Methods of Accounting Used by Corporations That Acquire the Assets of Other Corporations, 45673-45689 [2011-19256]

Agencies

• Internal Revenue Service
• DEPARTMENT OF THE TREASURY

[Federal Register Volume 76, Number 147 (Monday, August 1, 2011)]
[Rules and Regulations]
[Pages 45673-45689]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-19256]


=======================================================================
-----------------------------------------------------------------------

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 9534]
RIN 1545-BD81


Methods of Accounting Used by Corporations That Acquire the 
Assets of Other Corporations

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

-----------------------------------------------------------------------

SUMMARY: This document contains final regulations relating to the 
methods of accounting, including the inventory methods, to be used by 
corporations that acquire the assets of other corporations in certain 
corporate reorganizations and tax-free liquidations. These regulations 
clarify and simplify the rules regarding the accounting methods to be 
used following these reorganizations and liquidations.

DATES: Effective date: These regulations are effective on August 31, 
2011.
    Applicability date: For dates of applicability, see Sec. Sec.  
1.381(a)-1(e), 1.381(c)(4)-1(f), 1.381(c)(5)-1(f), and 1.446-
1(e)(4)(iii).

FOR FURTHER INFORMATION CONTACT: Cheryl Oseekey at (202) 622-4970 (not 
a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

    This document contains amendments to 26 CFR part 1. On November 16, 
2007, the IRS and the Treasury Department published a notice of 
proposed rulemaking (REG-151884-03) in the Federal Register (72 FR 
64545). This notice of proposed rulemaking, while continuing most of 
the provisions of the regulations originally issued under sections 
381(c)(4) and 381(c)(5) of the Internal Revenue Code (Code) regarding 
the methods of accounting to be used by a corporation that acquires the 
assets of another corporation in a section 381(a) transaction, proposed 
to clarify and simplify those existing regulations. The IRS received no 
comments in response to the notice of proposed rulemaking. No public 
hearing was requested or held. The proposed regulations, as revised by 
this Treasury decision, are adopted as final regulations.

Explanation of Provisions

    The final regulations differ somewhat in organization and format 
from the notice of proposed rulemaking. These changes are intended to 
be editorial in

[[Page 45674]]

nature and are not intended to alter the substance and principles of 
the rules set forth in the notice of proposed rulemaking. The IRS and 
the Treasury Department made these changes to further advance the 
objective, as expressed in the preamble to the notice of proposed 
rulemaking, of reducing uncertainty and controversy by providing 
regulations under sections 381(c)(4) and 381(c)(5) that are clear, 
consistent, and administrable. For example, the final regulations under 
sections 381(c)(4) and 381(c)(5) have been drafted so that the 
regulations mirror each other to the greatest extent possible, thus 
highlighting the consistencies of the regulations' provisions. 
Similarly, many of the examples in the notice of proposed rulemaking 
have been revised in the final regulations to specify the substantive 
tax rule in the regulations that the examples illustrate. Additionally, 
new examples were added to the final regulations to provide further 
illustrations of the substantive tax rules in these regulations.
    The keystone of the final regulations for sections 381(c)(4) and 
381(c)(5) continues to be whether the acquiring corporation operates 
the trades or businesses of the parties to a section 381(a) transaction 
as separate and distinct trades or businesses following the date of 
distribution or transfer. The final regulations continue to provide 
that when the acquiring corporation operates the trades or businesses 
of the parties as separate and distinct trades or businesses after the 
date of distribution or transfer, the acquiring corporation will use a 
carryover method. In contrast, when the acquiring corporation does not 
operate the trades or businesses of the parties as separate and 
distinct trades or businesses after the date of distribution or 
transfer, the acquiring corporation will use a principal method. These 
rules do not apply when a carryover method or principal method, as 
applicable, is not a permissible method, or when the acquiring 
corporation chooses not to use a carryover method or principal method. 
In those cases, the general rules under section 446(e) that govern 
methods of accounting apply.
    The final regulations modify the test for determining a principal 
method when the acquiring corporation does not operate the trades or 
businesses of the parties to the section 381(a) transaction as separate 
and distinct trades or businesses after the date of distribution or 
transfer. Under the final regulations, the determination of whether the 
distributor or transferor corporation is larger than the acquiring 
corporation is made by comparing certain attributes (that is, under 
section 381(c)(4) the adjusted bases of the assets and gross receipts, 
and under section 381(c)(5) the fair market value of the inventory) of 
only the trades or businesses that will be integrated after the date of 
distribution or transfer rather than comparing the attributes for the 
entire entity. The IRS and the Treasury Department believe that the 
attributes of a trade or business that will continue to operate as a 
separate and distinct trade or business after the date of distribution 
or transfer should not influence the determination of a principal 
method that will be used by trades or businesses that will be 
integrated after the date of distribution or transfer. The IRS and the 
Treasury Department also believe that applying the test at the trade or 
business level is consistent with Sec.  1.446-1(d) because methods of 
accounting are generally determined at the trade or business level.
    The final regulations also provide rules on how an acquiring 
corporation identifies a principal method when an acquiring corporation 
or a distributor or transferor corporation operates more than one 
separate and distinct trade or business on the date of distribution or 
transfer, has more than one method of accounting used in the trades or 
businesses, and the acquiring corporation combines the trades or 
businesses after the date of distribution or transfer. While the IRS 
and the Treasury Department do not think these situations occur 
frequently, the final regulations are revised to provide certainty for 
an acquiring corporation and to obviate the need to obtain a ruling in 
these situations.
    The final regulations under sections 381(c)(4) and 381(c)(5) 
clarify the definition of ``cut-off basis.'' The final regulations 
provide that cut-off basis generally means a manner in which a change 
in method of accounting is made without a section 481(a) adjustment and 
under which only the items arising after the beginning of the year of 
change (or, in the case of a change made to a principal method, only 
the items arising after the date of distribution or transfer) are 
accounted for under the new method of accounting. The definition of 
cut-off basis is expanded in the final regulations under section 
381(c)(5) to clarify that a taxpayer that makes a change within the 
last-in, first-out (LIFO) inventory method from one LIFO method or sub-
method to another LIFO method or sub-method does not recompute the cost 
of its beginning inventories for the year of change under the new LIFO 
inventory method when it implements the change on a cut-off basis.
    The final regulations under section 381(c)(5) also make certain 
organizational changes to Sec.  1.381(c)(5)-1(e)(6) of the notice of 
proposed rulemaking with respect to the integration of inventories 
after a section 381(a) transaction. These changes do not change the 
substantive rules in the notice of proposed rulemaking but are intended 
to clarify that the rules apply whether the inventory method of either 
the acquiring corporation or the transferor or distributor corporation 
must be changed to a principal method. The IRS and the Treasury 
Department are considering issuing additional guidance that would 
clarify or modify the manner in which inventories must be combined and 
integrated in a section 381(a) transaction.
    Finally, the final regulations correct the discussion of section 
472(d) that was in Sec.  1.381(c)(5)-1(e)(6)(ii)(B) of the notice of 
proposed rulemaking. Section 1.381(c)(5)-1(e)(6)(ii)(B) of the notice 
of proposed rulemaking provided that the restoration to cost of any 
previous write-downs to market value shall be taken into account fully 
in the year that included the date of distribution or transfer. 
Consistent with the amendments to section 472(d), the final regulations 
provide that these restorations shall be taken into account by the 
acquiring corporation ratably in each of the three taxable years 
beginning with the taxable year that includes the date of the 
distribution or transfer.
    The IRS and the Treasury Department are aware that some 
practitioners were concerned that the notice of proposed rulemaking did 
not provide audit protection when an acquiring corporation uses a 
principal method after the date of distribution or transfer. For the 
reasons expressed in the preamble to the notice of proposed rulemaking, 
the final regulations continue to deny audit protection in these 
circumstances. Unlike changes in method of accounting under section 
446(e) for which a taxpayer must disclose its use of a method of 
accounting, proper or improper, as part of the process for obtaining 
consent to make the change, changes to a principal method pursuant to 
these final regulations are made on the acquiring corporation's tax 
return with no disclosure on a Form 3115, ``Application for Change in 
Accounting Method,'' that a change in method of accounting occurred.
    The IRS and the Treasury Department are aware that some taxpayers 
desire to obtain audit protection for a required change to a principal 
method by filing a Form 3115. However, the IRS and the Treasury 
Department believe that, given

