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NEW RULES REWARD PROMPTNESS IN REQUESTING ACCOUNTING METHOD CHANGE.

MAR. 2, 1992

Rev. Proc. 92-20; 1992-1 C.B. 685

DATED MAR. 2, 1992
DOCUMENT ATTRIBUTES
  • Institutional Authors
    Internal Revenue Service
  • Cross-Reference

    26 CFR 601.204: Changes in accounting periods and in methods of

    accounting.

    (Also Part I, Sections 446, 472, 481; 1.446-1, 1.481-1, 1.472-1.)

  • Code Sections
  • Subject Areas/Tax Topics
  • Index Terms
    accounting methods
  • Jurisdictions
  • Language
    English
  • Tax Analysts Document Number
    Doc 92-1921 (95 original pages)
  • Tax Analysts Electronic Citation
    92 TNT 48-7
Citations: Rev. Proc. 92-20; 1992-1 C.B. 685

Modified and Superseded by Rev. Proc. 97-27 Modified by T.D. 8680 Modified by Rev. Proc. 97-10 Modified by Rev. Proc. 96-31 Modified by Rev. Proc. 96-1 Modified by Rev. Proc. 95-8 Modified by Rev. Proc. 95-1 Modified by Rev. Proc. 94-8 Modified by Rev. Proc. 94-1 Modified by Rev. Proc. 93-23 Modified by Rev. Proc. 92-85

Rev. Proc. 92-20

TABLE OF CONTENTS

SECTION 1. PURPOSE

 

 

SEC. 2. BACKGROUND

 

     01 Change in method of accounting defined

 

     02 Changes made as part of examination

 

     03 Securing permission to change a method

 

     04 Terms and conditions of change

 

     05 Section 481(a) and the regulations thereunder

 

        (1) Need for adjustment

 

        (2) Adjustment period

 

        (3) Cut-off method change

 

     06 Consistency and clear reflection of income

 

     07 Penalties

 

 

SEC. 3. DEFINITIONS

 

     01 Taxpayer

 

     02 Under examination

 

     03 Year of change

 

     04 Filed

 

     05 Section 481(a) adjustment period

 

     06 Category A method of accounting

 

     07 Designated A method of accounting

 

     08 Category B method of accounting

 

     09 Designated B method of accounting

 

 

SEC. 4. RULES FOR PARTICULAR SITUATIONS

 

     01 Under examination -- general rules

 

     02 Before an appeals office

 

     03 Before a federal court

 

     04 Criminal investigation

 

     05 Designated A method -- first six taxable years

 

 

SEC. 5. PROCEDURES FOR TAXPAYERS NOT UNDER EXAMINATION

 

     01 Submission of application

 

        (1) General

 

        (2) Late application

 

        (3) Early application

 

     02 Year of change

 

     03 Section 481(a) adjustment period

 

        (1) Category A method

 

        (2) Category B method

 

        (3) Special rule for LIFO changes

 

 

SEC. 6. PROCEDURES FOR TAXPAYERS UNDER EXAMINATION

 

     01 Submission of application

 

     02 90-day window period after contact for examination

 

        (1) Application

 

        (2) Category A method

 

        (3) Category B method

 

        (4) Special rules for LIFO changes

 

     03 120-day window period

 

        (1) Application

 

        (2) Year of change

 

        (3) Section 481(a) adjustment period

 

     04 30-day window period

 

        (1) Application

 

        (2) Year of change

 

        (3) Section 481(a) adjustment period

 

     05 90-day window period for newly affiliated subsidiaries

 

        (1) Application

 

        (2) Year of change

 

        (3) Section 481(a) adjustment period

 

     06 Consent of District Director

 

 

SEC. 7. DESIGNATED A METHODS

 

     01 Background

 

     02 Application

 

        (1) General

 

        (2) Filing procedures for taxpayers not under examination

 

        (3) Filing procedures for taxpayers under examination

 

     03 Alternative methods for changing

 

        (1) General

 

        (2) Amended return(s) filed beginning with the first taxable

 

 

            year that the taxpayer adopted or was required to change

 

            from the Designated A method

 

        (3) Amended returns filed for the earliest taxable year open

 

            under the statute of limitations if the taxable year of

 

            required change or adoption is closed

 

        (4) Prospective change from a Designated A method

 

     04 Manner of effecting the change

 

 

SEC. 8. EXCEPTIONS TO THE GENERAL SECTION 481(a) ADJUSTMENT PERIOD

 

     01 General

 

        (1) De minimis rule

 

        (2) Attributable to immediately preceding taxable year

 

        (3) Number of taxable years the method has been used

 

        (4) Cooperatives

 

     02 Short period as a separate taxable year

 

        (1) Examples

 

     03 Acceleration of adjustment

 

        (1) Reduction in inventory value

 

        (2) Ceasing to engage in the trade or business

 

        (3) Subsequent LIFO elections

 

 

SEC. 9. SPECIAL RULES FOR LIFO TAXPAYERS

 

     01 Use of the cut-off method

 

     02 Net section 481(a) adjustment

 

     03 Discontinuance of LIFO

 

        (1) General

 

        (2) Termination event statement

 

        (3) C Corporations for which S elections are effective

 

            subsequent to LIFO discontinuance

 

        (4) Corporations making S elections effective for the year of

 

            LIFO discontinuance

 

     04 Readoption of LIFO

 

 

SEC. 10. GENERAL APPLICATION PROCEDURES

 

     01 Service reserves discretion in administering this revenue

 

        procedure

 

     02 Compliance with provisions

 

     03 Processing applications

 

        (1) Facts and circumstances to be considered

 

        (2) Incomplete Form 3115 -- 45 day rule

 

     04 Two or more trades or businesses

 

        (1) Requirements of section 1.446-1(d)(1) and (2)

 

        (2) Requirement of section 1.446-1(d)(3)

 

        (3) Requirements for filing Form 3115

 

     05 Where to file

 

     06 Copy to District Director

 

     07 Signature requirements

 

     08 Consolidated groups

 

     09 Consent Agreement requirements

 

        (1) General

 

        (2) Signature requirements

 

        (3) 45-day requirement

 

        (4) Change in method of accounting not made by taxpayer

 

     10 Changes initiated by the taxpayer

 

     11 Applicability of Rev. Proc. 92-1 and

 

        Rev. Proc. 92-4

 

     12 Protection for years prior to the year of change

 

     13 Conferences in the National Office

 

     14 Effect of this revenue procedure on other offices of the

 

        Service

 

 

SEC. 11. SUMMARY OF TERMS AND CONDITIONS

 

 

SEC. 12. INQUIRIES

 

 

SEC. 13. EFFECT ON OTHER DOCUMENTS

 

 

SEC. 14. EFFECTIVE DATE

 

     01 General

 

     02 Transition rules -- taxpayers under examination

 

 

DRAFTING INFORMATION

 

 

SECTION 1. PURPOSE

This revenue procedure provides the general procedures under section 1.446-1(e) of the Income Tax Regulations for obtaining the consent of the Commissioner of Internal Revenue to change a method of accounting for federal income tax purposes. It modifies and supersedes Rev. Proc. 84-74, 1984-2 C.B. 736. These procedures are designed to encourage prompt compliance with proper tax accounting principles, and to discourage taxpayers from delaying the filing of applications for permission to change an impermissible accounting method.

Generally, this revenue procedure uses a gradation of incentives to encourage prompt voluntary compliance. Under this approach, a taxpayer generally receives better terms and conditions for any change in accounting method if the taxpayer files its request to change methods before it is contacted for examination by the Internal Revenue Service. Upon contact for examination, the revenue procedure provides a limited 90-day window period during which the taxpayer may file a request to change an accounting method without first obtaining the approval of the district director. Consistent with the gradation of incentives, the taxpayer receives terms and conditions during this 90-day window period (e.g., year of change and section 481(a) adjustment period) that are less favorable than those available for method changes made prior to contact, but more favorable than those required by the district director as part of an examination.

While timely compliance can generally be accomplished through this gradation of incentives, the Service recognizes that this approach may not be effective in all cases. Recently, the Service has become aware that a number of taxpayers have been able to avoid making timely accounting method changes required by amendments to the Internal Revenue Code. These taxpayers have used the procedures of Rev. Proc. 84-74 to submit Forms 3115 requesting a change to the required method of accounting for a taxable year later than the statutorily mandated year of change and on different terms and conditions than those required by the statute. Because it is not appropriate to permit such changes on a basis more favorable than applicable under the governing statute, section 7 of this revenue procedure provides, for these types of situations, special terms and conditions designed to place the taxpayer in a position no more favorable than a taxpayer that timely complied with the required change. These terms and conditions apply only to specifically designated accounting method changes.

Many of the complex rules and requirements in Rev. Proc. 84-74 have been simplified or eliminated. For example, the "clearly erroneous" standard has been removed from the definition of a Category A method of accounting, the limitation on the use of net operating loss and income tax credit carryovers to offset a net section 481(a) adjustment has been eliminated, and the "67-percent test" to determine the section 481(a) adjustment period has been eliminated.

SEC. 2. BACKGROUND

01 CHANGE IN METHOD OF ACCOUNTING DEFINED.

Section 1.446-1(e)(2)(ii)(a) of the regulations provides that a change in method of accounting includes a change in the overall plan of accounting for gross income or deductions, or a change in the treatment of any material item. A material item is any item that involves the proper time for the inclusion of the item in income or the taking of a deduction. In determining whether a practice involves the proper time for the inclusion of an item in income or the taking of a deduction, the relevant question is generally whether the practice permanently changes the amount of taxable income over the taxpayer's lifetime. If the practice does not permanently affect the taxpayer's lifetime taxable income, but does or could change the taxable year in which taxable income is reported, it involves timing and is therefore considered a method of accounting. See Rev. Proc. 91-31, 1991-1 C.B. 566.

Although a method of accounting may exist under this definition without a pattern of consistent treatment of an item, a method of accounting is not established in most instances without consistent treatment. The treatment of a material item in the same way in determining the gross income or deductions in two or more consecutively filed tax returns (without regard to any change in status of the method as permissible or impermissible) represents consistent treatment of that item for purposes of section 1.446- 1(e)(2)(ii)(a) of the regulations. If a taxpayer treats an item properly in the first return that reflects the item, however, it is not necessary for the taxpayer to treat the item consistently in two or more consecutive tax returns to have adopted a method of accounting. See Rev. Rul. 90-38, 1990-1 C.B. 57. If a taxpayer has not adopted a method of accounting under these rules, the taxpayer may correct the impermissible treatment of an item by amending its prior income tax return.

02 CHANGES MADE AS PART OF EXAMINATION.

If a taxpayer under examination is not eligible to change an accounting method under this revenue procedure (including subsection 6.06), the change may be made by the district director.

03 SECURING PERMISSION TO CHANGE A METHOD.

Section 446(e) of the Internal Revenue Code and section 1.446- 1(e) of the regulations state that, except as otherwise provided, a taxpayer must secure the consent of the Commissioner before changing a method of accounting for federal income tax purposes. Section 446(e) of the Code gives the Commissioner authority to impose terms and conditions, including the year of change. Section 1.446- 1(e)(3)(i) requires that in order to obtain the Commissioner's consent to a method change, an application must be filed within 180 days after the beginning of the taxable year in which the taxpayer desires to make the proposed change. Unless specifically authorized by the Commissioner, a taxpayer may not request, or otherwise make, a retroactive change in method of accounting, whether the change is from a permissible or impermissible method. See generally Rev. Rul. 90-38.

Section 10511 of the Revenue Act of 1987, Pub. L. 100-203, 1987- 3 C.B. 1, as extended by section 11319 of the Revenue Reconciliation Act of 1990, Pub. L. 101-508, requires taxpayers to pay user fees for requests for changes in accounting method. Rev. Proc. 90-17, 1990-1 C.B. 479, contains the schedule of fees (as of March 23, 1992) and provides guidance for administering the user fee requirements. However, no user fee is required if the requested change in accounting method is permitted to be made pursuant to a published automatic change revenue procedure. Taxpayers are encouraged to review the automatic change revenue procedures before submitting a Form 3115 to the National Office.

04 TERMS AND CONDITIONS OF CHANGE.

Section 1.446-1(e)(3)(ii) of the regulations authorizes the Commissioner to prescribe administrative procedures setting forth the limitations, terms, and conditions deemed necessary to permit a taxpayer to obtain consent to change a method of accounting in accordance with section 446(e) of the Code. Unless other published guidance provides terms and conditions that must be employed when making a specific type of accounting method change, a change in method of accounting will be made pursuant to the terms and conditions provided in this revenue procedure, including subsection 10.01.

05 SECTION 481(a) AND THE REGULATIONS THEREUNDER.

(1) NEED FOR ADJUSTMENT.

Section 481(a) of the Code requires that those adjustments necessary to prevent amounts from being duplicated or omitted be taken into account when the taxpayer's taxable income is computed under a method of accounting different from the method used to compute taxable income for the preceding taxable year. When there is a change in method of accounting to which section 481(a) is applied, income for the year preceding the year of change must be determined under the method of accounting that was then employed, and income for the year of change and the following years must be determined under the new method of accounting.

EXAMPLE.

The taxpayer uses the first-in, first-out inventory method, and changes its method of valuing inventory from lower of cost or market to cost. The value of the taxpayer's inventory at lower of cost or market as of December 31, 1991 (the and of the year preceding the year of change), was $365,000. The value of the inventory as of January 1, 1992 (the beginning of the year of change), computed in accordance with the new cost method of accounting for inventory to be used by the taxpayer, is $410,000. Unless the method change is made under the cut-off approach described in paragraph 2.05(3), the taxpayer is treated in 1992 and future years as if it had always used the new cost method of accounting. Accordingly, a net positive section 481(a) adjustment of $45,000 ($410,000 -$365,000) is necessary upon the method change to prevent a duplication of cost of goods sold deductions.

(2) ADJUSTMENT PERIOD.

Section 481(c) of the Code and section 1.481-5 of the regulations provide that the adjustment required by section 481(a) may be taken into account in determining taxable income in the manner and subject to the conditions agreed to by the Commissioner and the taxpayer. In the absence of this special rule, the net section 481(a) adjustment (if any) is taken into account completely in the year of change, subject to section 481(b) which limits the amount of tax where the net section 481(a) adjustment is substantial. Under the Commissioner's authority in section 1.446-1(e)(3)(ii) to prescribe terms and conditions to changes in method of accounting, this revenue procedure provides specific adjustment periods under section 481(a) that are intended to achieve an appropriate balance between the goals of mitigating distortions of income that result from accounting method changes and providing appropriate incentives for voluntary compliance.

(3) CUT-OFF METHOD CHANGE.

