Rev. Proc. 98-58, 1998-49 IRB 19, provides a procedure to allow farmers to automatically change their method of accounting for certain deferred payment sales ("DPS") contracts to the installment method for purposes of alternative minimum tax ("AMT") computations. This procedure allows a taxpayer, without seeking the consent of the Commissioner, to comply with Section 403 of the Taxpayer Relief Act of 1997 ("TRA 1997"), PubI. L. No. 105-34, Ill Stat. 788 (Aug. 5, 1997), repealing Section 56(a)(6) of the Code, which had prohibited the use of the installment method in computing alternative minimum taxable income ("AMTI") for post-1987 dispositions.

Rev. Proc. 98-58 represents the final chapter in an AMT saga that began in the mid-1990s. At that time, the IRS challenged how a farmer using the cash method of accounting should report income on DPS contracts for AMT purposes. The issue arose where, under the Section 453 provisions for the installment method of reporting income the receipt of all or a portion of the sales proceeds was deferred to a year following the sale. The IRS, relying on (now repealed) Section 56(a)(6), took the position that the deferred sales proceeds should be included in AMTI in the year of sale, even though the income would be deferred until receipt for regular income tax purposes. See, TAM 9640003 (dated Dec. 21, 1995, and published Oct. 4, 1996). In the U.S. Tax Court case of Loomis v. Commissioner, the IRS advanced its position against farmers who entered into DPS grain contracts in 1991, but did not receive payments until 1992. Less than a month before the courts decision in the matter, Section 56(a)(6) was repealed under the TRA of 1997. In light of this repeal, the court held in the farmers favor. Loomis v. Commissioner, T.C.Memo 1997-381.

Section 56(a)(6) was enacted under the 1986 Tax Reform Act. This section of the Code stated that for purposes of computing AMT, income from any disposition of any Section 1221(1) property after March 1, 1986, shall be determined without regard to the installment method under Section 453. In other words, Section 56(a)(6) prohibited the use by a cash basis taxpayer of the installment method of reporting, with respect to Section 1221(1) property (which includes farm products), in computing AMTI. Thus, the fair market value (or the issue price) of the DPS obligation was required to be included in the taxpayers AMTI in the taxable year of the sale. However, for regular tax purposes, Section 453 permits a cash method taxpayer to report income on a DPS contract as payments are received.

Section 403 of the TRA 1997 repealed Section 56(a)(6) retroactively to 1987, permitting use of the installment method by a cash method taxpayer in computing AMTI. The change from the prior prohibition under Section 56(a)(6) to the use of the installment method is a change in the taxpayers method accounting under Section 446(e). Treas. Reg. Section 1.446(c) requires a taxpayer to obtain the consent of the Commissioner to make a change in accounting method, even where the method is proper and permitted under the Code. However, Treas. Reg. Section 1.446-1(e)(3)(ii) authorizes the Commissioner to prescribe administrative procedures which, if followed, allow the taxpayer to automatically change methods of accounting without seeking the Commissioners consent.

Rev. Proc. 98-58 provides the following administrative procedure for DPS contracts: To make the change in accounting method prospectively, beginning with the current taxable year, the taxpayer simply uses the installment method to report income from DPS contracts (entered into in the current year and all subsequent years) for AMT purposes. For those farmers that had followed the IRS position with respect to the application of the AMT to DPS contracts, to make retroactive changes in accounting method, amended returns are required to be filed pursuant to the guidelines set forth in Rev. Proc. 98-58.

Sue Ann Nelson
Alisa B. Burns