Part III. Administrative, Procedural, and Miscellaneous

to account for inventories, unless otherwise authorized by the Commissioner under § 1.446–1(c)(2)(ii). Under § 1.446– 1(c)(2)(ii), the Commissioner has the authority to permit a taxpayer to use a method of accounting that clearly reflects income even though the method is not specifically authorized by the regulations.

.03 Section 447 generally requires the taxable income from farming of a C corporation engaged in the trade or business of farming, or a partnership engaged in the trade or business of farming with a C corporation partner, to be determined using an accrual method, unless the C corporation meets the $1,000,000 ($25,000,000 for family corporations) gross receipts test.

.04 Section 448 generally prohibits the use of the cash method by a C corporation (other than a farming business and a qualified personal service corporation) and a partnership with a C corporation partner (other than a farming business and a qualified personal service corporation), unless the C corporation or partnership with a C corporation partner meets the $5,000,000 gross receipts test. Section 448 also prohibits tax shelters from using the cash method.

.05 The cash method generally requires an item of income to be included in income when actually or constructively received and permits a deduction for an expense when paid. Section 1.446– 1(c)(1)(i). Other provisions of the Code or regulations applicable to cash method taxpayers may change these general rules, including, for example, § 263 (requiring the capitalization of expenses paid out for a new building or for permanent improvements or betterments made to increase the value of any property or estate, or for restoring property or making good the exhaustion of property for which an allowance is or has been made); § 263A (requiring capitalization of direct and allocable indirect costs of real or tangible personal property produced by a taxpayer or real or personal property that is acquired by a taxpayer for resale); § 460 (requiring the use of the percentage-ofcompletion method for certain long-term contracts); and § 475 (requiring dealers in securities to mark securities to market).

Proposed Revenue Procedure Regarding the Cash Method

Notice 2001–76

Pursuant to the discretion granted the Commissioner of Internal Revenue under §§ 446 and 471 of the Internal Revenue Code, this notice provides a proposed revenue procedure that will allow qualifying small business taxpayers with gross receipts of less than $10 million to use the cash receipts and disbursements method of accounting as described in the proposed revenue procedure with respect to eligible trades or businesses. This proposed revenue procedure is intended to reduce the administrative and tax compliance burdens on certain small business taxpayers and to minimize disputes between the Internal Revenue Service (Service) and these taxpayers regarding the requirement to use an accrual method of accounting under § 446 of the Code because of the requirement to account for inventories under § 471. Although this revenue procedure is being issued in proposed form, taxpayers may rely on it for taxable years ending on or after December 31, 2001.

The Service believes that § 263A will have limited applicability to resellers and producers with gross receipts of $10,000,000 or less because of the exception for resellers in § 263A(b)(2)(B) and the indirect cost exception for producers in §1.263A–2(b)(3)(iv). However, the Service requests comments on any additional relief that should be considered for taxpayers with gross receipts of $10,000,000 or less to relieve any administrative burden of § 263A. The Service also welcomes other comments on the proposed revenue procedure provided in this notice. Comments should be submitted by March 1, 2002, either to:

Internal Revenue Service P. O. Box 7604 Ben Franklin Station Washington, DC 20044 Attn: CC:PA:T:CRU (ITA) Room 5529

or electronically via the Service internet site at: Notice.Comments@m1.irscounsel.treas.gov (the Service Comments e-mail address).

Rev. Proc. 2001–XX