[[Page 45675]]

the need for efficient tax administration, filing a Form 3115 merely to 
obtain audit protection should not be allowed. Although audit 
protection is not provided for a change to a principal method required 
under these regulations, audit protection ordinarily is provided for 
any voluntary change in method of accounting for which a party to a 
section 381(a) transaction obtains consent under section 446(e) and the 
generally applicable administrative procedures.

Special Analyses

    It has been determined that this Treasury decision is not a 
significant regulatory action as defined in Executive Order 12866. 
Therefore, a regulatory assessment is not required. It is hereby 
certified that these regulations will not have a significant economic 
impact on a substantial number of small entities. Therefore, a 
regulatory flexibility analysis under the Regulatory Flexibility Act (5 
U.S.C. chapter 6) is not required. This certification is based on the 
belief of the IRS and the Treasury Department that the corporate 
reorganizations and tax-free liquidations described in section 381(a) 
generally involve large entities. In addition, these final regulations 
reduce the burden on taxpayers by clarifying and simplifying the 
existing rules and make the procedures for requesting changes in 
methods of accounting relating to corporate reorganizations and tax-
free liquidations described in section 381(a) consistent with the 
general rules for requesting changes in methods of accounting. Pursuant 
to section 7805(f), the notice of proposed rulemaking that preceded 
these final regulations was submitted to the Chief Counsel for Advocacy 
of the Small Business Administration for comment on its impact on small 
business. Consistent with 5 U.S.C. section 553(d), the regulations are 
effective 30 days after publication of this document in the Federal 
Register.

Drafting Information

    The principal author of these final regulations is Cheryl Oseekey, 
Office of Associate Chief Counsel (Income Tax and Accounting). However, 
other personnel from the IRS and the Treasury Department participated 
in their development.

List of Subjects in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

Adoption of Amendments to the Regulations

    Accordingly, 26 CFR part 1 is amended as follows:

PART 1--INCOME TAXES

0
Paragraph 1. The authority citation for part 1 continues to read in 
part as follows:

    Authority: 26 U.S.C. 7805 * * *
    Section 1.381(c)(4)-1 also issued under 26 U.S.C. 381(c)(4). * * 
*
    Section 1.381(c)(5)-1 also issued under 26 U.S.C. 381(c)(5). * * 
*


0
Par. 2. In Sec.  1.381(a)-1, paragraph (b)(1)(i) is revised and 
paragraph (e) is added to read as follows:


Sec.  1.381(a)-1  General rule relating to carryovers in certain 
corporate acquisitions.

* * * * *
    (b) * * *
    (1) * * * (i) The complete liquidation of a subsidiary corporation 
upon which no gain or loss is recognized in accordance with the 
provisions of section 332;
* * * * *
    (e) Effective/applicability date. The rules of paragraph (b)(1)(i) 
of this section apply to corporate reorganizations and tax-free 
liquidations described in section 381(a) that occur on or after August 
31, 2011.

0
Par. 3. Section 1.381(c)(4)-1 is revised to read as follows:


Sec.  1.381(c)(4)-1  Method of accounting.

    (a) Introduction--(1) Purpose. This section provides guidance 
regarding the method of accounting or combination of methods (other 
than inventory and depreciation methods) an acquiring corporation must 
use following a distribution or transfer to which sections 381(a) and 
381(c)(4) apply and how to implement any associated change in method of 
accounting. See Sec.  1.381(c)(5)-1 for guidance regarding the 
inventory method an acquiring corporation must use following a 
distribution or transfer to which sections 381(a) and 381(c)(5) apply. 
See Sec.  1.381(c)(6)-1 for guidance regarding the depreciation method 
an acquiring corporation must use following a distribution or transfer 
to which sections 381(a) and 381(c)(6) apply.
    (2) Carryover method requirement for separate and distinct trades 
or businesses. In a transaction to which section 381(a) applies, if an 
acquiring corporation continues to operate a trade or business of the 
parties to the section 381(a) transaction as a separate and distinct 
trade or business after the date of distribution or transfer, the 
acquiring corporation must use a carryover method as defined in 
paragraph (b)(5) of this section for each continuing trade or business, 
unless either the carryover method is impermissible and must be changed 
under paragraph (a)(4) of this section or the acquiring corporation 
changes the carryover method in accordance with paragraph (a)(5) of 
this section. The carryover method requirement applies to the overall 
method of accounting (for example, an accrual method of accounting) and 
any special method of accounting (for example, the percentage of 
completion method of accounting described in section 460) as defined in 
paragraph (b)(2) of this section used by each trade or business after 
the date of distribution or transfer. The acquiring corporation need 
not secure the Commissioner's consent to continue a carryover method.
    (3) Principal method requirement for trades or businesses not 
operated as separate and distinct trades or businesses. In a 
transaction to which section 381(a) applies, if an acquiring 
corporation does not operate the trades or businesses of the parties to 
the section 381(a) transaction as separate and distinct trades or 
businesses after the date of distribution or transfer, the acquiring 
corporation must use a principal method determined under paragraph (c) 
of this section, unless either the principal method is impermissible 
and must be changed under paragraph (a)(4) of this section or the 
acquiring corporation changes the principal method in accordance with 
paragraph (a)(5) of this section. The principal method requirement 
applies to the overall method of accounting (for example, the cash 
receipts and disbursements method of accounting) and any special method 
of accounting (for example, the installment method under section 453) 
as defined in paragraph (b)(2) of this section used by each integrated 
trade or business after the date of distribution or transfer. The 
acquiring corporation must change to a principal method in accordance 
with paragraph (d)(1) of this section for each integrated trade or 
business and need not secure the Commissioner's consent to use a 
principal method.
    (4) Carryover method or principal method not a permissible method. 
If a carryover method or principal method is not a permissible method 
of accounting, the acquiring corporation must secure the Commissioner's 
consent to change to a permissible method of accounting as provided in 
paragraph (d)(2) of this section. If the acquiring corporation must use 
a single method of accounting for a particular item after the date of 
distribution or transfer regardless of the

