IRS obsoletes 1958 revenue ruling on research and experimental costs

The IRS released Rev. Rul. 2023-08 on Wednesday, obsoleting a revenue ruling from the 1950s that allowed taxpayers that used the expense method of accounting for research and experimental expenditures, which was allowed under Sec. 174(a) before amendment by the law known as the Tax Cuts and Jobs Act (TCJA), P.L. 115-97, to deduct on an amended return research and experimental expenditures it did not deduct in a prior year.

The new ruling states that the IRS’s reasoning behind obsoleting Rev. Rul. 58-74 was independent of the removal of the expense method by amendments to former Sec. 174 made by the TCJA. Rather, Rev. Rul. 58-74 from 1958 is being obsoleted because the two-paragraph, four-sentence ruling lacks enough facts “to properly analyze whether the taxpayer’s failure to deduct certain research or experimental expenditures, such as the cost of obtaining a patent, when it deducted other research or experimental expenditures, constituted a method of accounting or an error.”

As examples, the IRS noted that Rev. Rul. 58-74 fails to explain “whether the taxpayer consistently treated the costs of obtaining a patent in determining its taxable income” and “also fails to describe the cause and extent of the deviation in the treatment of certain research or experimental expenditures that were not deducted.”

If a taxpayer failed to deduct the expenditures because of a change in method of accounting, relying on Rev. Rul. 58-74 to file an amended return, refund claim, or administrative adjustment request would conflict with the “statutory requirement that a taxpayer must secure the consent of the Commissioner to change a method of accounting” and would be inconsistent with “the IRS’s position that a taxpayer may not, without prior consent, retroactively change from an erroneous to a permissible method of accounting by filing amended returns.”

Taxpayers have until July 31, when Rev. Rul. 58-74 is obsoleted, to file a refund claim, an amended return, or an administrative adjustment request in reliance on the ruling if their claim falls under certain parameters. But that does not guarantee IRS approval.

“The IRS will continue to challenge the applicability of Rev. Rul. 58-74 to a particular claim for refund, amended return, or AAR [administrative adjustment request] when appropriate,” the Service said.

— To comment on this article or to suggest an idea for another article, contact Martha Waggoner at Martha.Waggoner@aicpa-cima.com.