Reg. § 1.1502-17 Methods of accounting.
(a) General rule The method of accounting to be used by each member of the group is determined in accordance with the provisions of section as if such member filed a separate return.
(b) Adjustments required if method of accounting changes
(1) General rule If a member of a group changes its method of accounting for a consolidated return year, the terms and conditions prescribed by the Commissioner under section , including section where applicable, shall apply to the member. If the requirements of section are met because applicable adjustments under section are substantial, the increase in tax for any prior year shall be computed upon the basis of a consolidated return or a separate return, whichever was filed for such prior year.
(2) Changes in method of accounting for intercompany transactions If a member changes its method of accounting for intercompany transactions for a consolidated return year, the change in method generally will be effected on a cut-off basis.
(c) Anti-avoidance rules
(1) General rule If one member (B) directly or indirectly acquires an activity of another member (S), or undertakes S's activity, with the principal purpose to avail the group of an accounting method that would be unavailable (or would be unavailable without securing consent from the Commissioner) if S and B were treated as divisions of a single corporation, B must use the accounting method for the acquired or undertaken activity determined under of this section or must secure consent from the Commissioner under applicable administrative procedures to use a different method.
(2) Treatment as divisions of a single corporation B must use the method of accounting that would be required if B acquired the activity from S in a transaction to which section applied. Thus, the principles of section (c)(4) and (c)(5) apply to resolve any conflicts between the accounting methods of S and B, and the acquired or undertaken activity is treated as having the accounting method used by S. Appropriate adjustments are made to treat all acquisitions or undertakings that are part of the same plan or arrangement as a single acquisition or undertaking.
(d) Examples The provisions of this section are illustrated by the following examples:
Example 1. Separate return treatment generally. X and its wholly-owned subsidiary Y filed separate returns for their calendar years ending December 31, 1965. During calendar year 1965, X employed an accrual method of accounting, established a reserve for bad debts, and elected under section to amortize bond premiums with respect to its fully taxable bonds. During calendar year 1965, Y employed the cash receipts and disbursements method, used the specific charge-off method with respect to its bad debts, and did not elect to amortize bond premiums under section with respect to its bonds. X and Y filed a consolidated return for 1966. For 1966 X and Y must continue to compute income under their respective methods of accounting (unless a change in method under section is made).
Example 2. Adopting methods.
Corporation P is a member of a consolidated group. P provides consulting services to customers under various agreements. For one type of customer, P's agreements require payment only when the contract is completed (payment-on-completion contracts). P uses an overall accrual method of accounting. Accordingly, P takes its income from consulting contracts into account when earned, received, or due, whichever is earlier. With the principal purpose to avoid seeking the consent of the Commissioner to change its method of accounting for the payment-on-completion contracts to the cash method, P forms corporation S, and S begins to render services to those customers subject to the payment-on-completion contracts. P continues to render services to those customers not subject to these contracts.
(b) Under of this section, S must account for the consulting income under the payment-on-completion contracts on an accrual method rather than adopting the cash method contemplated by P.
Example 3. Changing inventory sub-method.
(a) Corporation P is a member of a consolidated group. P operates a manufacturing business that uses dollar-value LIFO, and has built up a substantial LIFO reserve. P has historically manufactured all its inventory and has used one natural business unit pool. P begins purchasing goods identical to its own finished goods from a foreign supplier, and is concerned that it must establish a separate resale pool under . P anticipates that it will begin to purchase, rather than manufacture, a substantial portion of its inventory, resulting in a recapture of most of its LIFO reserve because of decrements in its manufacturing pool. With the principal purpose to avoid the decrements, P forms corporation S in Year 1. S operates as a distributor to nonmembers, and P sells all of its existing inventories to S. S adopts LIFO, and elects dollar-value LIFO with one resale pool. Thereafter, P continues to manufacture and purchase inventory, and to sell it to S for resale to nonmembers. P's intercompany gain from sales to S is taken into account under . S maintains its Year 1 base dollar value of inventory so that P will not be required to take its intercompany items (which include the effects of the LIFO reserve recapture) into account.
(b) Under of this section, S must maintain two pools (manufacturing and resale) to the same extent that P would be required to maintain those pools under if it had not formed S.
(e) Effective dates of this section applies to changes in method of accounting effective for years beginning on or after July 12, 1995. and of this section apply with respect to acquisitions occurring or activities undertaken in years beginning on or after July 12, 1995.
[T.D. 6894, 31 FR 11794, Sept. 8, 1966, as amended by T.D. 8597, 60 FR 36708, July 18, 1995; T.D. 10018, 89 FR 106867, Dec. 30, 2024]