The Commissioner may determine that certain categories of methods of accounting will be changed using a cut-off method. See, for example, section 1.472-8(f)(2) of the regulations and subsection 9.01 of this revenue procedure. Under this cut-off method, only the items arising on or after the beginning of the year of change (or other operative date) are accounted for under the new method of accounting. Any items arising prior to the year of change will continue to be accounted for under the taxpayer's former method of accounting. See, for example, section 461(h) of the Code which generally applies to amounts incurred on or after July 18, 1984. In other cases, the cut-off method may be applied on a transactional basis. See, for example, section 460 of the Code which generally requires the use of the percentage of completion method for all long- term contracts entered into on or after July 11, 1989. Because no items are duplicated or omitted from income when a cut-off method is used to effect a change in accounting method, no net section 481(a) adjustment is necessary.

06 CONSISTENCY AND CLEAR REFLECTION OF INCOME.

Methods of accounting should clearly reflect income on a continuing basis, and the Service exercises its discretion under sections 446(e) and 481(c) of the Code in a manner that generally minimizes distortions of income across taxable years and on an annual basis. Accordingly, in determining whether to consent to a taxpayer's request for a change of accounting method, the Service will weigh the need for consistency against the taxpayer's reason for desiring to change its method of accounting if the method of accounting from which the taxpayer is changing clearly reflects income.

07 PENALTIES.

Any otherwise applicable penalty for the failure of a taxpayer to change its method of accounting (e.g., the accuracy-related penalty under section 6662 of the Code or the fraud penalty under section 6663) may be imposed if the taxpayer does not timely file a request to change an accounting method. See section 446(f). (Additionally, the taxpayer's return preparer may also be subject to the preparer penalty under section 6694.) However, penalties will not be imposed when a taxpayer has changed from an impermissible method of accounting by complying with all appropriate provisions of this revenue procedure.

SEC. 3. DEFINITIONS

01 TAXPAYER.

For all purposes under this revenue procedure, the term "taxpayer" has the same meaning as the term "person" defined in section 7701(a)(1) of the Code (rather than the meaning of the term taxpayer defined in section 7701(a)(14) of the Code).

02 UNDER EXAMINATION.

A taxpayer is under examination if the taxpayer has been contacted in any manner by a representative of the Service for the purpose of scheduling any type of examination of any of its federal income tax returns. If a consolidated return is being examined by the Service, each member of the consolidated group will be considered under examination for purposes of this revenue procedure. Notwithstanding the preceding sentence, subsection 6.05 of this revenue procedure provides a 90-day window period, beginning on the date a new member becomes affiliated with a consolidated group, within which the parent of the group may request a method change on behalf of the new member.

An examination of a taxpayer (or consolidated group of which the taxpayer is a member) is considered to and for purposes of this revenue procedure at the earliest of the date:

(1) the taxpayer (or consolidated group of which the taxpayer is a member) receives a "no change" letter;

(2) the taxpayer (or consolidated group of which the taxpayer is a member) pays the deficiency (or proposed deficiency);

(3) the taxpayer (or consolidated group of which the taxpayer is a member) requests consideration by an appeals officer;

(4) the taxpayer (or consolidated group of which the taxpayer is a member) requests consideration by a federal court; or

(5) on which a deficiency, jeopardy, termination, bankruptcy, or receivership assessment is made.

03 YEAR OF CHANGE.

The year of change is the taxable year for which a change in method of accounting is effective, that is, the first taxable year the new method is to be applied, even if no affected items are taken into account for that year. It is the first taxable year for taking the net section 481(a) adjustment (if any) into account and for complying with any other terms and conditions set forth in the Commissioner's consent letter.

04 FILED.

For purposes of this revenue procedure, a Form 3115 is filed on the date (as determined by the date of the United States postmark under the rules of section 7502 of the Code) it is mailed to the proper address (or an address similar enough to complete delivery). If the Form 3115 is not mailed (or its date of mailing cannot be reasonably determined), it will be considered to be filed when delivered to and received by the Service. The rules of section 7503 are followed when the last day for the taxpayer's timely filing of a Form 3115 falls on a Saturday, Sunday, or legal holiday. In that case, the filing of the Form 3115 will be considered timely if it is filed on the next succeeding day which is not a Saturday, Sunday, or a legal holiday.

05 SECTION 481(a) ADJUSTMENT PERIOD.

The section 481(a) adjustment period is the applicable period for taking into account the net section 481(a) adjustment, whether positive (an increase in income) or negative (a decrease in income), required for the change in method of accounting. The applicable periods are set forth in sections 5, 6, 7, and 8 of this revenue procedure.

06 CATEGORY A METHOD OF ACCOUNTING.

A Category A method of accounting ("Category A method") is a method of accounting the taxpayer is specifically not permitted to use under the Code, the regulations, or a decision of the Supreme Court of the United States. A Category A method is also a method of accounting that differs from a method the taxpayer is specifically required to use under the Code, the regulations, or a decision of the Supreme Court of the United States. In addition, a Designated B method of accounting will be treated as a Category A method if the taxpayer files a Form 3115 requesting to change from the Designated B method of accounting more than two years (or such other period provided in the designating document) after the date of designation. See subsection 3.09 of this revenue procedure.

Some examples of Category A methods are:

(1) Methods of inventory valuation listed in sections 1.471-2(f)(1) through (7) of the regulations.

(2) A write-down of goods in inventory that does not comply with section 1.471-2(c) of the regulations.

(3) A write-down of any goods in inventory that does not comply with section 1.471-4(b) of the regulations.

(4) The write-down of what is regarded as "excess inventory" to a net realizable value although such inventory has not been scrapped, sold, or offered for sale at the reduced price. Thor Power Tool Co. v. Commissioner, 439 U.S. 522 (1979), 1979-1 C.B. 167.

(5) In the absence of a specific statutory or regulatory exception, the use of the cash receipts and disbursements method of accounting for the purchases and sales of merchandise when such merchandise is an income-producing factor and therefore inventories are required. Section 1.446-1(c)(2)(i) of the regulations.

(6) The use of the cash receipts and disbursements method of accounting by a taxpayer subject to the provisions of section 447 or section 448 of the Code.

(7) The use of the LIFO method of accounting for inventories when there has been a termination event (as described in Rev. Proc. 79-23, 1979-1 C.B. 564, or any other applicable revenue ruling or revenue procedure) that occurred during a year not barred by the statue of limitations as of the date of the filing of a Form 3115 to request a change from the LIFO method. For purposes of this revenue procedure, a termination event does not occur if the taxpayer first issues nonconforming financial statements during the taxable year for which the LIFO inventory method is discontinued (the year of change) and the nonconforming financial statements relate either to the year of change or the year preceding the year of change. See the example in paragraph 9.03(2).

07 DESIGNATED A METHOD OF ACCOUNTING.

A Designated A method of accounting ("Designated A method") is a Category A method that has been designated as a Designated A method in a document published in the Internal Revenue Bulletin (the "designating document"). See section 4.05.

08 CATEGORY B METHOD OF ACCOUNTING.

Category B methods of accounting ("Category B methods") are all methods other than those determined to be Category A methods.

09 DESIGNATED B METHOD OF ACCOUNTING.

A Designated B method of accounting ("Designated B method") is a Category B method which has been designated as a Designated B method in a document published in the Internal Revenue Bulletin (the "designating document"). Generally, if a taxpayer files a Form 3115 to change a Designated B method more than two years (or such other period of time provided in the designating document) after the date the method is designated, the change will be treated as a change from a Category A method. If the Form 3115 is filed within two years (or such other period of time provided in the designating document) after the date of designation, the change will be treated as a change from a Category B method. If the designating document provides a different period of time for which the Category B terms and conditions will be applicable, the designating document will control. For example, a designating document may provide that the method will be treated as a Category A method beginning with the taxpayer's second taxable year following the taxable year within which the method is designated by the Service.

SEC. 4. RULES FOR PARTICULAR SITUATIONS

01 UNDER EXAMINATION -- GENERAL RULES.

A taxpayer under examination may not request to change an impermissible method of accounting if (1) the taxpayer is under examination for the year in which the taxpayer adopted the method, and (2) the method was an impermissible method of accounting with respect to the taxpayer in the year of adoption. A taxpayer under examination may not request to change a method to which it changed without permission if the taxpayer is under examination for the year in which the taxpayer made the unauthorized change. Under any other circumstance, a taxpayer under examination may change an accounting method under this revenue procedure, but only if the taxpayer requests the change under the applicable procedures, terms, and conditions set forth in section 6 or section 7 of this revenue procedure.

02 BEFORE AN APPEALS OFFICE.

If any of the taxpayer's returns are under consideration by an appeals office of the Service, the taxpayer may not change an accounting method under the procedures, terms, and conditions of this revenue procedure unless the taxpayer has obtained a written agreement from the appeals officer that the appeals office does not object to the taxpayer requesting a change in method of accounting pursuant to this revenue procedure. If the requested accounting method change is not an issue under consideration by the appeals office, permission to file a Form 3115 in accordance with the procedures, terms, and conditions of this revenue procedure will ordinarily be given. If the taxpayer is also under examination, the taxpayer is also subject to the limitation of subsection 4.01 of this revenue procedure. A written agreement from the appeals officer under this subsection 4.02 must be signed by the appeals officer and attached to the taxpayer's Form 3115. However, if the due date for the Form 3115 will expire before the likely date upon which the appeals officer will agree to the method change, the taxpayer may file the Form 3115 prior to obtaining the appeals officer's agreement, provided the application specifies that the agreement of the appeals officer is required and is perfected by submission of a separate statement to the National Office documenting agreement of the appeals officer.

03 BEFORE A FEDERAL COURT.

If any of the taxpayer's returns are before a federal court with respect to any income tax issue, the taxpayer may not change an accounting method under the procedures, terms, and conditions of this revenue procedure unless the taxpayer has obtained a written agreement from counsel for the Government that counsel does not object to the taxpayer requesting a change in method of accounting pursuant to this revenue procedure. If the requested accounting method change is not an issue under consideration by the federal court, permission to file a Form 3115 in accordance with the procedures, terms, and conditions of this revenue procedure will ordinarily be given. If the taxpayer is also under examination, it is also subject to the limitation of subsection 4.01 of this revenue procedure. A written agreement from the Government's counsel under this subsection 4.03 must be signed by the counsel for the Government and attached to the taxpayer's Form 3115. However, if the due date for the Form 3115 will expire before the likely date upon which the counsel for the Government will agree to the method change, the taxpayer may file the Form 3115 prior to obtaining the agreement of the counsel for the Government, provided the application specifies that the agreement of the counsel for the Government is required and is perfected by submission of a separate statement to the National Office documenting agreement of the Government's counsel.

04 CRIMINAL INVESTIGATION.

If there is pending a criminal investigation or proceeding concerning (1) directly or indirectly, any issue relating to the taxpayer's federal tax liability for any year, or (2) the possibility of false or fraudulent statements made by the taxpayer with respect to any issue relating to its federal tax liability for any year, the taxpayer may not change an accounting method under this revenue procedure.

05 DESIGNATED A METHOD -- FIRST SIX TAXABLE YEARS.

Except as otherwise provided in the designating document, for a period of six taxable years beginning with and including the first taxable year a taxpayer is required to change from a Designated A method, the taxpayer must make the change pursuant to section 7 of this revenue procedure. After the six-year period (or such other period provided in the designating document) has expired, a request to change from a Designated A method will be subject to the provisions of this revenue procedure governing a change from a Category A method.

SEC. 5. PROCEDURES FOR TAXPAYERS NOT UNDER EXAMINATION

01 SUBMISSION OF APPLICATION.

(1) GENERAL.

In general, a Form 3115 must be filed within 180 days after the beginning of the year of change, as provided in section 1.446- 1(e)(3)(i) of the regulations. This 180-day period begins on the first day of any taxable year. If the taxable year is a short period, the Form 3115 must be filed no later than 180 days after the beginning of the short taxable year, or if earlier, no later than the last day of the short taxable year.

(2) LATE APPLICATION.

(a) SECTION 301.9100-1 OF THE REGULATIONS.

One of the purposes of the 180-day rule is to provide the Service adequate time to process the applications it receives prior to the original due date of taxpayers' returns. A Form 3115 that is not filed within the period provided in paragraph 5.01(1) may nevertheless be considered as timely filed, under section 301.9100-1 of the Procedure and Administration Regulations, upon the showing of good cause by the taxpayer and a showing to the satisfaction of the Commissioner that granting an extension of time to file the Form 3115 will not jeopardize the interests of the government. See Rev. Proc. 79-63, 1979-2 C.B. 578. However, applications filed beyond 90 days after the due date of the Form 3115 will be presumed to jeopardize the interests of the Government. See section 301.9100-1(a)(3) of the regulations and section 2 of Rev. Proc. 79-63.

(b) CHOICE IF SECTION 301.9100-1 RELIEF DENIED.

If the Service denies relief under section 301.9100-1 of the regulations, the taxpayer may choose to have the application apply to the taxable year for which the application would have been considered timely. This choice must be made within 30 days after the issuance by the Service of a denial of relief under section 301.9100-1, by filing a current Form 3115 for the appropriate taxable year together with a copy of the letter from the Service denying relief under section 301.9100-1, and by remitting the appropriate user fee. (Any user fee remitted with the original Form 3115 filing will have been applied, however, toward the user fee requirement with respect to the request under section 301.9100-1. Accordingly, a taxpayer filing an application under this paragraph 5.01(2)(b) will pay a maximum of two user fees.)

(3) EARLY APPLICATION.

An otherwise qualified application for a change in method of accounting filed after the 180-day period for a taxable year and before the beginning of the succeeding taxable year will, under the following circumstances, be considered a timely filed application for the succeeding taxable year. To qualify, the current Form 3115 must be completed in all respects except for (1) the amount of the net section 481(a) adjustment as of the beginning of the year of change, and (2) the gross receipts and taxable income amounts for the year immediately preceding the year of change. The information in the preceding sentence must be furnished to the Service within the first 90 days after the beginning of the year of change. If the application is not perfected within the first 90 days, the Service will so notify the taxpayer. If, after notice, the application is not perfected within the first 120 days after the beginning of the year of change, the Service will close the case and will not otherwise process that Form 3115. The processing order of a qualified application will be determined by the date all information (including the amount of the net section 481(a) adjustment or a reasonable estimate of the adjustment) has been furnished. To assist in processing a Form 3115 filed under this early filing procedure, reference to this special procedure must be made a part of the Form 3115 by typing or legibly printing at the top of the Form 3115, "FILED UNDER PARAGRAPH 5.01(3) of REV. PROC. 92-20."

02 YEAR OF CHANGE.

The year of change for a taxpayer that is not under examination is the taxable year for which a Form 3115 is considered timely filed under subsection 5.01.

03 SECTION 481(a) ADJUSTMENT PERIOD.

(1) CATEGORY A METHOD.

(a) If a change from a Category A method results in a net positive adjustment under section 481(a) of the Code, the taxpayer just, beginning with the year of change, take the net section 481(a) adjustment into account ratably over three taxable years in computing taxable income. See section 8 of this revenue procedure for exceptions to this general rule.