[[Page 45676]]

number of separate and distinct trades or businesses operated on that 
date, the acquiring corporation must use the principal method for that 
item as determined under paragraph (c) of this section, unless either 
the principal method is impermissible and must be changed under this 
paragraph (a)(4) or the acquiring corporation changes the principal 
method in accordance with paragraph (a)(5) of this section.
    (5) Voluntary change. Any party to a section 381(a) transaction may 
request permission under section 446(e) to change a method of 
accounting for the taxable year in which the transaction occurs or is 
expected to occur. For trades or businesses that will not operate as 
separate and distinct trades or businesses after the date of 
distribution or transfer, a change in method of accounting for the 
taxable year that includes that date will be granted only if the 
requested method is the method that the acquiring corporation must use 
after the date of distribution or transfer. The time and manner of 
obtaining the Commissioner's consent to change to a different method of 
accounting is described in paragraph (d)(2) of this section.
    (6) Examples. The following examples illustrate the rules of this 
paragraph (a). Unless otherwise noted, the carryover method is a 
permissible method of accounting.

    Example (1). Carryover method for separate and distinct trades 
or businesses after the date of distribution or transfer--(i) Facts. 
X Corporation operates an employment agency that uses the overall 
cash receipts and disbursements method of accounting. T Corporation 
operates an educational institution that uses an overall accrual 
method of accounting. X Corporation acquires the assets of T 
Corporation in a transaction to which section 381(a) applies. After 
the date of distribution or transfer, X Corporation operates the 
employment agency as a trade or business that is separate and 
distinct from the educational institution.
    (ii) Conclusion. Because after the date of distribution or 
transfer X Corporation operates the employment agency as a separate 
and distinct trade or business, under paragraph (a)(2) of this 
section X Corporation must use the carryover method for each 
continuing trade or business, unless either the carryover method is 
impermissible and must be changed under paragraph (a)(4) of this 
section or X Corporation changes the carryover method in accordance 
with paragraph (a)(5) of this section. As defined in paragraph 
(b)(5) of this section, the carryover method for the employment 
agency is the cash receipts and disbursements method of accounting 
and the carryover method for the educational institution is the 
accrual method of accounting used by T Corporation immediately prior 
to the date of distribution or transfer. There is no change in 
method of accounting, and X Corporation need not secure the 
Commissioner's consent to use either carryover method.
    Example (2). Carryover method for a special method of 
accounting--(i) Facts. X Corporation provides personal grooming 
consulting and T Corporation provides weight management consulting. 
Both X Corporation and T Corporation use the same overall accrual 
method of accounting. X Corporation has elected to use the recurring 
item exception under Sec.  1.461-5. T Corporation does not use the 
recurring item exception. X Corporation acquires the assets of T 
Corporation in a transaction to which section 381(a) applies. After 
the date of distribution or transfer, X Corporation operates the 
personal grooming consulting business as a trade or business that is 
separate and distinct from the weight management consulting 
business.
    (ii) Conclusion. Because after the date of distribution or 
transfer, X Corporation operates the personal grooming consulting 
business as a separate and distinct trade or business, under 
paragraph (a)(2) of this section X Corporation must use a carryover 
method for each continuing trade or business, unless either the 
carryover method is impermissible and must be changed under 
paragraph (a)(4) of this section or X Corporation changes the 
carryover method in accordance with paragraph (a)(5) of this 
section. As defined in paragraph (b)(5) of this section, the 
carryover method for the overall method of accounting for each trade 
or business is the accrual method used immediately prior to the date 
of distribution or transfer. The carryover method for the special 
method of accounting for the personal grooming consulting business 
is the recurring item exception under Sec.  1.461-5 while the 
carryover method for the weight management consulting business is 
not to use the recurring item exception under Sec.  1.461-5. There 
is no change in method of accounting, and X Corporation need not 
secure the Commissioner's consent to use the carryover methods of 
accounting.
    Example (3). Carryover method for a special method of accounting 
not permissible--(i) Facts. X Corporation is an engineering firm 
that uses the overall cash receipts and disbursements method of 
accounting and has elected under section 171 to amortize bond 
premium with respect to its taxable bonds acquired at a premium. T 
Corporation is a manufacturer that uses an overall accrual method of 
accounting and has not made a section 171 election to amortize bond 
premium with respect to its taxable bonds acquired at a premium. X 
Corporation acquires the assets of T Corporation in a transaction to 
which section 381(a) applies. After the date of distribution or 
transfer, X Corporation operates the engineering firm as a trade or 
business that is separate and distinct from the manufacturing 
business.
    (ii) Conclusion. Because after the date of distribution or 
transfer X Corporation operates the engineering firm as a separate 
and distinct trade or business, under paragraph (a)(2) of this 
section X Corporation must use a carryover method for each 
continuing trade or business, unless either the carryover method is 
impermissible and must be changed under paragraph (a)(4) of this 
section or X Corporation changes the carryover method in accordance 
with paragraph (a)(5) of this section. As defined in paragraph 
(b)(5) of this section, the carryover method for the overall method 
of accounting for the engineering firm is the cash receipts and 
disbursements method used by X Corporation immediately prior to the 
date of distribution or transfer, and the carryover method for the 
overall method of accounting for the manufacturing business is the 
accrual method used by T Corporation immediately prior to the date 
of distribution or transfer. There is no change in method of 
accounting, and X Corporation need not secure the Commissioner's 
consent to use either carryover method. Notwithstanding that after 
the date of distribution or transfer X Corporation has two separate 
and distinct trades or businesses, X Corporation is permitted only 
one method of accounting for amortizable bond premium under section 
171. Because after the date of distribution or transfer X 
Corporation must use a single method of accounting for bond premium 
for all trades or businesses, X Corporation must use the principal 
method for that item as determined under paragraph (c) of this 
section, unless either the principal method is impermissible and 
must be changed under paragraph (a)(4) of this section or X 
Corporation changes that method in accordance with paragraph (a)(5) 
of this section. X Corporation must change to the principal method 
in accordance with paragraph (d)(1) of this section. If amortizing 
bond premium is not the principal method, X Corporation may make an 
election to amortize bond premium to the extent permitted by section 
171. See paragraph (e)(2) of this section for rules on making 
elections.

