rr-23-08.pdf

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Part I

Section 174.-- Amortization of Research and Experimental Expenditures

26 CFR 1.174-1: Research and experimental expenditures; in general.
(Also §§ 446, 7805(b)(8); 1.174-3, 1.446-1, 301.7805-1).

Rev. Rul. 2023-8

This revenue ruling obsoletes Rev. Rul. 58-74, 1958-1 C.B. 148.
LAW AND ANALYSIS
Section 13206 of Public Law 115-97, 131 Stat. 2054 (Dec. 22, 2017), commonly
referred to as the Tax Cuts and Jobs Act (TCJA), amended § 174 of the Internal
Revenue Code (Code) effective for amounts paid or incurred in taxable years beginning
after December 31, 2021.
1

For amounts paid or incurred in taxable years beginning on or before December 31,
2021, former § 174(a) permitted a taxpayer to currently deduct research or experimental
expenditures that were paid or incurred during the taxable year in connection with its

1
Unless otherwise specified, all “section” or “§” references are to sections of the Code or the Income Tax
Regulations (26 CFR part 1) and references to “former § 174” are to § 174 as in effect immediately prior
to the effective date of the amendments made by § 13206 of the TCJA.

trade or business (expense method). Alternatively, a taxpayer could elect to defer and
amortize these expenditures under former § 174(b). If expenditures were neither
currently deducted nor deferred and amortized, they had to be charged to capital
account. See § 1.174-1.
If the expense method was adopted for amounts paid or incurred in taxable years
beginning on or before December 31, 2021, it had to be used for all qualifying
expenditures in the taxable year adopted and for all subsequent years, unless the
Commissioner of Internal Revenue or the Commissioner’s delegate (Commissioner)
consented to a different method for all or part of the expenditures under former
§ 174(a)(3). See § 1.174-3(a). A taxpayer on a different method could apply for
permission to change to the expense method for all or part of the expenditures by
submitting a written application to the Internal Revenue Service (IRS). See § 1.174-3
and section 7.01 of Rev. Proc. 2022-14, 2022-7 I.R.B. 502.
Rev. Rul. 58-74 provides that if a taxpayer adopted the expense method but failed to
deduct expenses relating to the cost of obtaining a patent or other items of research or
experimental expenditures for prior taxable years to which the expense method is
applicable, the taxpayer should file a claim for refund or amended return to deduct
additional research or experimental expenditures in the year or years when the
expenditures were paid or accrued. Rev. Rul. 58-74 further provides that the additional
research or experimental expenditures cannot be treated as deferred and amortized
under former § 174(b) or chargeable to capital account and subsequently amortized or
written off upon abandonment of the project or projects because the Commissioner's
consent to change a method of accounting was not obtained. Accordingly, the