(b) If a change from a Category A method results in a net negative adjustment under section 481(a) of the Code, the taxpayer must take the entire net section 481(a) adjustment into account in computing taxable income in the year of change.

(2) CATEGORY B METHOD.

Whether a change from a Category B method results in a net positive or net negative adjustment under section 481(a) of the Code, the taxpayer must, beginning with the year of change, take the net section 481(a) adjustment into account ratably over six taxable years in computing taxable income. See section 8 of this revenue procedure for exceptions to this general rule.

(3) SPECIAL RULE FOR LIFO CHANGES.

For any Category A method or Category B method change within the LIFO inventory accounting method (i.e., from one LIFO inventory method or sub-method to another LIFO inventory method or sub-method), the change will be made using a cut-off method except as provided in subsection 9.01 of this revenue procedure.

SEC. 6. PROCEDURES FOR TAXPAYERS UNDER EXAMINATION

01 SUBMISSION OF APPLICATION.

This section provides the circumstances under which a taxpayer under examination may request a change in method of accounting (other than a change from a Designated A method during the period of time for which such change is subject to section 7 of this revenue procedure) and sets forth the procedures, terms, and conditions applicable to the change. Generally, it is not appropriate to permit a taxpayer to file an application for change in accounting method while the taxpayer is under examination without the consent of the district director. In certain situations, however, the Commissioner will permit a taxpayer under examination to request a change in accounting method under the terms of this revenue procedure without first obtaining the district director's consent, provided the taxpayer satisfies the district director notification requirement in subsection 10.06. The window periods provided in this section describe those situations. In addition, subsection 6.06 provides procedures through which taxpayers may change a method of accounting under this revenue procedure while under examination upon obtaining the consent of the district director.

For purposes of section 301.9100-1 of the regulations, applications filed beyond the time periods provided in the appropriate window periods for taxpayers under examination will be presumed to jeopardize the interests of the Government.

Additionally, it is not appropriate for a taxpayer to obtain more advantageous terms and conditions by requesting a change of accounting method after being contacted for examination. Therefore, the terms and conditions prescribed for a method change under this section are no more favorable than if the taxpayer had not been contacted for examination.

02 90-DAY WINDOW PERIOD AFTER CONTACT FOR EXAMINATION.

(1) APPLICATION.

If an examination has begun, a taxpayer may request to change any method of accounting (other than a Designated A method during the period of time for which such change is subject to section 7 of this revenue procedure) under the procedures, terms, and conditions of this revenue procedure during the 90-day period beginning on the day after the beginning of the examination (the "90-day window"). This 90-day window ends earlier if a taxpayer agrees to adjustments proposed by the Service (for example, by signing a Form 4549 or a Form 870). The 90-day window will not be available if a taxpayer is already under examination (as defined by subsection 3.02) for any other taxable year on the date of contact by the Service. To assist in processing the Form 3115 filed under this subsection, reference to this special exception must be made a part of the Form 3115 by typing or legibly printing at the top of the Form 3115, "FILED UNDER SUBSECTION 6.02 OF REV. PROC. 92-20."

(2) CATEGORY A METHOD.

(a) YEAR OF CHANGE.

If the taxpayer is changing from a Category A method during the 90-day window, the year of change is the earliest taxable year under examination (or if later, the first taxable year the method is considered impermissible). Because it is not appropriate to provide terms and conditions more favorable than if the taxpayer had not been contacted for examination, if a change from a Category A method results in a net negative adjustment under section 481(a) of the Code for the year specified in the preceding sentence, the year of change is the taxable year for which a Form 3115 (filed as of the first day of the 90-day window) would be considered timely filed under the rules for taxpayers not under examination prescribed in subsection 5.01.

(b) SECTION 481(a) ADJUSTMENT PERIOD.

(i) If a change from a Category A method results in a net positive adjustment under section 481(a) of the Code, the taxpayer must, beginning with the year of change, take the net section 481(a) adjustment into account ratably over three taxable years in computing taxable income. See section 8 of this revenue procedure for exceptions to this general rule.

(ii) Because it is not appropriate to provide terms and conditions more favorable than if the taxpayer had not been contacted for examination, if a change from a Category A method results in a net negative adjustment under section 481(a) of the Code for the earliest taxable year under examination (or if later, the first taxable year the method is considered impermissible), the taxpayer must compute its net section 481(a) adjustment as of the beginning of the year of change and take this adjustment into account in computing taxable income in accordance with the rules for taxpayers not under examination prescribed in paragraph 5.03(1).

(3) CATEGORY B METHOD.

(a) YEAR OF CHANGE.

If the taxpayer is changing from a Category B method during the 90-day window, the year of change is the taxable year for which a Form 3115 (filed as of the first day of the 90-day window) would be considered timely filed under the rules for taxpayers not under examination prescribed in subsection 5.01.

(b) SECTION 481(a) ADJUSTMENT PERIOD.

(i) If a change from a Category B method results in a net positive adjustment under section 481(a) of the Code, the taxpayer must take the entire net section 481(a) adjustment into account in computing taxable income for the year of change.

(ii) Because it is not appropriate to provide terms and conditions more favorable than if the taxpayer had not been contacted for examination, if a change from a Category B method results in a net negative adjustment under section 481(a) of the Code, the taxpayer must take the net section 481(a) adjustment into account in computing taxable income in accordance with the rules for taxpayers not under examination prescribed in paragraph 5.03(2).

(4) SPECIAL RULES FOR LIFO CHANGES.

(a) YEAR OF CHANGE.

If the taxpayer is changing from a Category A method or Category B method within its LIFO inventory accounting method (i.e., from one LIFO inventory method or sub-method to another LIFO inventory method or sub-method) during the 90-day window, the year of change is the earliest taxable year under examination (or if later, the first taxable year the LIFO method is considered impermissible). Because it is not appropriate to provide terms and conditions more favorable than if the taxpayer had not been contacted for examination, if the modified net section 481(a) adjustment (defined in paragraph 6.02(4)(c) below) is negative for the year specified in the preceding sentence, the year of change is the taxable year for which a Form 3115 (filed as of the first day of the 90-day window) would be considered timely filed under the rules for taxpayers not under examination prescribed in subsection 5.01.

(b) MODIFIED SECTION 481(a) ADJUSTMENT PERIOD.

For any Category A method or Category B method LIFO change made under this paragraph 6.02(4), the taxpayer must, beginning with the year of change, take any modified net section 481(a) adjustment that is positive into account ratably over six taxable years in computing taxable income. See section 8 of this revenue procedure for exceptions to this general rule. Because it is not appropriate to provide terms and conditions more favorable than if the taxpayer had not been contacted for examination, a taxpayer computing a modified net section 481(a) adjustment that is negative for its earliest taxable year under examination (or if later, the first taxable year the method is considered impermissible) must make its LIFO method change as provided in paragraph 5.03(3).

(c) MODIFIED NET SECTION 481(a) ADJUSTMENT.

To compute the modified net section 481(a) adjustment, LIFO inventory as of the beginning of the earliest taxable year under examination (or if later, the first taxable year the method is considered impermissible) must be revalued using the requested method of accounting only with respect to LIFO inventory activity during the ten taxable years preceding that taxable year. Accordingly, LIFO inventory layers created in taxable years prior to this ten year period need not be revalued to compute the modified net section 481(a) adjustment under this paragraph 6.02(4).

(d) LIMITATIONS ON APPLICABILITY OF THESE SPECIAL RULES FOR LIFO CHANGES.

This paragraph 6.02(4) does not apply to changes in method of accounting that could be made by a taxpayer that does not use the LIFO inventory method (e.g., a method governed by section 471 or section 263A of the Code). Additionally, the rules of this paragraph 6.02(4) limiting the extent to which LIFO revaluation is required to the amount of a modified net section 481(a) adjustment do not apply to any LIFO method change for which the Service has provided, in published guidance (including this revenue procedure), that a full net section 481(a) adjustment is required (see, for example, Announcement 91-173, 1991-47 I.R.B. 29, and subsection 9.01 of this revenue procedure); for these method changes, paragraphs 6.02(4)(a) and 6.02(4)(b) above shall be applied by substituting the term "net section 481(a) adjustment" for the term "modified net section 481(a) adjustment," wherever that term is used.

03 120-DAY WINDOW PERIOD.

(1) APPLICATION.

A taxpayer under examination that desires to change any method of accounting may request a change in accounting method under the procedures, terms, and conditions of this revenue procedure during the 120-day period following the date an examination ends (the "120- day window"), even though a subsequent examination may have commenced. However, during the period of time for which section 7 of this revenue procedure applies to a change from a Designated A method, such a change made during the 120-day window may only be made under the exclusive procedures, terms, conditions, and limitations set forth in paragraph 7.02(3). See subsection 3.02 for when an examination is considered to have ended for purposes of this revenue procedure.

This 120-day window will not be available (1) when the method of accounting is included as an item of adjustment in a basic report form as a result of a prior examination by the Service, (2) when the method of accounting issue is placed in suspense by the Service, or (3) when the taxpayer has received written notification from the examiner(s) (e.g., by examination plan, information document request, notification of proposed adjustments or income tax examination changes) prior to the filing of the Form 3115 specifically citing the method or sub-method to be changed as an issue under consideration for a taxable year in the subsequent examination. To assist in processing the Form 3115 filed under this subsection, reference to this special exception must be made a part of the Form 3115 by typing or legibly printing at the top of the Form 3115, "FILED UNDER SUBSECTION 6.03 OF REV. PROC. 92-20."

(2) YEAR OF CHANGE.

For a taxpayer filing during this 120-day window, the year of change is the taxable year that includes the first day of the 120-day window.

(3) SECTION 481(a) ADJUSTMENT PERIOD.

(a) CATEGORY A METHOD.

(i) If a change from a Category A method results in a net positive adjustment under section 481(a) of the Code, the taxpayer must, beginning with the year of change, take the net section 481(a) adjustment into account ratably over three taxable years in computing taxable income. See section 8 of this revenue procedure for exceptions to this general rule.

(ii) If a change from a Category A method results in a net negative adjustment under section 481(a) of the Code, the taxpayer must take the entire net section 481(a) adjustment into account in computing taxable income for the year of change.

(b) CATEGORY B METHOD.

Whether a change from a Category B method results in a net positive or net negative adjustment under section 481(a) of the Code, the taxpayer must, beginning with the year of change, take the net section 481(a) adjustment into account ratably over six taxable years in computing taxable income. See section 8 of this revenue procedure for exceptions to this general rule.

(c) SPECIAL RULE FOR LIFO CHANGES.

For any Category A method or Category B method change within the LIFO inventory accounting method (i.e., from one LIFO inventory method or sub-method to another LIFO inventory method or sub-method), the change will be made using a cut-off method except as provided in subsection 9.01 of this revenue procedure.

04 30-DAY WINDOW PERIOD.

(1) APPLICATION.

A taxpayer under examination that desires to change any method of accounting may request a change in accounting method under the procedures, terms, and conditions of this revenue procedure during the first 30 days of any taxable year (the "30-day window") if (1) the taxpayer has been under examination for at least 18 consecutive months prior to such 30-day window, and (2) the taxpayer has not received written notification from the examiner(s) (e.g., by examination plan, information document request, notification of proposed adjustments or income tax examination changes) prior to the filing of the Form 3115 specifically citing the method or sub-method to be changed as an issue under consideration. However, during the period of time for which section 7 of this revenue procedure applies to a change from a Designated A method, such a change made during the 30-day window may only be made under the exclusive procedures, terms, conditions, and limitations set forth in paragraph 7.02(3). To assist in processing the Form 3115 filed under this subsection, reference to this special exception must be made a part of the Form 3115 by typing or legibly printing at the top of the Form 3115, "FILED UNDER SUBSECTION 6.04 OF REV. PROC. 92-20."

(2) YEAR OF CHANGE.

For a taxpayer filing during the 30-day window, the year of change is the taxable year that includes the first day of the 30-day window.

(3) SECTION 481(a) ADJUSTMENT PERIOD.

(a) CATEGORY A METHOD.

(i) If a change from a Category A method results in a net positive adjustment under section 481(a) of the Code, the taxpayer must, beginning with the year of change, take the net section 481(a) adjustment into account ratably over three taxable years in computing taxable income. See section 8 of this revenue procedure for exceptions to this general rule.

(ii) If a change from a Category A method results in a net negative adjustment under section 481(a) of the Code, the taxpayer must take the entire net section 481(a) adjustment into account in computing taxable income for the year of change.

(b) CATEGORY B METHOD.

Whether a change from a Category B method results in a net positive or net negative adjustment under section 481(a) of the Code, the taxpayer must, beginning with the year of change, take the net section 481(a) adjustment into account ratably over six taxable years in computing taxable income. See section 8 of this revenue procedure for exceptions to this general rule.

(c) SPECIAL RULE FOR LIFO CHANGES.

For any Category A method or Category B method change within the LIFO inventory accounting method (i.e., from one LIFO inventory method or sub-method to another LIFO inventory method or sub-method), the change will be made using a cut-off method except as provided in subsection 9.01 of this revenue procedure.

05 90-DAY WINDOW PERIOD FOR NEWLY AFFILIATED SUBSIDIARIES.

(1) APPLICATION.

If a subsidiary is newly affiliated with a consolidated group and the subsidiary, but for affiliation with the new consolidated group, would not be considered to be under examination (e.g., either by reason of an examination of its income tax returns or the income tax returns of a consolidated group with which the subsidiary was formerly affiliated), the parent corporation of the new consolidated group may request to change any method of accounting on behalf of the newly affiliated subsidiary under the procedures, terms, and conditions of this revenue procedure during the 90-day period following the first day of affiliation (the "90-day post-affiliation window"). However, during the period of time for which section 7 of this revenue procedure applies to a change from a Designated A method, such a change made during the 90-day post-affiliation window may only be made under the exclusive procedures, terms, conditions, and limitations set forth in paragraph 7.02(3). For purposes of this subsection, the first day of affiliation shall be determined without regard to any election into or out of the group under the 30-day rules of section 1.1502-76(b)(5)(i) and section 1.1502-76(b)(5)(ii) of the regulations. Additionally, a subsidiary will be considered to be under examination if any prior separate return year of the subsidiary is currently under examination. See subsection 3.02 to determine whether a subsidiary is considered to be under examination. If the 90-day post-affiliation window provided in this subsection 6.05 overlaps with the 90-day window of the consolidated group set forth in subsection 6.02, the year of change and section 481(a) adjustment period for the newly affiliated subsidiary shall be as prescribed in this subsection 6.05 (or in paragraph 7.02(3), if applicable, for a Designated A method). To assist in processing the Form 3115 filed under this subsection, reference to this special exception must be made a part of the Form 3115 by typing or legibly printing at the top of the Form 3115, "FILED UNDER SUBSECTION 6.05 OF REV. PROC. 92-20."