    (b) Definitions. For purposes of this section--
    (1) Method of accounting. A method of accounting has the same 
meaning as provided in section 446 and any applicable Income Tax 
Regulations.
    (2) Special method of accounting. A special method of accounting is 
a method expressly permitted or required by the Internal Revenue Code, 
Income Tax Regulations, or administrative guidance published in the 
Internal Revenue Bulletin that deviates from the normal application of 
the cash receipts and disbursements method or an accrual method of 
accounting. The installment method under section 453, the mark-to-
market method under section 475, the amortization of bond premium under 
section 171, the percentage of completion method under section 460, the 
recurring item exception of Sec.  1.461-5, and the income deferral 
methods under section 455 and Sec.  1.451-5 are examples of special 
methods of accounting. See Sec.  1.446-1(c)(1)(iii).
    (3) Adoption of a method of accounting. Adoption of a method of 
accounting has the same meaning as provided in Sec.  1.446-1(e)(1).

[[Page 45677]]

    (4) Change in method of accounting. A change in method of 
accounting has the same meaning as provided in Sec.  1.446-1(e)(2).
    (5) Carryover method. A carryover method for the overall method of 
accounting is the overall method of accounting that each party to a 
section 381(a) transaction uses for each separate and distinct trade or 
business immediately prior to the date of distribution or transfer. The 
carryover method for a special method of accounting for an item is the 
special method of accounting for that item that each party to a section 
381(a) transaction uses for each separate and distinct trade or 
business immediately prior to the date of distribution or transfer.
    (6) Principal method. A principal method is an overall or special 
method of accounting that is determined under paragraph (c) of this 
section.
    (7) Permissible method of accounting. A permissible method of 
accounting is a method of accounting that is proper or permitted under 
the Internal Revenue Code or any applicable Income Tax Regulations.
    (8) Acquiring corporation. An acquiring corporation has the same 
meaning as provided in Sec.  1.381(a)-1(b)(2).
    (9) Distributor corporation. A distributor corporation means the 
corporation, foreign or domestic, that distributes its assets to 
another corporation described in section 332(b) in a distribution to 
which section 332 (relating to liquidations of subsidiaries) applies.
    (10) Transferor corporation. A transferor corporation means the 
corporation, foreign or domestic, that transfers its assets to another 
corporation in a transfer to which section 361 (relating to 
nonrecognition of gain or loss to corporations) applies, but only if--
    (i) The transfer is in connection with a reorganization described 
in section 368(a)(1)(A), (a)(1)(C), or (a)(1)(F), or
    (ii) The transfer is in connection with a reorganization described 
in section 368(a)(1)(D) or (a)(1)(G), provided the requirements of 
section 354(b) are met.
    (11) Parties to the section 381(a) transaction. Parties to the 
section 381(a) transaction means the acquiring corporation and the 
distributor or transferor corporation that participate in a transaction 
to which section 381(a) applies.
    (12) Date of distribution or transfer. The date of distribution or 
transfer has the same meaning as provided in section 381(b)(2) and 
Sec.  1.381(b)-1(b).
    (13) Separate and distinct trades or businesses. Separate and 
distinct trades or businesses has the same meaning as provided in Sec.  
1.446-1(d).
    (14) Gross receipts. Gross receipts means all the receipts, 
including amounts that are excludible from gross income, that must be 
taken into account under the method of accounting used in a 
representative period (determined without regard to this section) for 
federal income tax purposes. For example, gross receipts includes 
income from investments, amounts received for services, rents, total 
sales (net of returns and allowances), and both taxable and tax-exempt 
interest. See paragraph (e)(5) of this section for rules on determining 
the representative period.
    (15) Audit protection. Audit protection means, for purposes of 
paragraph (d)(1) of this section, that the IRS will not require an 
acquiring corporation that is required to change a method of accounting 
under paragraph (a)(3) of this section to change that method for a 
taxable year ending prior to the taxable year that includes the date of 
distribution or transfer.
    (16) Section 481(a) adjustment. The section 481(a) adjustment means 
an adjustment that must be taken into account as required under section 
481(a) to prevent amounts from being duplicated or omitted when the 
taxable income of an acquiring corporation is computed under a method 
of accounting different from the method used to compute taxable income 
for the preceding taxable year.
    (17) Cut-off basis. A cut-off basis means a manner in which a 
change in method of accounting is made without a section 481(a) 
adjustment and under which only the items arising after the beginning 
of the year of change (or, in the case of a change made under paragraph 
(d)(1) of this section, after the date of distribution or transfer) are 
accounted for under the new method of accounting.
    (18) Adjustment period. The adjustment period means the number of 
taxable years for taking into account the section 481(a) adjustment 
required as a result of a change in method of accounting.
    (19) Component trade or business. A component trade or business is 
a trade or business of a party to the section 381(a) transaction that 
will be combined and integrated with a trade or business of the other 
party to the section 381 transaction. See paragraph (e)(4)(ii) of this 
section for the determination of whether a trade or business is 
operated as a separate and distinct trade or business after the date of 
distribution or transfer.
    (c) Principal method--(1) In general. For each integrated trade or 
business, the principal method is generally the method of accounting 
used by the component trade or business of the acquiring corporation 
immediately prior to the date of distribution or transfer. If, however, 
the component trade or business of the distributor or transferor 
corporation is larger than the component trade or business of the 
acquiring corporation on the date of distribution or transfer, the 
principal method is the method used by the component trade or business 
of the distributor or transferor corporation immediately prior to that 
date. If the larger component trade or business does not have a special 
method of accounting for a particular item immediately prior to the 
date of distribution or transfer, the principal method for that item is 
the method of accounting used by the component trade or business that 
does have a special method of accounting for that item. See paragraph 
(e)(9) of this section for special rules concerning methods of 
accounting that are elected on a project-by-project, job-by-job, or 
other similar basis. For each integrated trade or business, the 
component trade or business of the distributor or transferor 
corporation is larger than the component trade or business of the 
acquiring corporation on the date of distribution or transfer if--
    (i) The aggregate of the adjusted bases of the assets held by each 
component trade or business of the distributor or transferor 
corporation (determined under section 1011 and any applicable Income 
Tax Regulations) exceeds the aggregate of the adjusted bases of the 
assets of each component trade or business of the acquiring corporation 
immediately prior to the date of distribution or transfer, and
    (ii) The aggregate of the gross receipts for a representative 
period of each component trade or business of the distributor or 
transferor corporation exceeds the aggregate of the gross receipts for 
the same period of each component trade or business of the acquiring 
corporation. See paragraph (e)(5) of this section for rules on 
determining the representative period.
    (2) Multiple component trades or businesses with different 
principal methods. If a party to the section 381(a) transaction has 
multiple component trades or businesses and more than one principal 
overall method of accounting or more than one principal special method 
of accounting for an item, then the acquiring corporation may choose 
which of the principal methods of accounting used by such component 
trades or businesses will be the