deduction for the additional research or experimental expenditures could be lost if the
period of limitations on claims for credit or refund under § 6511 has expired and
amended returns could not be timely filed.
Section 13206(a) of the TCJA amended former § 174 to require research or
experimental expenditures (for amounts paid or incurred in taxable years beginning
after December 31, 2021) to be charged to capital account and amortized ratably over
the five-year period (or the 15-year period in the case of any specified research or
experimental expenditures which are attributable to foreign research) beginning with the
midpoint of the taxable year in which the specified research or experimental
expenditures were paid or incurred. The rationale of the Department of the Treasury
(Treasury Department) and the IRS for obsoleting Rev. Rul. 58-74 is independent of the
removal of the expense method by the TCJA amendments to former § 174.
Pursuant to the authority provided under § 301.7805-1 of the Procedure and
Administration Regulations, the Treasury Department and the IRS periodically obsolete
rulings that are no longer determinative because: (1) the applicable statutory provisions
or regulations have been changed or repealed; (2) the ruling position is specifically
covered by a statute, regulation, or subsequent published position; or (3) the facts set
forth no longer exist or are not sufficiently described to permit clear application of the
current statute and regulations.
The Treasury Department and the IRS are obsoleting Rev. Rul. 58-74 because there
are insufficient facts in the ruling 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. For example, Rev. Rul. 58-74 does not explain
whether the taxpayer consistently treated the costs of obtaining a patent in determining
its taxable income. See Huffman v. Commissioner, 126 T.C. 322, 354 (2006), aff’d, 518
F.3d 357 (6th Cir. 2008) (“[I]t is the consistent treatment of an item involving a question
of timing that establishes such treatment as a method of accounting.”). Rev. Rul. 58-74
also fails to describe the cause and extent of the deviation in the treatment of certain
research or experimental expenditures that were not deducted. See § 1.446-
1(e)(2)(ii)(b).
Whether a change in accounting treatment of amounts paid or incurred for research
or experimentation expenditures constitutes a change in method of accounting or the
correction of an error depends on the specific facts of a particular situation. If the facts
demonstrate that a taxpayer has a change in method of accounting, then filing an
amended return, refund claim, or administrative adjustment request under § 6227
(AAR), as applicable, in reliance upon Rev. Rul. 58-74 would conflict with the statutory
requirement that a taxpayer must secure the consent of the Commissioner to change a
method of accounting. See § 446(e), former § 174(a)(3), § 1.174-3(b), and § 1.174-
4(b), as applicable, for the taxable years in which former § 174 was in effect. In
addition, filing an amended return, refund claim, or AAR, as applicable, in reliance upon
Rev. Rul. 58-74 in such a case 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. See § 446(e); § 1.446-
1(e)(2)(i); Capital One Fin. Corp v. Commissioner, 659 F.3d 316, 322-23 (4th Cir. 2011);
Diebold Inc., v. United States, 891 F.2d 1579, 1583 (Fed. Cir. 1989), cert. denied, 498

U.S. 823 (1990). Lastly, filing an amended return, refund claim, or AAR, as applicable,
in reliance upon Rev. Rul. 58-74 in such a case would be inconsistent with the
automatic change procedure for a taxpayer changing from treating research or
experimental expenditures under any provision of the Code other than § 174 to treating
such expenditures under former § 174 and the regulations thereunder. See section
7.01(2)(a)(iv) of Rev. Proc. 2022-14. For these reasons, Rev. Rul. 58-74 is no longer
determinative.
EFFECT ON OTHER REVENUE RULINGS
Rev. Rul. 58-74 is obsoleted.
PROSPECTIVE APPLICATION
Pursuant to § 7805(b), Rev. Rul. 58-74 is obsoleted as of July 31, 2023. The
obsoletion of Rev. Rul. 58-74 does not affect the characterization of the costs of
obtaining a patent in § 1.174-2(a)(1). Furthermore, the obsoletion of Rev. Rul. 58-74
does not affect the specific rules for changing a method of accounting under former
§ 174 and the regulations under former § 174, including the requirement that such
change be implemented on a cut-off basis. See former § 174(a)(3), § 1.174-3(b)(2),
and § 1.174-4(a)(5).
A taxpayer may file a claim for refund, amended return, or AAR, as applicable, in
reliance on Rev. Rul. 58-74 if the taxpayer is (1) claiming a deduction for additional
research or experimental expenditures to which the expense method under former
§ 174(a) is applicable for the taxable year or years in which they were improperly
deferred or capitalized, (2) otherwise using the expense method for such taxable year or
years, and (3) timely filing the claim for refund, amended return, or AAR not later than

July 31, 2023. The eligibility to file a claim for refund, an amended return, or an AAR in
reliance on Rev. Rul. 58-74 does not imply that the IRS will grant such claim for refund,
amended return, or AAR. The IRS will continue to challenge the applicability of Rev.
Rul. 58-74 to a particular claim for refund, amended return, or AAR when appropriate.
For example, the IRS may challenge the applicability of Rev. Rul. 58-74 when the
taxpayer’s facts in the amended return, refund claim, or AAR are distinguishable from
Rev. Rul. 58-74, including where the taxpayer failed to adopt the expense method under
former § 174(a).
DRAFTING INFORMATION
The principal author of this revenue ruling is Bruce Chang of the Office of Associate
Chief Counsel (Income Tax & Accounting). For further information regarding this
revenue ruling, contact Mr. Chang at (202) 317-4870 (not a toll-free number).