(2) YEAR OF CHANGE.

For a taxpayer filing during this 90-day post-affiliation window, the year of change is (1) the taxable year that includes the first day of the 90-day post-affiliation window, or if later, (2) the taxable year that includes the first day the newly acquired subsidiary is included in the consolidated group (after considering the effects of an election under section 1.1502-76(b)(5)(i) or section 1.1502-76(b)(5)(ii)).

(3) SECTION 481(a) ADJUSTMENT PERIOD.

(a) CATEGORY A METHOD.

(i) If a change from a Category A method results in a net positive adjustment under section 481(a) of the Code, the taxpayer must, beginning with the year of change, take the net section 481(a) adjustment into account ratably over three taxable years in computing taxable income. See section 8 of this revenue procedure for exceptions to this general rule.

(ii) If a change from a Category A method results in a net negative adjustment under section 481(a) of the Code, the taxpayer must take the entire net section 481(a) adjustment into account in computing taxable income for the year of change.

(b) CATEGORY B METHOD.

Whether a change from a Category B method results in a net positive or net negative adjustment under section 481(a) of the Code, the taxpayer must, beginning with the year of change, take the net section 481(a) adjustment into account ratably over six taxable years in computing taxable income. See section 8 of this revenue procedure for exceptions to this general rule.

(c) SPECIAL RULE FOR LIFO CHANGES.

For any Category A method or Category B method change within the LIFO inventory accounting method (i.e., from one LIFO inventory method or sub-method to another LIFO inventory method or sub-method), the change will be made using a cut-off method except as provided in subsection 9.01 of this revenue procedure.

06 CONSENT OF DISTRICT DIRECTOR.

If the district director does not object, a taxpayer under examination may file a request for change in accounting method under the same terms and conditions provided in section 5 for taxpayers not under examination. The year of change shall be the taxable year in which the Form 3115 is filed, or the succeeding taxable year if the Form 3115 is filed more than 180 days after the beginning of the taxable year. The district director will not object unless, in the opinion of the district director, the method of accounting to be changed is of a type that would ordinarily be included as an item of adjustment in the year(s) for which the taxpayer is under examination or for years to which the examination could be extended. The taxpayer must attach to its Form 3115 a statement from the district director that the district director does not object to the taxpayer filing the Form 3115. To assist in processing the Form 3115 filed under this subsection, reference to this special exception must be made a part of the Form 3115 by typing or legibly printing at the top of the Form 3115, "FILED UNDER SUBSECTION 6.06 OF REV. PROC. 92-20." If the district director properly rejects a request under this subsection, the change in method of accounting may not be made under this revenue procedure. See subsection 2.02.

SEC. 7. DESIGNATED A METHODS

01 BACKGROUND.

While section 446(e) of the Code does not give a taxpayer a right to demand that a change in method be made retroactively, it does authorize the Commissioner to consent to a retroactive change in method of accounting, whether the change is from a permissible or impermissible method. See generally Rev. Rul. 90-38. See also section 2 of this revenue procedure. In the interest of sound tax administration, the Service has decided to allow taxpayers the option of filing amended returns to change from a Designated A method (as defined in subsection 3.07 of this revenue procedure) under the circumstances described herein. In addition, the Service will also consider prospective changes from a Designated A method but only with compensating terms and conditions that will prevent a taxpayer from benefiting from the failure to timely change from a Designated A method.

This section provides the exclusive procedures for taxpayers that have failed to make a timely change from a Designated A method (e.g., that have failed to make the change in the taxable year required by statute). These exclusive procedures are generally effective for a period of six taxable years beginning with and including the first taxable year that a taxpayer adopted or was required to change from a Designated A method. The designating document may, however, provide a different period of time for which these section 7 procedures will be applicable. After the six-year period (or such other period provided in the designating document) has expired, a request to change from a Designated A method will be subject to the provisions of this revenue procedure governing a change from a Category A method.

Because this section provides the exclusive procedures for taxpayers that have failed to change from a Designated A method, a taxpayer may not use any other section of this revenue procedure (except as specifically provided in this section) or any other revenue procedure during the period for which the taxpayer is required to use the procedures set forth in this section to change from a Designated A method. A taxpayer making a change from a Designated A method without complying with the conditions of this section has made a change in method of accounting without obtaining the required consent of the Commissioner.

02 APPLICATION.

(1) GENERAL.

The terms, conditions, limitations, and procedures provided in this section apply to a change from a Designated A method except to the extent modified by or otherwise provided in a designating document.

(2) FILING PROCEDURES FOR TAXPAYERS NOT UNDER EXAMINATION.

A taxpayer that is not under examination may (1) file an amended return in order to make a retroactive change from a Designated A method, or (2) file a Form 3115 in accordance with subsection 5.01 of this revenue procedure in order to make a prospective change from a Designated A method. If a taxpayer requests a prospective change from a Designated A method under paragraph 7.03(4), the year of change is the taxable year for which a Form 3115 is considered timely filed under subsection 5.01.

(3) FILING PROCEDURES FOR TAXPAYERS UNDER EXAMINATION.

Generally, the Service believes it is not appropriate to permit a taxpayer to change from a Designated A method, either by filing an amended return or filing a Form 3115, while the taxpayer is under examination. The procedures, terms, and conditions of this section are designed to encourage timely compliance with statutorily-mandated changes in accounting methods and to place a taxpayer in a position no more favorable than a taxpayer that timely complied with such a required change. Accordingly, because the gradation of incentives available through the 90-day window of subsection 6.02 is inconsistent with the purposes of the Designated A terms and conditions and because a taxpayer would have no incentive to change from a Designated A method prior to contact for examination if the 90-day window were available to the taxpayer, a taxpayer under examination may not file amended returns or a Form 3115 to change from a Designated A method during the 90-day window.

Because the purposes for the Designated A terms and conditions are not frustrated by permitting method changes during the 120-day window provided in paragraph 6.03, the 30-day window provided in paragraph 6.04, or the 90-day post-affiliation window provided in paragraph 6.05, changes from Designated A methods will be permitted during these window periods. If a taxpayer does not elect to file amended returns under paragraph 7.03(2) or 7.03(3), the year of change for applications filed during these window periods will be determined by paragraph 6.03(2), paragraph 6.04(2), or paragraph 6.05(2), whichever is applicable. The section 481(a) adjustment periods with respect to both amended returns and Form 3115 filings are provided in subsection 7.03. A taxpayer filing a Form 3115 must also comply with the requirements for designating the applicable window period described in paragraphs 6.03(1), 6.04(1), and 6.05(1). Further, a taxpayer filing a Form 3115 pursuant to this paragraph while under examination must send a copy of the Form 3115 to the district director for the district in which the returns are being examined at the same time the original Form 3115 is sent to the National Office. The Form 3115 filed with the National Office must contain the name and telephone number of the examining agent.

03 ALTERNATIVE METHODS FOR CHANGING.

(1) GENERAL.

This section describes two alternative methods for changing from a Designated A method: (1) filing amended return(s) for the first taxable year that the taxpayer adopted or was required to change from a Designated A method and for any affected succeeding taxable year for which a federal income tax return has been filed (see paragraph 7.03(2)) or, if the first taxable year is closed, filing amended returns for the earliest taxable year open under the statute of limitations at the time the amended returns are filed and for any affected succeeding taxable year for which a federal income tax return has been filed (see paragraph 7.03(3)), or (2) filing a Form 3115 requesting a prospective change in accounting method for a current taxable year, subject to specified terms and conditions (see paragraph 7.03(4)).

(2) AMENDED RETURN(S) FILED BEGINNING WITH THE FIRST TAXABLE YEAR THAT THE TAXPAYER ADOPTED OR WAS REQUIRED TO CHANGE FROM THE DESIGNATED A METHOD.

(a) In these unique circumstances and in accordance with section 1.446-1(e)(2)(i) of the regulations, consent is granted to any taxpayer within the scope of this section to automatically change its method of accounting from a Designated A method. This consent is conditioned on filing an amended return or returns that reflect the change from the Designated A method to a proper method of accounting for the first taxable year that the taxpayer was required to change to or adopt the proper method, and for any affected succeeding taxable year for which a federal income taxable return has been filed.

(b) If a taxpayer changes from a Designated A method pursuant to paragraph 7.03(2) of this revenue procedure, the taxpayer must follow the applicable terms and conditions, including treatment of the net section 481(a) adjustment, as prescribed in the Code, the regulations or another document that required the method of accounting to be changed.

(c) Any taxpayer changing from a Designated A method pursuant to this paragraph must follow the notification procedures in paragraph 7.04(1) of this revenue procedure.

(3) AMENDED RETURNS FILED FOR THE EARLIEST TAXABLE YEAR OPEN UNDER THE STATUTE OF LIMITATIONS IF THE TAXABLE YEAR OF REQUIRED CHANGE OR ADOPTION IS CLOSED.

(a) In these unique circumstances and in accordance with section 1.446-1(e)(2)(i) of the regulations, consent is granted to any taxpayer within the scope of this section to automatically change its method of accounting from a Designated A method. This consent is conditioned on filing amended returns that reflect the change from the Designated A method to a proper method of accounting for the earliest taxable year open under the statute of limitations (year of change) and for any affected succeeding taxable year for which a federal income tax return has been filed.

(b) SECTION 481(a) ADJUSTMENT PERIOD.

(i) NET POSITIVE SECTION 481(a) ADJUSTMENT.

If a change from a Designated A method results in a net positive adjustment under section 481(a) of the Code, the taxpayer must take the entire net section 481(a) adjustment into account in computing taxable income in the amended return filed for the year of change.

(ii) NET NEGATIVE SECTION 481(a) ADJUSTMENT.

If a change from a Designated A method results in a net negative adjustment under section 481(a) of the Code, the taxpayer must, beginning with the year of change, take the net section 481(a) adjustment into account ratably over three taxable years in computing taxable income. See section 8 of this revenue procedure for exceptions to this general rule.

(c) NOTIFICATION. Any taxpayer changing from a Designated A method pursuant to this paragraph must follow the notification procedures in paragraph 7.04(1) of this revenue procedure.

(4) PROSPECTIVE CHANGE FROM A DESIGNATED A METHOD.

(a) A taxpayer that does not want to make a change from a Designated A method by filing amended returns pursuant to paragraph 7.03(2) or 7.03(3) of this revenue procedure may, pursuant to section 1.446-1(e) of the regulations, request the consent of the Commissioner to change from the Designated A method by filing a Form 3115 in accordance with subsection 7.02 of this revenue procedure.

(b) SECTION 481(a) ADJUSTMENT PERIOD.

(i) NET POSITIVE SECTION 481(a) ADJUSTMENT.

If a change from a Designated A method results in a net positive adjustment under section 481(a) of the Code, taxpayer must take the entire net section 481(a) adjustment into account in the year of change.

(ii) NET NEGATIVE SECTION 481(a) ADJUSTMENT.

If a change from a Designated A method results in a net negative adjustment under section 481(a) of the Code, the taxpayer must, beginning with the year of change, take the net section 481(a) adjustment into account ratably over three taxable years in computing taxable income. See section 8 of this revenue procedure for exceptions to this general rule.

(c) ADDITIONAL AMOUNT CONDITION TO PROSPECTIVE CHANGE.

(i) IN GENERAL. Taxpayers making a change from a Designated A method pursuant to this paragraph 7.03(4) must agree to pay an "additional amount" designed to place the taxpayer in a position that is no more favorable than the taxpayer's position would have been if it had filed amended tax returns in accordance with the procedures of either paragraph 7.03(2) or 7.03(3), whichever is applicable at the time the taxpayer files its Form 3115. The additional amount is intended to approximate the time value of money economic benefit (the "time value benefit") that the taxpayer derived from the delay in changing its method of accounting under this prospective change method. The additional amount is not treated as interest under section 163(a), however, and may not be capitalized or deducted under any other provision of the Code.

Procedures for calculating the additional amount are provided in paragraph 7.03(4)(c)(ii), special rules for pass-through entity calculations of the additional amount are provided in paragraph 7.03(4)(c)(iii), and an example illustrating the steps to an additional amount calculation is provided in paragraph 7.03(4)(c)(iv).

Finally, paragraph 7.03(4)(c)(v) provides procedures which may be used by the taxpayer and the Service to modify the additional amount calculation if the taxpayer is placed in a substantially different position than if the taxpayer had filed amended returns under paragraph 7.03(2) or 7.03(3) by reason of the required tax rate assumptions used in computing the additional amount. (See the "applicable tax rate" requirement at paragraph 7.03(4)(c)(ii)(A).) Paragraph 7.03(4)(c)(v) also provides that the Service may adjust the additional amount for the effects of changes in tax rates during the period in which the taxpayer delays changing from a Designated A method under the prospective change method.

(ii) CALCULATING THE ADDITIONAL AMOUNT. The additional amount a taxpayer must agree to pay if it elects to prospectively change from a Designated A method pursuant to this paragraph 7.03(4) equals the sum of the time value benefit (detriment) computed with respect to each prior taxable year for which the taxpayer would have filed an amended return if it had used the alternative amended return procedure of either paragraph 7.03(2) or 7.03(3), whichever is applicable at the time the taxpayer files the Form 3115. If the sum of the time value benefit (detriment) computed with respect to each such prior taxable year is negative, the additional amount required under this paragraph will be zero and no refund will be made to the taxpayer. The time value benefit (detriment) with respect to each prior taxable year equals the "hypothetical underpayment (overpayment)" defined in paragraph 7.03(4)(c)(ii)(A), multiplied by the "applicable time value rate" defined in paragraph 7.03(4)(c)(ii)(B), compounded daily for the "applicable period" defined in paragraph 7.03(4)(c)(ii)(C).

(A) HYPOTHETICAL UNDERPAYMENT (OVERPAYMENT). For each prior year in which the taxpayer would have filed an amended return if it had used the alternative amended return procedure of either paragraph 7.03(2) or 7.03(3), whichever is applicable at the time the taxpayer files the Form 3115, the taxpayer must compute a hypothetical underpayment (overpayment) if the change in method of accounting by amended return would have produced an increase (decrease) in taxable income. The hypothetical underpayment (overpayment) for a taxable year is equal to (1) the net increase or decrease in taxable income (including the appropriate portion of any net section 481(a) adjustment) that would have been reflected on the amended return if the taxpayer had used the procedure described in paragraph 7.03(2) or 7.03(3), multiplied by (2) the "applicable tax rate" for the taxable year of the hypothetical underpayment (overpayment) calculation. For this purpose, only adjustments associated with the change from the Designated A method are taken into account. For purposes of this paragraph 7.03(4), the applicable tax rate equals the highest rate of tax potentially applicable to the taxpayer (e.g., the highest tax rate in effect under section 1 for individuals or section 11 for corporations) for the relevant taxable year.

