Or, Don’t Jump the Gun

 That’s the lesson Judge Kroupa delivers in Lattice Semiconductor Corporation, 2011 T.C. Mem. 100, released 5/9/11.

Lattice wanted to change its accounting method to take advantage of the proposed change in the regulations to Section 263,  that took effect 2004. The old rule for accrual basis taxpayers, and the one Lattice had followed, was that expenses fully incurred in one tax year and not applicable to more 12 calendar months, but in part applicable to the succeeding tax year, had to be capitalized. But the rules changed in 2004 to allow all such expenses to be deducted in the tax year incurred, even for accrual basis taxpayers.

Lattice applied for the change for years prior to the effective date of the new regulations, but IRS rejected the application, because the final regulations were not effective at the time Lattice applied. Lattice argued that IRS failed to take into account the proposed change and a Seventh Circuit case (even though Lattice was a Ninth Circuit domiciliary).

No go, says Judge Kroupa. IRS warned taxpayers in the Notice of Proposed Rulemaking not to apply for a change prior to the final regulations becoming effective. Lattice’s argument that IRS’ warning amounted to an “automatic rejection” policy fails for want of substantiation.

More importantly, IRS consent underpins the proper collection of revenue. Absent consent, taxpayers would cherry-pick accounting methods and eviscerate the proper collection of revenue. IRS has broad discretion over accounting method changes. Tax Court finds no abuse of IRS’s discretion.

The takeaway? Don’t jump offside, taxpayers. Wait for the regulations.