[[Page 45678]]

principal methods of the integrated trade or business. The acquiring 
corporation must choose a principal method that is a permissible method 
of accounting. In general, a change to a principal method in a 
transaction to which section 381(a) and paragraph (a)(3) of this 
section applies is made under paragraph (d)(1) of this section.
    (3) Examples. The following examples illustrate the rules of this 
paragraph (c). Unless otherwise noted, the principal method is a 
permissible method of accounting.

    Example (1). Principal method is the method used by the 
acquiring corporation--(i) Facts. X Corporation and T Corporation 
each operate an employment agency. X Corporation uses the overall 
cash receipts and disbursements method of accounting, and T 
Corporation uses an overall accrual method of accounting. X 
Corporation acquires the assets of T Corporation in a transaction to 
which section 381(a) applies. The adjusted bases of the assets in X 
Corporation's employment agency immediately prior to the date of 
distribution or transfer exceed the adjusted bases of the assets in 
T Corporation's employment agency, and the gross receipts in X 
Corporation's employment agency for the representative period exceed 
the gross receipts of T Corporation's employment agency for the 
period. After the date of distribution or transfer, X Corporation's 
employment agency will not be operated as a trade or business that 
is separate and distinct from T Corporation's employment agency.
    (ii) Conclusion. Because after the date of distribution or 
transfer X Corporation will not operate its employment agency as a 
separate and distinct trade or business, X Corporation must use a 
principal method under paragraph (a)(3) of this section, unless 
either the principal method is impermissible and must be changed 
under paragraph (a)(4) of this section or X Corporation changes the 
principal method in accordance with paragraph (a)(5) of this 
section. Because on the date of distribution or transfer T 
Corporation's employment agency is not larger than X Corporation's 
employment agency, the principal method for the overall method of 
accounting is the cash receipts and disbursements method used by X 
Corporation's employment agency. X Corporation need not secure the 
Commissioner's consent to use this method of accounting. However, in 
accordance with paragraph (d)(1) of this section, X Corporation must 
change the method of accounting for the employment agency acquired 
from T Corporation to the cash receipts and disbursements method.
    Example (2). Principal method is the method used by the 
acquiring corporation--(i) Facts. The facts are the same as in 
Example (1), except that the gross receipts of T Corporation's 
employment agency for the representative period exceed the gross 
receipts of X Corporation's employment agency for the period.
    (ii) Conclusion. The result is the same as in Example (1). 
Although the gross receipts of T Corporation's employment agency 
exceed the gross receipts of X Corporation's employment agency, T 
Corporation's employment agency is not larger than X Corporation's 
employment agency because the adjusted bases of the assets of T 
Corporation's employment agency do not exceed the adjusted bases of 
the assets of X Corporation's employment agency. Thus, the principal 
method for the overall method of accounting is the cash receipts and 
disbursements method of accounting used by X Corporation's 
employment agency immediately prior to the date of distribution or 
transfer. X Corporation need not secure the Commissioner's consent 
to use this method of accounting. However, in accordance with 
paragraph (d)(1) of this section, X Corporation must change the 
method of accounting for the employment agency business acquired 
from T Corporation to the cash receipts and disbursements method.
    Example (3). Principal method is the method used by the 
distributor or transferor corporation--(i) Facts. The facts are the 
same as in Example (2), except that the adjusted bases of the assets 
held by T Corporation's employment agency immediately prior to the 
date of distribution or transfer exceed the adjusted bases of the 
assets held by X Corporation's employment agency.
    (ii) Conclusion. The principal method for the overall method of 
accounting is the accrual method of accounting used by T 
Corporation's employment agency immediately prior to the date of 
distribution or transfer because on the date of distribution or 
transfer T Corporation's employment agency is larger than X 
Corporation's employment agency. The adjusted bases of the assets of 
T Corporation's employment agency exceed the adjusted bases of the 
assets of X Corporation's employment agency, and the gross receipts 
of T Corporation's employment agency exceed the gross receipts of X 
Corporation's employment agency. X Corporation need not secure the 
Commissioner's consent to use this method of accounting. However, in 
accordance with paragraph (d)(1) of this section, X Corporation must 
change the method of accounting for the employment agency business 
it operated prior to the date of distribution or transfer to the 
accrual method of accounting used by T Corporation's employment 
agency immediately prior to the date of distribution or transfer.
    Example (4). Impermissible principal method--(i) Facts. The 
facts are the same as in Example (1), except that X Corporation is 
prohibited under section 448 from using the cash receipts and 
disbursements method of accounting after the date of distribution or 
transfer.
    (ii) Conclusion. Because section 448 prohibits X Corporation 
from using the cash receipts and disbursements method of accounting, 
X Corporation is not permitted to use the principal method for the 
overall method of accounting as determined in Example (1). Because 
after the date of distribution or transfer that method is not a 
permissible method, under paragraph (a)(4) of this section X 
Corporation must secure the Commissioner's consent to change to a 
permissible method in accordance with the procedures set forth in 
paragraph (d)(2) of this section.
    Example (5). Voluntary change not allowable--(i) Facts. The 
facts are the same as in Example (4), except that T Corporation 
wants to discontinue using the overall accrual method of accounting 
for its employment agency and change to the cash receipts and 
disbursements method for the taxable year in which the section 
381(a) transaction occurs or is expected to occur.
    (ii) Conclusion. Under paragraph (a)(5) of this section, the 
Commissioner will grant a request to change a method of accounting 
for the taxable year that includes the date of distribution or 
transfer only if the requested method is the method that the 
acquiring corporation must use after the date of distribution or 
transfer. The Commissioner will not consent to a request by T 
Corporation to change to the cash receipts and disbursements method 
for the taxable year in which the section 381(a) transaction occurs 
or is expected to occur because X Corporation cannot use the cash 
receipts and disbursements method after the date of distribution or 
transfer.
    Example (6). Principal methods are the acquiring corporation's 
methods--(i) Facts. X Corporation and T Corporation each publishes 
magazines. X Corporation acquires the assets of T Corporation in a 
transaction to which section 381(a) applies. Both X Corporation and 
T Corporation use an overall accrual method of accounting. X 
Corporation has elected to defer income from its subscription sales 
under section 455. T Corporation has not elected to defer income 
from its subscription sales under section 455 and instead has 
recognized the income from these sales in accordance with section 
451. The adjusted bases of the assets in X Corporation's publication 
business immediately prior to the date of distribution or transfer 
exceed the adjusted bases of the assets in T Corporation's 
publication business, and the gross receipts in X Corporation's 
publication business for the representative period exceed the gross 
receipts in T Corporation's publication business for the 
representative period. After the date of distribution or transfer, X 
Corporation will not operate its publication business as a trade or 
business that is separate and distinct from T Corporation's 
publication business.
    (ii) Conclusion. Because after the date of distribution or 
transfer X Corporation will not operate its publication business as 
a separate and distinct trade or business, X Corporation must use 
the principal method under paragraph (a)(3) of this section, unless 
either the principal method is impermissible and must be changed 
under paragraph (a)(4) of this section or X Corporation changes the 
principal method in accordance with paragraph (a)(5) of this 
section. The adjusted bases of the assets in T Corporation's 
publication business do not exceed the adjusted bases of the assets 
in X Corporation's publication business, and the gross receipts in T 
Corporation's publication business do not exceed the gross receipts 
in X Corporation's publication business. Because on the date of 
distribution or transfer T Corporation's publication business is not