(B) APPLICABLE TIME VALUE RATE. The applicable time value rate generally equals the average of the highest underpayment rate in effect under section 6621(a) of the Code throughout the year immediately preceding the year of change. However, for a taxpayer that would be entitled to a section 163 deduction for the additional amount if the additional amount were treated as an interest expense arising from an underpayment of tax, the applicable time value rate may be computed at a reduced rate equaling (1) the average of the highest underpayment rate under section 6621(a) of the Code throughout the year immediately preceding the year of change, multiplied by (2) the excess of 100% over the applicable tax rate (defined in paragraph 7.03(4)(c)(ii)(A)) for the year of change.

(C) APPLICABLE PERIOD. For each hypothetical underpayment (overpayment), the period for computing the time value benefit (detriment) begins on the due date (without regard to extensions) of the return for the year of underpayment (overpayment) and ends on the earlier of: (1) the due date (without regard to extensions) of the return for the year of change, or (2) the date on which both the tax return for the year of change is filed and the tax for that year is paid in full. The time value benefit (detriment) is compounded daily at the applicable time value rate during this applicable period.

(iii) PASS-THROUGH ENTITY ADDITIONAL AMOUNT CALCULATIONS.

(A) IN GENERAL. A pass-through entity must compute any additional amount under this paragraph 7.03(4) by applying the rules in paragraphs 7.03(4)(c)(i) and (ii) at the entity level, subject however to the following modifications. First, the applicable tax rate (defined in paragraph 7.03(4)(c)(ii)(A)) used in computing the hypothetical underpayment (overpayment) is generally the highest rate of tax in effect under section 1 of the Code. However, if more than 50 percent (by value) of the interests of the pass-through entity are held by C corporations at all times during a given taxable year for which the hypothetical underpayment (overpayment) is computed, the applicable tax rate is the highest rate of tax in effect under section 11 for that year. Second, the applicable period for computing the time value benefit (detriment) ends on the due date (without regard to extensions) of the entity's return for the year of change. Third, the applicable time value rate defined in paragraph 7.03(4)(c)(ii)(B) must be computed without any reduction for the deductibility by the pass-through entity's owners of the additional amount if the additional amount were treated as interest expense arising from an underpayment of tax.

(B) ELECTION OF AGGREGATE ADDITIONAL AMOUNT CALCULATION BY PASS- THROUGH ENTITIES. A pass-through entity may elect to compute any additional amount at the owner level, accumulate the additional amounts for each owner, aggregate additional amounts for all owners, and make a single payment of the additional amount. Any pass-through entity electing the aggregate additional amount calculation method under this paragraph 7.03(4)(c)(iii)(B) must follow the notification procedures in paragraph 7.04(2)(b).

(iv) EXAMPLE. The following example illustrates the calculation of the additional amount under paragraph 7.03(4)(c)(ii) when the first taxable year that the taxpayer was required to change from a Designated A method is open under the statute of limitations at the time the taxpayer files the Form 3115.

EXAMPLE. In 1992, an accounting method required by regulation is designated in a document published in the Internal Revenue Bulletin as subject to section 7 of this revenue procedure. X, a calendar year corporate taxpayer, files a Form 3115 to change to the required method for 1993. The first taxable year for which the required method of accounting should have been used was 1991 and for that year there would have been a net positive section 481(a) adjustment. At the time X files its Form 3115, the 1991 taxable year is open under the statute of limitations. The provisions of the governing regulation permitted a 4-year spread of a net positive section 481(a) adjustment. The average of the highest underpayment rate in effect under section 6621(a) of the Code throughout 1992 is assumed to be 10 percent. The additional amount under paragraph 7.03(4) would be deductible by X if treated as interest expense arising from an underpayment of tax. Accordingly, assuming an applicable tax rate of 34 percent for the 1993 year of change, the applicable time value rate, reduced in accordance with paragraph 7.03(4)(c)(ii)(B), for purposes of calculating the additional amount is 6.6 percent (10 percent x [100 percent - 34 percent]). The applicable tax rates for 1991 and 1992 were also 34 percent. X files its 1993 federal income tax return on March 15, 1994 (the due date without regard to extensions). The due date for X's 1991 federal income tax return was March 15, 1992; the due date for X's 1992 federal income tax return was March 15, 1993.

If X had used the amended return procedure of paragraph 7.03(2), it would have filed amended returns for 1991 and 1992. For 1991, assume that taxable income (attributable only to the change in accounting method and including one-quarter of the net section 481(a) adjustment) would have increased by $150. The hypothetical underpayment for 1991 is $51 ($150 x .34). X must compute the time value benefit with respect to the 1991 hypothetical underpayment of $51 from March 15, 1992 (the due date of X's 1991 federal income tax return), to March 15, 1994 (the date X filed its 1993 federal income tax return and fully paid the tax for that year), at the rate of 6.6 percent per year, compounded daily. For 1992, assume taxable income (attributable to the change in accounting method and including one-quarter of the net section 481(a) adjustment) would have increased by $480. Thus, the hypothetical underpayment for 1992 is $163 ($480 x .34). X must compute the time value benefit with respect to the 1992 hypothetical underpayment amount of $163 from March 15, 1993 (the due date of X's 1992 federal income tax return), to March 15, 1994 (the date X filed its 1993 federal income tax return and fully paid the tax for that year), at the rate of 6.6 percent per year, compounded daily. The sum of the time value benefits computed with respect to each of the 1991 and 1992 years equals the additional amount.

(v) PROCEDURES FOR ADJUSTMENT OF THE ADDITIONAL AMOUNT. If the use of the applicable tax rate defined in paragraph 7.03(4)(c)(ii)(A) would place the taxpayer in a substantially less favorable position than if the taxpayer had filed amended returns under paragraph 7.03(2) or 7.03(3), the taxpayer may submit a more detailed calculation substantiating what the additional amount would have been if the taxpayer had filed amended returns for all applicable taxable years. This situation might occur, for example, if a corporation would have taken a net positive section 481(a) adjustment into account in a year for which it would not have been subject to the highest section 11 rate if it had filed amended returns under paragraph 7.03(2) or 7.03(3).

Conversely, if the Commissioner determines that the use of the applicable tax rate places the taxpayer in a substantially more favorable position than if the taxpayer had filed amended tax returns under paragraph 7.03(2) or 7.03(3), the Commissioner may perform a more detailed calculation of what the additional amount would have been if the taxpayer had filed amended returns for all applicable taxable years. This situation might occur, for example, if a corporation would have taken a net negative section 481(a) adjustment into account in years for which it would not have been subject to the highest section 11 rate if it had filed amended returns under paragraph 7.03(2) or 7.03(3).

Additionally, the Service will consider whether changes in effective tax rates place the taxpayer in a more favorable position or less favorable position than if the taxpayer had changed from a Designated A method under the applicable amended return procedure described in paragraph 7.03(2) or 7.03(3). In these circumstances, the Service may adjust the additional amount based on the effects of the tax rate changes. For example, if a corporation with a net positive section 481(a) adjustment changes from a Designated A method prospectively in a year for which its effective tax rate is 40%, whereas its effective tax rate was 20% in the taxable years for which amended returns would have been filed under paragraph 7.03(2) or 7.03(3), the Service may reduce the additional amount, and provide a taxpayer refund if appropriate, to compensate for the increase in tax rates.

04 MANNER OF EFFECTING THE CHANGE.

(1) TAXPAYER FILING AMENDED RETURNS.

(a) A taxpayer filing amended returns pursuant to the provisions of paragraph 7.03(3) of this revenue procedure (i.e., when the earliest taxable year open under the statute of limitations is not the first taxable year that the taxpayer was required to change from or adopt a Designated A method) must complete and file a statement in duplicate notifying the Service of its change from a Designated A method under this revenue procedure. The original must be attached to the taxpayer's amended return for the first taxable year for which the taxpayer changed from the Designated A method. A copy must be filed with the National Office of the Internal Revenue Service, Attention: CC:IT&A, P.O. Box 7604, Benjamin Franklin Station, Washington, D.C. 20044, at the same time the amended return is filed. The taxpayer must type or legibly print the following language at the top of the statement: "NOTIFICATION PROCEDURES UNDER SUBSECTION 7.04 OF REV. PROC. 92-20 AND (cite to the designating document)."

(i) The notification statement required by paragraph 7.04(1)(a) must include the following information:

(A) The taxpayer's name, address, and identifying number,

(B) A description of the taxpayer's Designated A method and a description of the method to which the taxpayer is changing, and

(C) A computation of the amount of the net section 481(a) adjustment included in the amended return.

(ii) No user fee is required with the filing of a copy of the notification statement.

(b) Taxpayers filing amended returns for the purpose of changing from a Designated A method pursuant to either paragraph 7.03(2) or 7.03(3) of this revenue procedure must type or legibly print the following language at the top of each amended return: "AUTOMATIC CHANGE FILED UNDER SUBSECTION 7.04 OF REV. PROC. 92-20 AND (cite to the designating document)."

(2) TAXPAYER FILING FOR PROSPECTIVE CHANGE.

(a) A taxpayer applying for a change in method of accounting pursuant to the provisions of paragraph 7.03(4) of this revenue procedure must file a Form 3115 in accordance with subsection 7.02. In addition to including all information required on the Form 3115, the taxpayer must state (1) that it agrees to all of the conditions of Rev. Proc. 92-20 and the designating document, and (2) that it proposes to take the net section 481(a) adjustment into account over the appropriate period required by paragraph 7.03(4)(b)(i) or 7.03(4)(b)(ii) of this revenue procedure or the designating document, as appropriate.

(b) An election under paragraph 7.03(4)(c)(iii) of this revenue procedure to apply the aggregate method for pass-through entities must be made by stating on the Form 3115 that an election is being made under paragraph 7.03(4)(c)(iii) of Rev. Proc. 92-20. This election is made by the entity and may not be revoked.

(c) The taxpayer must include with its Form 3115 (1) the computation of the amount of a hypothetical net section 481(a) adjustment (i.e., the amount that would have been reflected on amended returns had the taxpayer followed the amended return procedures), and (2) the computation of the additional amount due, if any, pursuant to paragraph 7.03(4)(c) of this revenue procedure.

(d) Taxpayers who are granted permission to change from a Designated A method pursuant to the provisions of paragraph 7.03(4) of the revenue procedure must enter into a closing agreement pursuant to section 7121 of the Code. A pro forma closing agreement will be provided that will address various issues (e.g., when the additional amount computed under paragraph 7.03(4)(c) will be payable and the manner in which the additional amount will be submitted to the Government).

SEC. 8. EXCEPTIONS TO THE GENERAL SECTION 481(a) ADJUSTMENT PERIOD.

01 GENERAL.

In general, the section 481(a) adjustment periods are provided in sections 5, 6, and 7. The section 481(a) adjustment periods prescribed in sections 5, 6 and 7 will be shortened in the following situations.

(1) DE MINIMIS RULE.

If the entire net section 481(a) adjustment is less than $25,000 (either positive or negative), the taxpayer may elect to use a one- year adjustment period in lieu of the adjustment period otherwise provided by this revenue procedure. The taxpayer must affirmatively state on an attachment to Form 3115 that it desires to elect this de minimis rule.

(2) ATTRIBUTABLE TO IMMEDIATELY PRECEDING TAXABLE YEAR.

If 90 percent or more of the net section 481(a) adjustment is attributable to the taxable year immediately preceding the year of change, the taxpayer must take the entire net section 481(a) adjustment into account in computing taxable income for the year of change. The amount attributable to the taxable year immediately preceding the year of change is the difference between the amount of the net adjustment determined under section 481(a) of the Code for the year of change and the amount of the net adjustment that would have been required under section 481(a) if the same change in method of accounting had been made in the preceding year.

If the taxpayer's books and records do not contain sufficient information to compute the net section 481(a) adjustment attributable to the taxable year immediately preceding the year of change, the taxpayer may reasonably estimate this amount, attach to the Form 3115 the computations upon which the estimate is based, and attach the following signed statement to the Form 3115:

Under penalties of perjury, I hereby certify that:

(a) the books and records of [name of the taxpayer] do not contain sufficient information to permit a computation of the net section 481(a) adjustment attributable to the taxable year immediately preceding the year of change, and

(b) based on the information that is contained in such records, to the best of my knowledge and belief, 90 percent or more of the net section 481(a) adjustment [indicate "is" or "is not", as the case may be] attributable to the taxable year immediately preceding the year of change.

(i) EXAMPLE.

Y timely files an application to change its method of accounting for valuing inventory to a method that is in accord with the provisions of section 1.471-3 of the regulations, beginning with its 1992 taxable year. The information furnished shows that Y used its present method of valuing inventory for nine taxable years prior to the year of change and that the entire net adjustment required under section 481(a) of the Code for the year of change is $300,000. The information furnished further shows that the adjustment required under section 481(a) would have been $20,000 had the change been made for Y's 1991 taxable year. Thus, 93.3 percent of the amount of the adjustment is attributable to the taxable year immediately preceding the proposed year of change. Under these circumstances, Y will take the entire $300,000 net section 481(a) adjustment into account in computing its taxable income for its 1992 taxable year.

(3) NUMBER OF TAXABLE YEARS THE METHOD HAS BEEN USED.

If paragraphs 8.01(1) or 8.01(2) do not apply, the taxpayer must, beginning with the year of change, take the net section 481(a) adjustment into account in computing taxable income ratably over the number of taxable years the present method has been used, if that number is fewer than the number of taxable years in the section 481(a) adjustment period provided in section 5, 6, or 7, whichever is applicable.

(i) EXAMPLE.

The taxpayer, a retailer who uses the first-in, first-out inventory method, changes its method of valuing inventory from lower of cost or market to cost. The taxpayer had adopted the lower of cost or market method on its first return, 4 years earlier. The year of change is the 1995 taxable year. The value of the taxpayer's inventory as of December 31, 1994 (the end of the year preceding the year of change), was $365,000. This value included a market write-down of $45,000. The value of the inventory as of January 1, 1995 (the beginning of the year of change), computed in accordance with the new method of accounting to be used by the taxpayer, is $410,000, and the net section 481(a) adjustment is $45,000 ($410,000-$365,000).

The hypothetical net section 481(a) adjustment that would have been required if the change had been made in the taxable year immediately preceding the year of change is $30,000.

Under the provisions of paragraph 8.01(3) of this revenue procedure, the taxpayer must take the $45,000 net section 481(a) adjustment into account ratably in computing taxable income over the 4-year period beginning with the 1995 taxable year, rather than, for example, the 6-year period in paragraph 5.03(2).

(4) COOPERATIVES.

A cooperative within the meaning of section 1381(a) of the Code must generally take the entire amount of a net section 481(a) adjustment into account in computing taxable income for the year of change. See Rev. Rul. 79-45, 1979-1 C.B. 284.

02 SHORT PERIOD AS A SEPARATE TAXABLE YEAR.

If the year of change, or any year during the section 481(a) adjustment period, is a short taxable year, the net section 481(a) adjustment must be included in income as if such short taxable year were a full 12 months. See Rev. Rul. 78-165, 1978-1 C.B. 276.

