Internal Revenue Service
Revenue Ruling

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 Rev. Rul. 79-68

1979-1 C.B. 133

Section 312

IRS Headnote

Earnings and profits; advance payments. An accrual method taxpayer need not make any adjustment in computing its earnings and profits under section 312 of the Code for advance payments deferred under Rev. Proc. 71-21.

Full Text

Rev. Rul. 79-68

ISSUE

Is the taxpayer required to make any adjustment in computing its earnings and profits under section 312 of the Internal Revenue Code of 1954 for the amount of income deferred under Rev. Proc. 71-21, 1971-2 C.B. 549?

FACTS

The taxpayer corporation owns and operates health clinics throughout the United States. The taxpayer has continuously used the accrual method of accounting and has properly elected to include advance payments for services in income in accordance with the provisions of Rev. Proc. 71-21.

Rev. Proc. 71-21 implements an administrative decision made by the Commissioner in the exercise of the Commissioner's discretion under section 446 of the Code, to allow accrual method taxpayers in certain specified and limited circumstances to defer the inclusion in gross income for federal income tax purposes of payments received (or amounts due and payable) in one taxable year for services to be performed by the end of the next succeeding taxable year.

LAW AND ANALYSIS

Section 1.312-6(a) of the Income Tax Regulations states that in determining the amount of earnings and profits, due consideration must be given to the facts, and while mere bookkeeping entries increasing or decreasing surplus will not be conclusive, the amount of the earnings and profits in any case will be dependent upon the method of accounting properly employed in computing taxable income.

Section 1.446-1(a)(1) of the regulations provides that the term "method of accounting" includes not only the overall method of accounting of the taxpayer but also the accounting treatment of any item.

Section 3.14 of Rev. Proc. 71-21 provides that the deferral of the inclusion in gross income of amounts in accordance with the provisions of the Revenue Procedure will be treated as an acceptable method of accounting under section 446 of the Code so long as the method is consistently used by the taxpayer.

Generally, in determining the earnings and profits of a corporation, taxable income is used as a starting point in such determination. Adjustments are then made to that amount for items whose treatment is different for federal tax purposes than it is for financial statement purposes.

Section 1.312-6(a) of the regulations indicates that the amount of earnings and profits is dependent upon the method of accounting properly used in computing taxable income. In the present situation the taxpayer is using the method of accounting prescribed in Rev. Proc. 71-21, which is an acceptable method of accounting for computing taxable income, the starting point for the computation of the current year's earnings and profits.

HOLDING

The use of the specialized method of accounting prescribed in Rev. Proc. 71-21 for reporting advance payments for services does not give rise to any adjustments in computing earnings and profits.