[[Page 45679]]

larger than X Corporation's publication business, the principal 
method for the overall method of accounting is the accrual method 
used by X Corporation's publication business immediately prior to 
the date of distribution or transfer. The principal method for 
subscription sales is the section 455 deferral method used by X 
Corporation immediately prior to the date of distribution or 
transfer. X Corporation need not secure the Commissioner's consent 
to use the principal method for either the overall method of 
accounting or the special method of accounting. However, in 
accordance with paragraph (d)(1) of this section, X Corporation must 
change both the overall method of accounting and the special method 
of accounting for the publication business acquired from T 
Corporation to the accrual method and the section 455 deferral 
method used by X Corporation immediately prior to the date of 
distribution or transfer.
    Example (7). Principal methods are the acquiring corporation's 
methods--(i) Facts. The facts are the same as in Example (6), except 
that the adjusted bases of the assets in T Corporation's publication 
business immediately prior to the date of distribution or transfer 
exceed the adjusted bases of the assets in X Corporation's business.
    (ii) Conclusion. The result is the same as in Example (6). 
Because on the date of distribution or transfer T Corporation's 
publication business is not larger than X Corporation's publication 
business, the principal method for the overall method of accounting 
is the accrual method used by X Corporation's publication business 
immediately prior to the date of distribution or transfer. The 
principal method for subscription sales is the section 455 deferral 
method used by X Corporation immediately prior to the date of 
distribution or transfer. X Corporation need not secure the 
Commissioner's consent to use the principal method for either the 
overall method of accounting or the special method of accounting. 
However, in accordance with paragraph (d)(1) of this section, X 
Corporation must change both the overall method of accounting and 
the special method of accounting for the publication business 
acquired from T Corporation to the accrual method and the section 
455 deferral method used by X Corporation immediately prior to the 
date of distribution or transfer.
    Example (8). Principal method determination when larger 
component trade or business does not have a special method of 
accounting--(i) Facts. X Corporation and T Corporation both install 
ice skating rinks. Both X Corporation and T Corporation use an 
overall accrual method of accounting for their respective 
businesses. X Corporation completes its installation contracts 
within the contracting year and uses an accrual method of accounting 
to recognize the revenue from its installation contracts. T 
Corporation's installation contracts are subject to section 460, and 
T Corporation recognizes the revenue from such contracts under the 
percentage-of-completion method. X Corporation acquires the assets 
of T Corporation in a transaction to which section 381(a) applies. 
The adjusted bases of the assets in X Corporation's installation 
business immediately prior to the date of distribution or transfer 
exceed the adjusted bases of the assets in T Corporation's 
installation business, and the gross receipts in X Corporation's 
installation business for the representative period exceed the gross 
receipts in T Corporation's installation business for the 
representative period. After the date of distribution or transfer, X 
Corporation will not operate its installation business as a trade or 
business that is separate and distinct from T Corporation's 
installation business.
    (ii) Conclusion. Because after the date of distribution or 
transfer X Corporation will not operate its installation business as 
a separate and distinct trade or business, X Corporation must use a 
principal method under paragraph (a)(3) of this section, unless 
either the principal method is impermissible and must be changed 
under paragraph (a)(4) of this section or X Corporation changes the 
principal method in accordance with paragraph (a)(5) of this 
section. The adjusted bases of the assets in T Corporation's 
installation business do not exceed the adjusted bases of the assets 
in X Corporation's installation business, and the gross receipts in 
T Corporation's installation business do not exceed the gross 
receipts in X Corporation's installation business. Because on the 
date of distribution or transfer T Corporation's installation 
business is not larger than X Corporation's installation business, 
the principal method for the overall method of accounting is the 
accrual method used by X Corporation's installation business 
immediately prior to the date of distribution or transfer. X 
Corporation need not secure the Commissioner's consent to use the 
principal method for the overall method of accounting. However, in 
accordance with paragraph (d)(1) of this section, X Corporation must 
change the overall method of accounting for the installation 
business acquired from T Corporation to the accrual method used by X 
Corporation. Under paragraph (c) of this section, the principal 
method for T Corporation's long-term contracts is the percentage-of-
completion method used by T Corporation immediately prior to the 
date of distribution or transfer because X Corporation's 
installation business does not have a method of accounting for long-
term contracts. There is no change in method of accounting, and X 
Corporation need not secure the Commissioner's consent to use T 
Corporation's percentage-of-completion method.
    Example (9). Principal method determination with a combined 
trade or business and a separate and distinct trade or business--(i) 
Facts. X Corporation operates a tennis academy as a trade or 
business that is separate and distinct from its trade or business of 
operating a golf academy. X Corporation uses the overall cash 
receipts and disbursements method of accounting for the tennis 
academy and an overall accrual method of accounting for the golf 
academy. T Corporation operates a tennis academy and uses an accrual 
method of accounting for the overall method. X Corporation acquires 
the assets of T Corporation in a transaction to which section 381(a) 
applies. After the date of distribution or transfer, X Corporation 
will not operate its tennis academy as a trade or business that is 
separate and distinct from T Corporation's tennis academy. X 
Corporation will continue to operate its golf academy as a trade or 
business that is separate and distinct from the operation of the 
tennis academy. The adjusted bases of the assets in T Corporation's 
tennis academy exceed the adjusted bases of the assets in X 
Corporation's tennis academy immediately prior to the date of 
distribution or transfer. The gross receipts of T Corporation's 
tennis academy for the representative period exceed the gross 
receipts of X Corporation's tennis academy for that period.
    (ii) Conclusion. Because after the date of distribution or 
transfer X Corporation will not operate its tennis academy as a 
separate and distinct trade or business, X Corporation must use a 
principal method under paragraph (a)(3) of this section, unless 
either the principal method is impermissible and must be changed 
under paragraph (a)(4) of this section or X Corporation changes the 
principal method in accordance with paragraph (a)(5) of this 
section. Because on the date of distribution or transfer the tennis 
academy operated by T Corporation is larger than the tennis academy 
operated by X Corporation, the principal method for the overall 
method of accounting for the combined tennis academy business is the 
accrual method used by T Corporation's tennis academy immediately 
prior to the date of distribution or transfer. X Corporation need 
not secure the Commissioner's consent to use the principal method 
for the overall method of accounting. However, in accordance with 
paragraph (d)(1) of this section, X Corporation must change the 
method of accounting for its tennis academy to the accrual method. 
Because X Corporation will operate the golf academy as a separate 
trade or business, under paragraph (a)(2) of this section X 
Corporation must continue to use the accrual method that it used 
immediately prior to the date of distribution or transfer as the 
carryover method for the golf academy. There is no change in method 
of accounting, and X Corporation need not secure the Commissioner's 
consent to use the carryover method.
    Example (10). Principal method determination with multiple 
component trades or businesses--(i) Facts. The facts are the same as 
in Example (9), except that after the date of distribution or 
transfer X Corporation will not operate its golf academy as a trade 
or business that is separate and distinct from the tennis academy. 
In addition, X Corporation's component trades or businesses are 
larger than T Corporation's component trade or business: (1) the 
adjusted bases of the assets of X Corporation's tennis academy and 
golf academy businesses, in the aggregate, exceed the adjusted bases 
of the assets held by T Corporation's tennis academy; and (2) the 
gross receipts for the representative period of X Corporation's 
tennis academy and golf academy businesses, in the aggregate, exceed 
the gross receipts in T Corporation's tennis academy.
    (ii) Conclusion. Because on the date of distribution or transfer 
T Corporation's tennis academy is not larger than X Corporation's