(1) EXAMPLES.

EXAMPLE 1. A calendar year taxpayer received permission to change an accounting method beginning with the 1992 calendar year. The net section 481(a) adjustment was $30,000, and the adjustment period was six taxable years. In 1993, the taxpayer changes its annual accounting period to September 30, effective September 30, 1993. In accordance with this subsection 8.02, the amount of the net section 481(a) adjustment included in income for the short period from January 1, 1993, through September 30, 1993, is $5,000.

EXAMPLE 2. Two years ago, X Corporation, a calendar year taxpayer, received permission to change a method of accounting. The year of change was 1992, and the net section 481(a) adjustment is being taken into account ratably over six taxable years. On June 30, 1994, Z Corporation acquired X Corporation in a transaction to which section 381(a) applies. Z Corporation is a calendar year taxpayer that originally adopted the same method of accounting to which X Corporation had previously changed.

In accordance with subsection 8.02, X Corporation must include one-sixth of the net section 481(a) adjustment attributable to its change in accounting method in its short period income tax return for the period from January 1, 1994, through June 30, 1994. In addition, Z Corporation must include one-sixth of the net section 481(a) adjustment attributable to X Corporation's 1992 change in accounting method in its income tax return for calendar year 1994.

03 ACCELERATION OF ADJUSTMENT.

Paragraphs 8.03(1) through 8.03(4) describe the situations that will cause the immediate acceleration of a net section 481(a) adjustment. All taxpayers changing an accounting method under the terms of this revenue procedure must accelerate the net section 481(a) adjustment in these situations unless the Service specifically provides otherwise in the taxpayer's ruling letter permitting the accounting method change. In that letter, the Service may require the immediate acceleration of the net section 481(a) adjustment in other situations when it is in the best interest of sound tax administration to do so. See subsection 10.01.

(1) REDUCTION IN INVENTORY VALUE.

If the change in method of accounting involves a change in method of inventory valuation and, on the last day of any taxable year of the adjustment period, the value of the taxpayer's inventory to which the net section 481(a) adjustment relates is reduced by more than 33-1/3 percent of the inventory value at the beginning of the first taxable year of the adjustment period and is so reduced by at least such percentage at the end of the following taxable year (temporary fluctuations are not controlling; permanent reductions are controlling), the remaining balance of the net section 481(a) adjustment must be taken into account in determining taxable income in the year succeeding the year of the reduction. If the value of the inventory does not remain reduced for one year, the reduction is not considered permanent and the provisions of this paragraph do not apply. In applying this paragraph, the 33-1/3-percent rule applies only to the specific category of inventory to which the net section 481(a) adjustment relates.

This paragraph 8.03(1) does not apply if the taxpayer demonstrates to the satisfaction of the Commissioner that the reduction is attributable to a strike, involuntary conversion, or involuntary interruption of the availability of goods. To make such a demonstration, the taxpayer must file a request for waiver of this paragraph no later than 90 days after the end of the taxable year in which this paragraph would otherwise apply. The request must state the facts and circumstances showing that the reduction is attributable to a strike, involuntary conversion, or involuntary interruption of the availability of goods, and must contain a copy of the initial ruling letter. The request must be filed with the Commissioner of Internal Service, Attention: CC:IT&A, P.O. Box 7604, Benjamin Franklin Station, Washington, D.C. 20044. This request is a ruling request for which a user fee (applicable for a change in method of accounting) must be paid.

EXAMPLE.

A taxpayer received permission from the Commissioner to change its method of inventory valuation for the taxable year beginning January 1, 1992. The amounts involved are as follows:

      Inventory under the new method               1/1/92     $100,000

 

      Net positive section 481(a) adjustment                    30,000

 

      Adjustment period determined to be 6 years beginning

 

           with 1992 year

 

 

On December 31, 1994, the inventory was reduced to $60,000. This $40,000 reduction represented 40 percent of the inventory's value on January 1, 1992. On December 31, 1995, the taxpayer's inventory was $65,000. This $35,000 reduction represented 35 percent of the inventory value at January 1, 1992. Because the inventory value remained reduced by more than 33-1/3 percent for a period of one year, the remaining balance of the net section 481(a) adjustment ($15,000) must be included in income for the taxable year ending December 31, 1995.

           Section 481(a) adjustment reported:

 

 

                     1992           $ 5,000

 

                     1993             5,000

 

                     1994             5,000

 

                     1995            15,000

 

                                    _______

 

                                    $30,000

 

                                    =======

 

 

(2) CEASING TO ENGAGE IN THE TRADE OR BUSINESS.

If a taxpayer that is taking a net section 481(a) adjustment into account pursuant to section 5, 6, or 7 ceases to engage in the trade or business to which the net section 481(a) adjustment relates, or if the taxpayer operating the trade or business terminates existence, any balance of the net section 481(a) adjustment not previously taken into account must be taken into account in computing taxable income in the taxable year of such cessation or termination.

Except as provided in paragraphs 8.03(2)(c) or 8.03(2)(d) below, a taxpayer is treated as ceasing to engage in a trade or business if the operations of the trade or business cease, or substantially all of the assets of the trade or business are transferred to another taxpayer. For purposes of this paragraph 8.03(2), "substantially all" has the same meaning as subsection 3.01 of Rev. Proc. 77-37, 1977-2 C.B. 568.

(a) The following is a nonexclusive list of transactions that are treated as the cessation of a trade or business for purposes of accelerating the section 481(a) adjustment period under this paragraph 8.03(2).

(i) The trade or business to which the net section 481(a) adjustment relates is incorporated.

(ii) The trade or business to which the net section 481(a) adjustment relates is purchased by another taxpayer in a transaction to which section 1060 of the Code applies.

(iii) The trade or business to which the net section 481(a) adjustment relates is terminated or transferred pursuant to a taxable liquidation.

(iv) A division of a corporation ceases to operate the trade or business to which the net section 481(a) adjustment relates.

(v) Assets of a trade or business to which the net section 481(a) adjustment relates are contributed to a partnership.

(b) No acceleration of the section 481(a) adjustment period is required under this paragraph 8.03(2) when a C corporation elects to be treated as an S corporation, or an S corporation terminates its S election and is then treated as a C corporation. However, acceleration is required if a sole proprietor incorporates and immediately elects to be treated as an S corporation.

(c) CERTAIN TRANSFERS TO WHICH SECTION 381(a) APPLIES.

For purposes of this paragraph 8.03(2), a taxpayer is not treated as ceasing to engage in a trade or business if substantially all of the assets of the trade or business that gave rise to the net section 481(a) adjustment are transferred to another taxpayer in a transfer to which section 381(a) of the Code applies and for which the accounting method (the change to which gave rise to the net section 481(a) adjustment) is a tax attribute that is carried over and continued to be used as a method by the acquiring corporation pursuant to section 381(c). Any acquiring corporation in a transaction to which section 381(a) applies that meets the requirements of the preceding sentence will be subject to any terms and conditions imposed on the transferor (or any predecessor of the transferor) as a result of its change in method of accounting.

(d) CERTAIN TRANSFERS PURSUANT TO SECTION 351 WITHIN A CONSOLIDATED GROUP.

For purposes of this paragraph 8.03(2), a member of a consolidated group (the "original transferor") is not treated as ceasing to engage in a trade or business if substantially all of the assets of the trade or business that gave rise to the net section 481(a) adjustment are transferred to another member (the "transferee member") of the same consolidated group in an exchange qualifying under section 351 of the Code and the transferee member adopts and, immediately after the transfer, uses the same method of accounting (the change to which gave rise to the net section 481(a) adjustment) as that used by the original transferor. An exchange satisfies the requirements of the preceding sentence only if (1) avoidance of tax is not a principal purpose of the exchange, and (2) the original transferor continues to take the net section 481(a) adjustment into account pursuant to the terms and conditions set forth in this revenue procedure and in its Consent Agreement (see subsection 10.09). In applying the provisions of this subsection 8.03, the original transferor must consider activities of the transferee member (or any successor) in determining whether acceleration of the section 481(a) adjustment period is required. For example, except as provided in the following sentence, the original transferor must take any remaining net section 481(a) adjustment into account in computing taxable income in the taxable year in which the transferee member ceases to engage in the trade or business to which the net section 481(a) adjustment relates. The original transferor's section 481(a) adjustment period will not be accelerated when the transferee member engages in a transaction described in paragraph 8.03(2)(c) or this paragraph 8.03(2)(d).

This paragraph 8.03(2)(d) exception to acceleration of the section 481(a) adjustment period ceases to apply and any remaining balance of the original transferor's net section 481(a) adjustment must be taken into account by the original transferor immediately preceding (1) the time the original transferor ceases to be a member of the group, (2) the time any transferee member owning substantially all of the assets of the trade or business which gave rise to the net section 481(a) adjustment ceases to be a member of the group, or (3) a separate return year of the common parent of the group. In applying the preceding sentence, the exceptions to restoration of deferred gain or loss set forth in section 1.1502-13(f)(2) of the regulations apply (substituting "original transferor" for "selling member" and substituting "transferee member" for "member which owns the property" where appropriate), but only if the method of accounting to which the original transferor changed and to which the net section 481(a) adjustment relates is adopted, carried over, or continued to be used by any group member acquiring the assets of the trade or business that gave rise to the net section 481(a) adjustment immediately after acquisition of such assets. For example, no acceleration of the original transferor's section 481(a) adjustment period is required if a transferee member ceases to be a member of a consolidated group by reason of an acquisition to which section 381(a) of the Code applies and the acquiring corporation (1) is a member of the same group as the original transferor, and (2) continues, under section 381(c)(4) and regulations thereunder, to use the same method of accounting as that used by the original transferor with respect to the assets of the trade or business to which the net section 481(a) adjustment relates.

(3) SUBSEQUENT LIFO ELECTIONS.

If a taxpayer elects the LIFO method of inventory valuation, section 472(d) of the Code requires that the taxpayer restore to income any write-downs below cost (as a result of the proper use of the prior method of inventory valuation) ratably over a 3-year period beginning with the taxable year the LIFO inventory valuation method is elected. If the taxpayer elects the LIFO inventory method during an adjustment period which is attributable to a prior change in an inventory valuation method, the taxpayer must include the unamortized balance of the net section 481(a) adjustment attributable to the prior change in income in the taxable year of the LIFO election in an amount equal to the amount that would have been included in income by that time under section 472(d) if the LIFO inventory method had been adopted at the time the prior inventory method was adopted. The following examples illustrate this paragraph:

EXAMPLE 1.

A calendar year taxpayer received permission to change from the lower of cost or market method to the cost method of inventory valuation for its 1992 taxable year. The ending inventory under the old method was $40 on December 31, 1991. The beginning inventory under the new method of valuation on January 1, 1992, was $100. The net section 481(a) adjustment of $60 was to be spread over six years. The taxpayer elected the LIFO inventory method for its 1992 taxable year.

The inclusion in income of the $60 is accomplished as follows:

           Taxable Years                     Amount

 

           _____________                     ______

 

 

               1992                            $20

 

               1993                             20

 

               1994                             20

 

                                               ___

 

               Total                           $60

 

                                               ===

 

 

This 3-year adjustment period is required regardless of any longer adjustment period otherwise granted in connection with the change to the cost method of inventory valuation.

EXAMPLE 2.

If, under the facts of Example 1, the taxpayer elected the LIFO method in 1993, this subsection would apply as follows:

(1) For its 1992 taxable year, the taxpayer would include 1/6th of the net section 481(a) adjustment in income.

1992 $10

(2) For its 1993 taxable year, the taxpayer would accelerate the net section 481(a) adjustment in an amount sufficient to "catch up" to the amount that would have been included in income under section 472(d) of the Code.

1993 $30

(3) For its 1994 taxable year, the remaining portion of the net section 481(a) adjustment would be included in income.

1994 $20

EXAMPLE 3.

If, under the facts of Example 1, the taxpayer elected the LIFO method in 1995, this subsection would apply as follows:

(1) For its 1992, 1993 and 1994 taxable years, the taxpayer would include 1/6th of the net section 481(a) adjustment in income.

(2) For its 1995 taxable year, the taxpayer would include in its income the remainder of the net section 481(a) adjustment on its federal income tax return.

           Taxable Years                     Amount

 

           _____________                     ______

 

 

               1992                            $10

 

               1993                            $10

 

               1994                            $10

 

               1995                            $30

 

 

SEC. 9. SPECIAL RULES FOR LIFO TAXPAYERS.

01 USE OF THE CUT-OFF METHOD.

If a taxpayer is granted consent, pursuant to the provisions of section 5 or subsections 6.03, 6.04, 6.05, or 6.06 of this revenue procedure, to change a method of accounting from one LIFO inventory method (or sub-method) to another LIFO inventory method (or sub- method), the change will be effected pursuant to a cut-off method as described in paragraph 2.05(3), unless the Service has provided in published guidance (including this revenue procedure) that a net section 481(a) adjustment is required. See paragraph 6.02(4).

Announcement 91-173 provides that the Service will require taxpayers to compute and take a net section 481(a) adjustment into account for a change in method of accounting for certain bulk bargain purchases of inventory required to comply with Hamilton Industries, Inc. v. Commissioner, 97 T.C. 120 (1991). Because no other terms and conditions were provided in Ann. 91-173 and because such a change is treated as a change from a Category B method, a taxpayer not within the 90-day window of section 6.02 must make this method change pursuant to the procedures, terms, and conditions applicable for non- LIFO Category B methods. For such a change made within the 90-day window, the taxpayer is subject to the procedures, terms, and conditions applicable to LIFO method changes during the 90-day window; see paragraphs 6.02(4) and 6.02(4)(d). Future guidance requiring a net section 481(a) adjustment for a method change within the LIFO method will provide guidance similar to that in this paragraph regarding the terms and conditions applicable upon the change (e.g., whether Category A or Category B method terms and conditions for non-LIFO changes are to apply to a change made outside of the 90-day window).

If a taxpayer is changing from one LIFO inventory method (or sub-method) to another LIFO inventory method (or sub-method) outside of the scope of this revenue procedure, a net section 481(a) adjustment is required. See, for example, subsection 2.02.

If a taxpayer that uses the LIFO inventory method of accounting makes a change in method of accounting that could be made by a taxpayer that does not use the LIFO inventory method (e.g., a method governed by section 471 or section 263A of the Code), the cut-off method prescribed in this subsection does not apply and an adjustment under section 481(a) is required with respect to the change.

02 NET SECTION 481(a) ADJUSTMENT.

For changes in LIFO methods of accounting for which a net section 481(a) adjustment is required to be computed, the Service will permit the use of reasonable estimation procedures.

03 DISCONTINUANCE OF LIFO.

(1) GENERAL.

