.)

cite as: 26 USC 451