[[Page 45680]]

combined tennis academy and golf academy, the principal method for 
the overall method of accounting is the method of accounting used by 
the component trades or businesses of X Corporation that will be 
combined with T Corporation's component trade or business on that 
date. Because on the date of distribution or transfer X Corporation 
operates two component trades or businesses with different overall 
methods of accounting that will be integrated after the date of 
distribution or transfer, X Corporation may choose under paragraph 
(c)(2) of this section which overall method (and any special method 
of accounting) used by its component trades or businesses will be 
the principal method. X Corporation may choose to use either the 
accrual method used by the golf academy or the cash receipts and 
disbursements method used by its tennis academy as the principal 
method after the date of distribution or transfer, if either method 
is a permissible method. In accordance with paragraph (d)(1) of this 
section, X Corporation must change T Corporation's overall method of 
accounting to the principal method. Under paragraph (a)(3) of this 
section, X Corporation also must change either its golf academy 
business or its tennis academy business, depending on which 
principal method X Corporation selects, to the principal method.

    (d) Procedures for changing a method of accounting--(1) Change made 
to principal method under paragraph (a)(3) of this section--(i) Section 
481(a) adjustment--(A) In general. An acquiring corporation that 
changes its method of accounting or the distributor or transferor 
corporation's method of accounting under paragraph (a)(3) of this 
section does not need to secure the Commissioner's consent to use the 
principal method. To the extent the use of a principal method 
constitutes a change in method of accounting, the change in method is 
treated as a change initiated by the acquiring corporation for purposes 
of section 481(a)(2). Any change to a principal method, whether the 
change relates to a trade or business of the acquiring corporation or a 
trade or business of the distributor or transferor corporation, must be 
reflected on the acquiring corporation's federal income tax return for 
the taxable year that includes the date of distribution or transfer. 
The amount of the section 481(a) adjustment and the adjustment period, 
if any, necessary to implement a change to the principal method are 
determined under Sec.  1.446-1(e) and the applicable administrative 
procedures that govern voluntary changes in methods of accounting under 
section 446(e). If the Internal Revenue Code, the Income Tax 
Regulations, or administrative procedures require that a method of 
accounting be implemented on a cut-off basis, the acquiring corporation 
must implement the change on a cut-off basis as of the date of 
distribution or transfer on its federal income tax return for the 
taxable year that includes the date of distribution or transfer. If the 
Internal Revenue Code, the Income Tax Regulations, or administrative 
procedures require a section 481(a) adjustment, the acquiring 
corporation must determine the section 481(a) adjustment and include 
the appropriate amount of the section 481(a) adjustment on its federal 
income tax return for the taxable year that includes the date of 
distribution or transfer and subsequent taxable year(s), as necessary. 
This adjustment is determined by the acquiring corporation as of the 
beginning of the day that is immediately after the date of distribution 
or transfer.
    (B) Example. The following example illustrates the rules of this 
paragraph (d)(1)(i):

    Example. X Corporation uses the overall cash receipts and 
disbursements method of accounting, and T Corporation uses an 
overall accrual method of accounting. X Corporation acquires the 
assets of T Corporation in a transaction to which section 381(a) 
applies. X Corporation determines that under the rules of paragraph 
(c)(1) of this section X Corporation must change the method of 
accounting for the business acquired from T Corporation to the cash 
receipts and disbursements method. X Corporation will determine the 
section 481(a) adjustment pertaining to the change to the cash 
receipts and disbursements method by consolidating the adjustments 
(whether the amounts thereof represent increases or decreases in 
items of income or deductions) arising with respect to balances in 
the various accounts, such as accounts receivable, as of the 
beginning of the day that immediately follows the day on which X 
Corporation acquires the assets of T Corporation. X Corporation will 
reflect this adjustment, or an appropriate part thereof, on its 
federal income tax return for the taxable year that includes the 
date of distribution or transfer.