A taxpayer's request to discontinue the use of the LIFO inventory method is a change in method of accounting within the meaning of sections 446 and 481 of the Code and is subject to the provisions of this revenue procedure unless Rev. Proc. 88-15, 1988-1 C.B. 683, applies. Rev. Proc. 88-15 allows certain taxpayers to obtain expeditious consent to discontinue the use of the LIFO inventory method. Taxpayers to which Rev. Proc. 88-15 applies may not use this revenue procedure. If a taxpayer does not qualify to use Rev. Proc. 88-15, consent to discontinue the use of the LIFO inventory method and change to an acceptable inventory method will ordinarily be granted subject to the requirements of section 1.472-6 of the regulations and the provisions of this revenue procedure, provided the taxpayer agrees not to elect the LIFO inventory method of accounting for a period of at least five taxable years beginning with the year of change, unless consent is granted by the Commissioner to change the method of accounting at an earlier time based on a showing of extraordinary circumstances.

(2) TERMINATION EVENT STATEMENT.

The taxpayer must attach to the Form 3115 filed to discontinue the use of the LIFO inventory method the following separate statement signed by the taxpayer:

Under penalties of perjury, I hereby certify that to the best of my knowledge and belief, with respect to [Name of taxpayer]'s use of the LIFO inventory method of accounting, there (indicate either "has" or "has not") been a termination event (as described in Rev. Proc. 79-23, 1979-1 C.B. 564, or any other applicable revenue ruling or revenue procedure) for purposes of Rev. Proc. 92-20 that occurred during a year not barred by the statute of limitations as of the date of the filing of the Form 3115.

For purposes of this revenue procedure, a termination event does not occur if the taxpayer first issues nonconforming financial statements during the taxable year for which the LIFO inventory method is discontinued (the year of change) and the nonconforming financial statements relate either to the year of change or the year preceding the year of change. For example, if a taxpayer issues nonconforming financial statements for its 1991 calendar year on March 15, 1992, and properly files in 1992 a request to discontinue the LIFO inventory method for its 1992 taxable year, there has been no termination event for purposes of this revenue procedure.

(3) C CORPORATIONS FOR WHICH S ELECTIONS ARE EFFECTIVE SUBSEQUENT TO LIFO DISCONTINUANCE.

If a taxpayer is a C corporation meeting the conditions set forth in paragraph 5.05(1)(a) of Rev. Proc. 88-15 and the Commissioner approves the taxpayer's request to discontinue the use of the LIFO inventory method, the Commissioner will impose a condition consistent with the provisions of paragraph 5.05(1)(b) of Rev. Proc. 88-15.

(4) CORPORATIONS MAKING S ELECTIONS EFFECTIVE FOR THE YEAR OF LIFO DISCONTINUANCE.

If a taxpayer that is a C corporation makes an S election that is effective for a taxable year in which it discontinues the LIFO inventory method, section 1363(d) requires both (1) an increase in the taxpayer's gross income for the LIFO recapture amount (as defined in section 1363(d)(3)) for the taxable year preceding the year of change (the taxpayer's last taxable year as a C corporation), and (2) a corresponding adjustment to the basis of the taxpayer's inventory as of the end of such preceding taxable year. This basis adjustment is taken into account in computing the net section 481(a) adjustment, if any, that results upon the discontinuance of the LIFO method by the corporation. A net section 481(a) adjustment may arise, for example, if upon discontinuance of the LIFO method, the taxpayer changes to an inventory method other than the first-in, first-out inventory method prescribed by section 1363(d)(3)(A) and section 1363(d)(4)(C) of the Code.

04 READOPTION OF LIFO.

Taxpayers desiring to change to the LIFO inventory method of accounting from their present method, having previously received permission from the Commissioner to change from the use of the LIFO inventory method, must file a current Form 3115 under the provisions of this revenue procedure. The Commissioner will not consent to a readoption of the LIFO inventory method, absent a showing of extraordinary circumstances, unless five taxable years have elapsed since the taxable year the taxpayer changed from the LIFO inventory method.

SEC. 10. GENERAL APPLICATION PROCEDURES

01 SERVICE RESERVES DISCRETION IN ADMINISTERING THIS REVENUE PROCEDURE.

The Service reserves the right to decline to process any application for change in accounting method filed under this revenue procedure in situations in which it would not be in the best interest of sound tax administration to permit the requested change. In this regard the Service will consider whether the change in method of accounting would clearly and directly frustrate compliance efforts of the Service in administering the income tax laws.

Except as otherwise provided in published guidance, a change in method of accounting will be made pursuant to the terms and conditions provided in this revenue procedure. Notwithstanding this general rule, the Service may determine that in the interest of sound tax administration, terms and conditions which differ from those provided in this revenue procedure are appropriate for changes made under this revenue procedure. Examples where the Service may impose differing terms and conditions in the interest of sound tax administration may include, but are not limited to, the following:

(1) The Service in its discretion may require that a cooperative take the net section 481(a) adjustment into account over a period of taxable years.

(2) The Service may require the immediate acceleration of the section 481(a) adjustment period in situations in which it would not be in the best interest of sound tax administration to permit the taxpayer to continue the section 481(a) adjustment period.

(3) The Service may limit the ability of a taxpayer to offset a net positive section 481(a) adjustment with a net operating loss carryover that is expiring in the year of change if it appears to the Service that the utilization of the expiring loss is a principal purpose for making the change in accounting method.

(4) The Service may limit the ability of a taxpayer to offset the tax attributable to a net positive section 481(a) adjustment with an income tax credit carryover that is expiring in the year of change if it appears to the Service that the utilization of the expiring credit is a principal purpose for making the change in accounting method.

02 COMPLIANCE WITH PROVISIONS.

If a taxpayer to which this revenue procedure applies changes its method of accounting without authorization or without complying with all the provisions of this revenue procedure, the taxpayer will be deemed to have initiated a change in method of accounting without obtaining the consent of the Commissioner required by section 446(e) of the Code. See subsection 4.01 for the rule excluding a taxpayer from the scope of this revenue procedure if a taxpayer is under examination for the taxable year in which the taxpayer made an unauthorized change in accounting method. Upon examination, a taxpayer that has initiated an unauthorized change in method of accounting may be required to effect the change in an earlier (or later) taxable year and may be denied the benefit of spreading the net section 481(a) adjustment over the number of taxable years otherwise prescribed by this revenue procedure. See subsection 2.02.

03 PROCESSING APPLICATIONS.

(1) FACTS AND CIRCUMSTANCES TO BE CONSIDERED.

In processing applications for changes in method of accounting, the Service will consider all facts and circumstances. Such consideration will include:

(a) Whether the method of accounting requested is consistent with the Code, regulations, revenue rulings, revenue procedures and decisions of the Supreme Court of the United States;

(b) Whether the present method of accounting clearly reflects income;

(c) Whether the use of the new method will clearly reflect income;

(d) The taxpayer's reason(s) for the change;

(e) The tax effect of the net section 481(a) adjustment;

(f) Whether the taxpayer's books and records, including financial statements, will conform with the proposed method of accounting; and

(g) The need for consistency in the accounting area. See subsection 2.06 of this revenue procedure.

If a prior application was withdrawn or was not perfected, or if a Consent Agreement was sent to the taxpayer and not signed and returned to the Service, and the taxpayer files another application within 6 years of the prior application requesting consent to change to the same method of accounting requested in the earlier application, a copy of the earlier application filed (i.e., the first Form 3115), together with any correspondence from the Service, must be attached to the Form 3115 filed for the subsequent taxable year. An explanation must be furnished stating why the application was withdrawn or not perfected, or why the change was not made. The Service will consider such explanation in determining whether the subsequent request for change in method of accounting will be granted.

(2) INCOMPLETE FORM 3115 -- 45 DAY RULE.

If the Service receives an application that is not properly completed in accordance with the instructions on the Form 3115 and the procedures of this revenue procedure, or if supplemental information is needed, the Service will notify the taxpayer. Such notification will specify the information that needs to be provided, and the taxpayer will be permitted 45 days from the date of the notification letter to furnish the necessary information. The Service reserves the right to impose shorter reply periods if subsequent requests of additional information are made. The rules of section 7503 of the Code are followed when the last day for responding falls on a Saturday, Sunday, or legal holiday. If the required information is not submitted to the Service within the reply period, the Form 3115 will not be processed for the requested year of change. An additional period, not to exceed 15 days, may be granted to a taxpayer to furnish information in unusual and compelling circumstances. The request for an extension of time must be made in writing and submitted within the reply period.

04 TWO OR MORE TRADES OR BUSINESSES.

(1) REQUIREMENTS OF SECTION 1.446-1(d)(1) AND (2).

Sections 1.44611(d)(1) and (2) of the regulations provide that when a taxpayer has two or more separate and distinct trades or businesses, a different method of accounting may be used for each trade or business provided the method of accounting used for each trade or business clearly reflects the income of the taxpayer and of that particular trade or business. No trade or business will be considered separate and distinct unless a complete and separable set of books and records is kept for such trade or business.

(2) REQUIREMENT OF SECTION 1.446-1(d)(3).

Section 1.446-1(d)(3) of the regulations provides that if, by reason of maintaining different methods of accounting, there is a creation or shifting of profits or losses between the trades or businesses of the taxpayer (for example, through inventory adjustments, sales, purchases, or expenses) so that income of the taxpayer is not clearly reflected, the trades or businesses of the taxpayer will not be considered to be separate and distinct. Accordingly, the Service will not approve the request unless the taxpayer can demonstrate that the proposed change in method of accounting requested on the Form 3115 (1) will not result in the creation or shifting of profits or losses between the trades or businesses, and (2) will clearly reflect the taxpayer's income.

(3) REQUIREMENTS FOR FILING FORM 3115.

If a taxpayer operates two or more separate and distinct trades or businesses and has kept separable books and records (and employed different methods of accounting for such businesses), a current Form 3115 is required for each separate business should the taxpayer desire to change the methods of accounting of the separate businesses. Full disclosure of the facts covering the taxpayer's use of such different methods of accounting is required. In addition, the taxpayer must identify all other trades or businesses by name and the method of accounting used by each trade or business for the particular item that is the subject of the requested change in method of accounting.

05 WHERE TO FILE.

A taxpayer, other than an exempt organization, wishing to invoke the provisions of this revenue procedure must complete end file a current Form 3115, together with the appropriate user fee, with the Commissioner of Internal Revenue Service, Attention: CC:CORP:T, P.O. Box 7604, Benjamin Franklin Station, Washington, D.C. 20044, and request the application of Rev. Proc. 92-20. An exempt organization must complete and file a current Form 3115, together with the appropriate user fee, with the Assistant Commissioner (Employee Plans and Exempt Organizations), Attn: E:EO, P.O. Box 120, Benjamin Franklin Station, Washington, D.C. 20044, and request the application of Rev. Proc. 92-20.

Section 10511 of the Revenue Act of 1987, Pub. L. 100-203, 1987- 3 C.B. 1, as extended by section 11319 of the Revenue Reconciliation Act of 1990, Pub. L. 101-508, requires taxpayers to pay user fees for requests for changes in accounting method. Rev. Proc. 90-17, 1990-1 C.B. 479, contains the schedule of fees (as of March 23, 1992) and provides guidance for administering the user fee requirements. However, no user fee is required if the requested change in accounting method is permitted to be made pursuant to a published automatic change revenue procedure. Taxpayers should review the automatic change revenue procedures before submitting a Form 3115 to the National Office.

A taxpayer applying for a change in method of accounting pursuant to this revenue procedure must file a current Form 3115. In addition to including all information required on the Form 3115, the taxpayer must state (1) that it "agrees to all of the conditions of Rev. Proc. 92-20," and (2) that it "proposes to take the net section 481(a) adjustment into account over [state the section 481(a) adjustment period required by section 5, 6, 7, or 8 of this revenue procedure]."

06 COPY TO DISTRICT DIRECTOR.

If the taxpayer files a Form 3115 under any of the window period exceptions set forth in section 6 of this revenue procedure, in addition to any other notification procedures specified in section 6, the taxpayer must send a copy of the Form 3115 filed with the National Office to the district director for the district in which the returns are being examined at the same time the original Form 3115 is sent to the National Office. The Form 3115 filed with the National Office must contain the name and telephone number of the examining agent.

07 SIGNATURE REQUIREMENTS.

The Form 3115 must be signed by or on behalf of the taxpayer requesting the change by an individual with authority to bind the taxpayer in such matters. For example, an officer must sign on behalf of a corporation, a general partner on behalf of a partnership, a trustee on behalf of a trust, or an individual taxpayer on behalf of a sole proprietorship. See the signature requirements set forth in the General Instructions attached to a current Form 3115 regarding those who are to sign. If an agent is authorized to represent the taxpayer before the Service, receive the original or a copy of the correspondence concerning the request, or perform any other act(s) regarding the application on behalf of the taxpayer, a power of attorney reflecting such authorization(s) must be attached to the application. A taxpayer's representative without a power of attorney to represent the taxpayer as indicated in this subsection will not be given any information regarding the application.

08 CONSOLIDATED GROUPS.

If the taxpayer is a member of a consolidated group, a Form 3115 submitted on behalf of the taxpayer must be signed by a duly authorized officer of the common parent. See section 1.1502-77 of the regulations. Section 1.1502-17(a) permits separate methods of accounting to be used by each member of the group, subject to the provisions of section 446 of the Code and the regulations thereunder. However, in considering whether to grant method changes for consolidated group members, the Service will consider the effects of such changes on the income of the group. A common parent requesting a change in method of accounting must submit any information necessary to permit the Service to evaluate the effect of the requested change on the income of the consolidated group.

A separate Form 3115 and user fee must be submitted for each member of a consolidated group for which a change in accounting method is requested.

09 CONSENT AGREEMENT REQUIREMENTS.

(1) GENERAL.

Unless otherwise specifically provided, the Commissioner's permission to change a taxpayer's method of accounting for a specific year will be set forth in a ruling letter (original and one copy) from the National Office that identifies the item or items being changed, the net section 481(a) adjustment (if any), and the terms and conditions under which the change is to be effected for the year specified in the ruling letter. See section 1.446-1(e)(3) and section 1.481-5 of the regulations. If the taxpayer agrees to the terms and conditions contained in the ruling letter, the taxpayer must date and execute the agreement copy of the ruling letter in the appropriate space provided. The signed copy of the ruling letter will constitute an agreement (hereinafter referred to as the "Consent Agreement") within the meaning of section 481(c) of the Code and as required by section 1.481-5(b). After the Consent Agreement is executed by the taxpayer, it must be returned to the National Office, as required below.

(2) SIGNATURE REQUIREMENTS.

The Consent Agreement may not be signed by the taxpayer's representative bus must be signed by or on behalf of the taxpayer making the request. The individual signing the Consent Agreement must have the authority to bind the taxpayer in such matters. The Consent Agreement must be returned (when mailed the postmark date will control) to the address provided in the Consent Agreement within 45 days of its issuance. The rules of section 7503 of the Code are followed when the last day for returning the Consent Agreement falls on a Saturday, Sunday, or legal holiday. In addition, a copy of the Consent Agreement must be attached to the taxpayer's income tax return for the year of change.

(3) 45-DAY REQUIREMENT.

If the taxpayer does not return the signed Consent Agreement within 45 days, the ruling letter granting the permission for the change will be null and void.

(4) CHANGE IN METHOD OF ACCOUNTING NOT MADE BY TAXPAYER.

If the taxpayer decides not to effect the change in accordance with the terms and conditions of the ruling letter, the taxpayer must so indicate by returning the unsigned copy of the ruling letter to the National Office addressed as follows: Commissioner of Internal Revenue, Attention (Individual whose name and symbols appear at the top of the Consent Agreement), P.O. Box 14095, Benjamin Franklin Station, Washington, D.C., 20044, with an explanation of why the accounting method change will not be effected.

If the taxpayer disagrees with the terms and conditions of the ruling letter, the taxpayer must express such disagreement together with an explanation of the reasons within the 45-day period set forth above. The Service will consider the reason for disagreement and notify the taxpayer whether the original ruling will be modified. If the ruling is not modified, the taxpayer will be notified, and given 15 days from the date of such notification to either accept the original ruling by signing and returning the Consent Agreement, or reject the change by returning the ruling and the Consent Agreement unsigned.

If a taxpayer signs and returns the Consent Agreement, the taxpayer must implement the change in accounting method in accordance with the terms and conditions provided in the Consent Agreement and this revenue procedure. See section 1.481-5(b).

10 CHANGES INITIATED BY THE TAXPAYER.

Any approved change in method of accounting made under the procedures, terms, and conditions of this revenue procedure shall be considered a change in method of accounting initiated by the taxpayer for purposes of section 481 of the Code.

11 APPLICABILITY OF REV. PROC. 92-1 AND REV PROC. 92-4.

Rev. Proc. 92-1, 1992-1 I.R.B. 9, and Rev. Proc. 92-4, 1992-1 I.R.B. 66, and any successor revenue procedures, are applicable to an application for change in accounting method (Form 3115) filed under this revenue procedure, unless specifically excluded or overridden by other published guidance (including the special procedures in this document).

12 PROTECTION FOR YEARS PRIOR TO THE YEAR OF CHANGE.

If a taxpayer timely files a Form 3115 under this revenue procedure, an examining agent may not propose that the taxpayer change the same method of accounting for a year prior to a year of change required under this revenue procedure. However, the net section 481(a) adjustment is, in every case, subject to verification by the district director. In addition, if the requested change in method is not granted by the National Office, or if the taxpayer (1) declines to implement a change in method of accounting pursuant to the terms and conditions of this revenue procedure, (2) does not comply with the terms and conditions contained in its ruling letter consenting to the accounting method change, or (3) withdraws its request, an examining agent may propose that the taxpayer change the same method of accounting for a year prior to a year of change set forth under this revenue procedure. In addition, if a taxpayer is changing a sub-method of accounting that is within another method of accounting, an examining agent may propose that the taxpayer change the method (including, in appropriate circumstances, the sub-method) for a year prior to a year of change under this revenue procedure. For example, an examining agent may propose to terminate the taxpayer's use of the LIFO inventory method during the year(s) currently under examination even though those taxable years precede the year of change for a taxpayer's change from one LIFO inventory method (or sub-method) to another LIFO inventory method (or sub- method).

13 CONFERENCES IN THE NATIONAL OFFICE.

The taxpayer must state in writing at the time the Form 3115 is filed under this revenue procedure whether the taxpayer or the taxpayer's authorized representative desires a conference if an adverse response is contemplated by the Service. If a conference is not specifically requested in writing at the time the taxpayer files Form 3115 under this revenue procedure or in a later written communication, the Service will presume that the taxpayer does not desire a conference. If requested, a conference will be arranged in the National Office prior to the Service's formal reply to the taxpayer's application. For taxpayers other than exempt organizations, see section 10 of Rev. Proc. 92-1. For exempt organizations, see section 11 of Rev. Proc. 92-4.

14 EFFECT OF THIS REVENUE PROCEDURE ON OTHER OFFICES OF THE SERVICE.

The provisions of this revenue procedure are not intended to preclude an appropriate representative of the Service (an appeals official with delegated settlement authority) from settling a particular taxpayer's case involving an accounting method issue by agreeing to terms and conditions that differ from those provided in this revenue procedure when it is in the best interest of the Government to do so.

SEC. 11. SUMMARY OF TERMS AND CONDITIONS

The Appendix to this revenue procedure contains a summary of the terms and conditions, relating to the year of change and the section 481(a) adjustment period, for taxpayers changing their accounting methods under sections 5 and 6 of this revenue procedure. The Appendix is for illustrative purposes only, and may not be relied upon for resolutions of any procedural or substantive issues. See the appropriate sections of this revenue procedure for the specific rules regarding the year of change and section 481(a) adjustment period.

SEC. 12. INQUIRIES

Inquiries regarding this revenue procedure may be addressed to the Commissioner of Internal Revenue, Attention: CC:IT&A, 1111 Constitution Avenue, N.W., Washington, D.C. 20224.

SEC. 13. EFFECT ON OTHER DOCUMENTS

Rev. Proc. 84-74 is modified and, as modified, is superseded.

Paragraph 8.03(2) of this revenue procedure provides a new rule for acceleration of the section 481(a) adjustment period. Because subsection 3.01 of this revenue procedure defines "taxpayer," for purposes of this revenue procedure, as a "person" under section 7701(a)(1) of the Code, the new rule generally requires acceleration of the section 481(a) adjustment period when any person taking the net section 481(a) adjustment into account ceases to engage in the trade or business to which the net section 481(a) adjustment relates. Effective for method changes made under this revenue procedure, the paragraph 8.03(2) rule replaces a condition contained in Rev. Proc. 84-74 (and other administrative procedures previously issued under section 1.446-1(e)(3)(ii) authority) that requires acceleration of the section 481(a) adjustment period when the "taxpayer," as defined in section 7701(a)(14), ceases to engage in the trade or business to which the net section 481(a) adjustment relates. Several revenue rulings have been issued interpreting the section 7701(a)(14) definition of taxpayer used in Rev. Proc. 84-74 and other method change administrative procedures. See Rev. Rul. 85-134, 1985-2 C.B. 160; Rev. Rul. 80-39, 1980-1 C.B. 112; Rev. Rul. 77-264, 1977-2 C.B. 187; and Rev. Rul. 66-206, 1966-2 C.B. 206. While these revenue revenues [sic] have continuing applicability in determining who is the taxpayer for method changes made under Rev. Proc. 84-74 (and other previously issued method change administrative procedures') conditions, they are not applicable to the interpretation of the term taxpayer under the new acceleration condition within paragraph 8.03(2) of this revenue procedure. Similarly, the above revenue rulings will not apply to cessation of trade or business acceleration conditions imposed under future administrative procedures that are issued under section 446(e) and section 1.446-1(e) authority and that define taxpayer as a person under section 7701(a)(1) of the Code.

SEC. 14. EFFECTIVE DATE

01 GENERAL.

This revenue procedure shall be effective with respect to Forms 3115 filed on or after March 23, 1992. Forms 3115 filed before March 23, 1992, will be subject to the provisions of Rev. Proc. 84-74. The following rules are intended to ensure that taxpayers receive a year of change and a section 481(a) adjustment period no less favorable than would have been available under Rev. Proc. 84-74 during a 180- day transition period.

02 TRANSITION RULES -- TAXPAYERS UNDER EXAMINATION.

(1) 180-DAY TRANSITION PERIOD.

Except as otherwise provided in published guidance (e.g., section 1.448-1T(h)(4)), if a taxpayer is under examination on March 23, 1992, the taxpayer is permitted to file a Form 3115 under these transition rules to change from a Category A method, Category B method, or Designated B method at any time before September 19, 1992. Taxpayers described in subsection 4.02 or subsection 4.03 may change a method of accounting under these transition rules only if they are able to satisfy the requirements in those subsections. A taxpayer will not be permitted to file a Form 3115 to change a Category A method (including a LIFO Category A method) during this transition period if an issue is pending on March 2, 1992, with respect to the Category A method. For purposes of this subsection 14.02, an issue is pending if the Service has sent the taxpayer written notification indicating that an adjustment is being or will be proposed with respect to the Category A method. This transition period will not extend beyond the close of the examination.

If a taxpayer is contacted for examination after March 23, 1992, but before September 19, 1992, the transition rules of this subsection 14.02 apply to any Form 3115 filed before September 19, 1992, but the terms and conditions provided in subsection 6.02 will apply to any Form 3115 filed during any portion of the 90-day window provided in that subsection that extends beyond September 18, 1992.

If, on March 23, 1992, a taxpayer is within the 120-day window provided in paragraph 4.02(1) of Rev. Proc. 84-74 or the 30-day window provided in paragraph 4.02(2) of Rev. Proc. 84-74, the taxpayer may file a Form 3115 under the terms and conditions applicable during those window periods under Rev. Proc. 84-74, in lieu of the terms and conditions set forth in paragraph 14.02(2) below. However, if the taxpayer is not within the 120-day window or the 30-day window of Rev. Proc. 84-74 on March 23, 1992, the 120-day and 30-day window provisions contained in section 6 of this revenue procedure apply during the 180-day transition period.

(2) TERMS AND CONDITIONS DURING TRANSITION PERIOD.

The following rules apply to taxpayers that are under examination on March 23, 1992, (or that are contacted for examination before September 19, 1992) and that request to change a method of accounting before September 19, 1992.

(a) CATEGORY A METHOD.

If a taxpayer is changing from a Category A method, the year of change and the section 481(a) adjustment period shall be determined under paragraph 6.02(2).

(b) CATEGORY B METHOD.

(i) YEAR OF CHANGE.

If a taxpayer is changing from a Category B or Designated B method, the year of change shall be the taxable year in which the Form 3115 is filed, or the subsequent taxable year if the Form 3115 is filed more than 180 days after the beginning of the taxable year. If, on the date the Form 3115 is filed, however, an issue is pending with respect to the Category B or Designated B method, the year of change will be the most recent taxable year that is being examined by the Service as of March 23, 1992, but not later than the most recent taxable year for which a federal income tax return has been filed as of the date the examination (in which the issue is pending) began.

(ii) SECTION 481(a) ADJUSTMENT PERIOD.

Whether a change from a Category B method or Designated B method results in a net positive or net negative adjustment under section 481(a) of the Code, the taxpayer must, beginning with the year of change, take the net section 481(a) adjustment into account ratably over six taxable years in computing taxable income. However, if the change is from a Designated B method for which the 2-year period in paragraph 5.12(2) of Rev. Proc. 84-74 has elapsed and for which the issue is pending on the date the Form 3115 is filed, the taxpayer must, beginning with the year of change, take the net section 481(a) adjustment into account ratably over three taxable years in computing taxable income. See section 8 of this revenue procedure for exceptions to these general rules.

(c) SPECIAL RULES FOR LIFO CHANGES.

If a change in method of accounting is from one LIFO inventory method (or sub-method) to another LIFO inventory method (or sub- method), the change will be made using a cut-off method except as provided in subsection 9.01 of this revenue procedure. The year of change shall be the taxable year in which the Form 3115 is filed, or the subsequent taxable year if filed more than 180 days after the beginning of the taxable year. However, if, on the date the Form 3115 is filed, an issue is pending with respect to the LIFO method, the year of change will be the most recent taxable year that is being examined by the Service as of March 23, 1992, but not later than the most recent taxable year for which a federal income tax return has been filed as of the date the examination (in which the issue is pending) began.

DRAFTING INFORMATION

The authors of this revenue procedure are Barbara Young and Richard Davis of the Office of Assistant Chief Counsel (Income Tax and Accounting). For further information regarding this revenue procedure, contact Barbara Young of the Office of Assistant Chief Counsel (Income Tax and Accounting) on (202) 566-4534 (not a toll- free call).

                               APPENDIX

 

 _____________________________________________________________________

 

 

                Adjust.        Year of Change              481(a)

 

                 + / -                               Adjustment Period

 

 _____________________________________________________________________

 

 

 Category A Methods

 

 __________________

 

 

 Treated        Positive       Current Year         Maximum of 3 Years

 

 as Not

 

 Under

 

 Examination*   Negative       Current Year     1 Year (Year of Change)

 

 

 90-Day         Positive      Earliest Open       Maximum of 3 Years

 

 Window                          Year

 

 (Taxpayer

 

 Under          Negative**    Current Year     1 Year (Year of Change)

 

 Examination)

 

 

 Category B Methods

 

 __________________

 

 

 Treated       Positive       Current Year         Maximum of 6 Years

 

 as Not

 

 Under

 

 Examination*  Negative       Current Year         Maximum of 6 Years

 

 

 90-Day        Positive       Current Year     1 Year (Year of Change)

 

 Window

 

 (Taxpayer

 

 Under         Negative**     Current Year        Maximum of 6 Years

 

 Examination)

 

 

 Changes Within the LIFO Method

 

 ______________________________

 

 

 Treated       Positive       Current Year    Not applicable, except as

 

 as Not                                        otherwise published.

 

 Under

 

 Examination*   Negative      Current Year    Not applicable, except as

 

                                              otherwise published.

 

 

 90-Day         Positive       Earliest Open   Maximum of 6 Years***

 

 Window                            Year

 

 (Taxpayer

 

 Under          Negative**     Current Year   Not applicable, except as

 

 examination)                                 otherwise published.

 

 

                         FOOTNOTE TO APPENDIX

 

 

      * This includes taxpayers not under examination, as well as

 

 taxpayers filing under the 120-day window described in subsection

 

 6.03, the 30-day window described in subsection 6.04, or the 90-day

 

 post-affiliation window described in subsection 6.05, and taxpayers

 

 that receive the consent of the district director to file under

 

 subsection 6.06.

 

 

      ** The taxpayer is treated as not under examination because it

 

 is not appropriate to provide terms and conditions more favorable

 

 than if the taxpayer had not been contacted for examination.

 

 

      *** Generally, a modified section 481(a) adjustment is computed

 

 using only the prior ten taxable years. See paragraph 6.02(4) of this

 

 revenue procedure.
DOCUMENT ATTRIBUTES
  • Institutional Authors
    Internal Revenue Service
  • Cross-Reference

    26 CFR 601.204: Changes in accounting periods and in methods of

    accounting.

    (Also Part I, Sections 446, 472, 481; 1.446-1, 1.481-1, 1.472-1.)

  • Code Sections
  • Subject Areas/Tax Topics
  • Index Terms
    accounting methods
  • Jurisdictions
  • Language
    English
  • Tax Analysts Document Number
    Doc 92-1921 (95 original pages)
  • Tax Analysts Electronic Citation
    92 TNT 48-7
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