    (ii) Audit protection. Notwithstanding any other provision in any 
other Income Tax Regulation or administrative procedure, no audit 
protection is provided for any change in method of accounting under 
paragraph (d)(1) of this section.
    (iii) Other terms and conditions. Except as otherwise provided in 
this section, other terms and conditions provided in Sec.  1.446-1(e) 
and the applicable administrative procedures for voluntary changes in 
method of accounting under section 446(e) apply to a change in method 
of accounting under this section. Thus, for example, if the 
administrative procedures for a particular change in method of 
accounting have a term and condition that provides for the acceleration 
of the section 481(a) adjustment period, this term and condition 
applies to a change made under this paragraph (d)(1). However, any 
scope limitation in the applicable administrative procedures will not 
apply for purposes of making a change under this paragraph (d)(1). For 
example, if the administrative procedures provide as a limitation that 
an identical change in method of accounting is barred for a period of 
years, this limitation will not bar a change to the principal method 
made under this section.
    (2) Change made to a method of accounting under paragraph (a)(4) or 
(a)(5) of this section--(i) In general. A party to a section 381(a) 
transaction that changes a method of accounting under either paragraph 
(a)(4) or paragraph (a)(5) of this section must follow the provisions 
of Sec.  1.446-(1)(e) and the applicable administrative procedures, 
including scope limitations, for voluntary changes in method of 
accounting under section 446(e), except as provided in paragraphs 
(d)(2)(ii) and (d)(2)(iii) of this section. An application on Form 
3115, ``Application for Change in Accounting Method,'' filed with the 
IRS to change a method of accounting under this paragraph (d)(2) should 
be labeled ``Filed under section 381(c)(4)'' at the top.
    (ii) Final year limitation. Any scope limitation relating to the 
final year of a trade or business will not apply to a taxpayer that 
changes its method of accounting in the final year of a trade or 
business that is terminated as the result of a section 381(a) 
transaction.
    (iii) Time to file. Under the authority of Sec.  1.446-1(e)(3)(ii), 
for a change in method of accounting requiring advance consent, the 
application for a change in method of accounting (for example, Form 
3115) must be filed with the IRS on or before the later of--
    (A) The due date for filing a Form 3115 as specified in Sec.  
1.446-1(e), for example, the last day of the taxable year in which the 
distribution or transfer occurred, or
    (B) The earlier of--
    (1) The day that is 180 days after the date of distribution or 
transfer, or
    (2) The day on which the acquiring corporation files its federal 
income tax return for the taxable year in which the distribution or 
transfer occurred.
    (e) Rules and procedures--(1) No method of accounting. If a party 
to a section 381(a) transaction is not using a method of accounting, 
does not have a method of accounting for a particular item, or came 
into existence as a result of the transaction, the party will not be 
treated as having a method of accounting different from that used by

[[Page 45681]]

another party to the section 381(a) transaction.
    (2) Elections and adoptions allowed. If an election does not 
require the Commissioner's consent, an acquiring corporation or a 
distributor or transferor corporation is not precluded from making any 
election that is otherwise permissible for the taxable year that 
includes the date of distribution or transfer. For purposes of this 
section, a corporation shall be deemed as having made any election as 
of the first day of the taxable year that includes the date of 
distribution or transfer. Similarly, where adoption is permissible, an 
acquiring corporation or a distributor or transferor corporation may 
adopt any permissible method of accounting for the taxable year that 
includes the date of distribution or transfer.
    (3) Elections continue after section 381(a) transaction--(i) 
General rule. An acquiring corporation is not required to renew any 
election not otherwise requiring renewal and previously made by it or 
by a distributor or transferor corporation for a carryover method or a 
principal method if the acquiring corporation uses the method after the 
section 381(a) transaction. If the acquiring corporation uses a method 
after the date of distribution or transfer, an election made by the 
acquiring corporation or by a distributor or transferor corporation for 
that method that was in effect on the date of distribution or transfer 
continues after the section 381(a) transaction as though the 
distribution or transfer had not occurred.
    (ii) Example. The following example illustrates the rules of this 
paragraph (e)(3):

    Example. The acquiring corporation, X Corporation, previously 
elected to amortize bond premium under section 171. X Corporation 
acquires the assets of T Corporation in a transaction to which 
section 381(a) applies. X Corporation determines under the rules of 
paragraph (c)(1) of this section that X Corporation's method of 
amortizing bond premium is the principal method. After the date of 
distribution or transfer, X Corporation is not required to renew its 
bond premium amortization election and is bound by it. Additionally, 
X Corporation would not be required to renew its election to 
amortize bond premium if the method were the carryover method under 
paragraph (a)(2) of this section.

    (4) Appropriate times for certain determinations--(i) Determining 
the method of accounting. The method of accounting used by a party to a 
section 381(a) transaction on the date of distribution or transfer is 
the method of accounting used by that party as of the end of the day 
that is immediately prior to the date of distribution or transfer.
    (ii) Determining whether there are separate and distinct trades or 
businesses after the date of distribution or transfer. Whether an 
acquiring corporation will operate the trades or businesses of the 
parties to a section 381(a) transaction as separate and distinct trades 
or businesses after the date of distribution or transfer will be 
determined as of the date of distribution or transfer based upon the 
facts and circumstances. Intent to combine books and records of the 
trades or businesses may be demonstrated by contemporaneous records and 
documents or by other objective evidence that reflects the acquiring 
corporation's ultimate plan of operation, even though the actual 
combination of the books and records may extend beyond the end of the 
taxable year that includes the date of distribution or transfer.
    (5) Representative period for aggregating gross receipts. The 
representative period for measuring gross receipts is generally the 12 
consecutive months preceding the date of distribution or transfer. If a 
component trade or business was not in existence for the 12 consecutive 
months preceding the date of distribution or transfer, then all 
component trades or businesses of each integrated trade or business 
will compare their gross receipts for the period that such trade or 
business was in existence. For example, if the acquiring corporation's 
component trade or business was formed in August and the date of 
distribution or transfer occurred in December of the sa