IRS Revenue Procedure
2002-9

Code Sec. NONE

Status: Modified & Amplified by 2002-36, Modified & Amplified by 2002-33,
Modified & Amplified by 2002-28, Modified & Amplified by 2002-17,
Modified & Amplified by 2002-27, Modified & Amplified by 2002-19

<<FULL TEXT>>

Status: Modified and clarified by Ann. 2002-17; modified and amplified by
Rev. Rul. 2002-9


26 CFR 601.204: Changes in accounting periods and in methods of
accounting.
(Also Part I, sections 56, 61, 77, 111, 162, 165, 166, 167, 168, 171, 174,
197, 263, 263A, 267, 404, 446, 448, 451, 454, 455, 460, 461, 471, 472,
475, 481, 585, 985, 1272, 1273, 1278, 1281, 1363; 1.61-8, 1.77-1, 1.77-2,
1.162-1, 1.162-3, 1.162-4, 1.162-11, 1.165-2, 1.165-3, 1.167(a)-2,
1.167(a)-14, 1.167(a)-8, 1.167(a)-11, 1.167(e)-1, 1.171-4, 1.174-1,
1.174-3, 1.174-4, 1.197-1T, 1.197-2, 1.263(a)-1, 1.263(a)-2, 1.263A-1,
1.263A-2, 1.263A-3, 1.263A-4, 1.446-1, 1.446-2, 1.448-2T, 1.451-1,
1.454-1, 1.455-6, 1.460-1, 1.460-4, 1.461-4, 1.461-5, 1.471-1, 1.471-2,
1.471-3, 1.472-1, 1.472-2, 1.472-6, 1.472-8, 1.481-1, 1.481-4, 1.861-18,
1.985-5, 1.985-8, 1.1272-1, 1.1273-1, 1.1273-2.)


Rev. Proc. 2002-9

SECTION 1. PURPOSE

SECTION 2. BACKGROUND AND CHANGES
.01 Change in method of accounting defined
.02 Securing permission to make a method change
.03 Terms and conditions of a method change
.04 No retroactive method change
.05 Method change with a section 481(a) adjustment
(1) Need for adjustment
(2) Adjustment period
.06 Method change using a cut-off method
.07 Consistency and clear reflection of income
.08 Separate trades or businesses
.09 Penalties
.10 Change made as part of an examination
.11 Significant changes

SECTION 3. DEFINITIONS
.01 Application
.02 Applicable provisions
.03 Taxpayer
(1) In general
(2) Consolidated group
.04 Timely mailing as timely filing
.05 Timely performance of acts
.06 Year of change
.07 Section 481(a) adjustment period
.08 Under examination
(1) In general
(2) Partnerships and S corporations subject to TEFRA
.09 Issue under consideration
(1) Under examination
(2) Before an appeals office
(3) Before a federal court
.10 Change within the LIFO inventory method
.11 Director

SECTION 4. SCOPE
.01 Applicability
.02 Inapplicability
(1) Under examination
(2) Before an appeals office
(3) Before a federal court
(4) Consolidated group member
(5) Partnerships and S corporations
(6) Prior change
(7) Section 381(a) transaction
(8) Final year of trade or business.
.03 Nonautomatic changes

SECTION 5. TERMS AND CONDITIONS OF CHANGE
.01 In general
.02 Year of change
.03 Section 481(a) adjustment
.04 Section 481(a) adjustment period
(1) In general
(2) Short period as a separate taxable year
(3) Shortened or accelerated adjustment periods
.05 NOL carryback limitation for taxpayer subject to criminal
investigation
.06 Change treated as initiated by the taxpayer

SECTION 6. GENERAL APPLICATION PROCEDURES
.01 Consent
.02 Filing requirements
(1) Applications
(2) Waiver of taxable year filing requirement
(3) Timely duplicate filing requirement
(4) Label
(5) Signature requirements
(6) Where to file copy
(7) No user fee
(8) Single application for certain consolidated groups
(9) Additional copies required where scope restrictions waived
.03 Taxpayer under examination
(1) In general
(2) 90-day window period
(3) 120-day window period
(4) Consent of director
(5) Changes lacking audit protection
.04 Taxpayer before an appeals office
.05 Taxpayer before a federal court
.06 Compliance with provisions

SECTION 7. AUDIT PROTECTION FOR TAXABLE YEARS PRIOR TO YEAR OF CHANGE
.01 In general
.02 Exceptions
(1) Change not made or made improperly
(2) Change in sub-method
(3) Prior year Service-initiated change
(4) Criminal investigation

SECTION 8. EFFECT OF CONSENT
.01 In general
.02 Retroactive change or modification

SECTION 9. REVIEW BY DIRECTOR
.01 In general
.02 Changes not made in compliance with all applicable provisions
.03 National office consideration

SECTION 10. REVIEW BY NATIONAL OFFICE
.01 In general
.02 Incomplete application
(1) 30 day rule
(2) Failure to provide additional information
.03 Conference in the national office
.04 National office determination
(1) Consent not granted
(2) Application changed

SECTION 11. APPLICABILITY OF REV. PROCS. 2001-1 AND 2001-4

SECTION 12. INQUIRIES

SECTION 13. EFFECTIVE DATE
.01 In general
.02 Transition rules
.03 Special rules.

SECTION 14. EFFECT ON OTHER DOCUMENTS

SECTION 15. PAPERWORK REDUCTION ACT

DRAFTING INFORMATION

APPENDIX

SECTION 1. COMMODITY CREDIT LOANS (SECTION 77)
.01 Treating amounts received as loans
(1) Description of change and scope
(2) Scope limitations inapplicable
(3) Manner of making change
.02 Reserved

SECTION 1A. TRADE OR BUSINESS EXPENSES (SECTION 162)
.01 Advances made by a lawyer on behalf of clients -- Description
of change and scope
.02 Year 2000 costs -- Description of change and scope
.03 Aircraft maintenance costs
(1) Description of change
(2) Year of change
(3) Scope limitations inapplicable
(4) Transition rule
.04 ISO 9000 costs
(1) Description of change
(2) Scope limitations inapplicable
.05 Track structure expenditures
(1) Description of change and scope
(2) Year of change
(3) Scope limitations inapplicable
(4) Special filing requirements for certain taxpayers
(5) Manner of making change
(6) Audit protection
(7) Effect of consent
.06 Restaurant smallwares packages
(1) Description of change
(2) Scope limitations inapplicable
(3) Section 481(a) adjustment

SECTION 1B. BAD DEBTS (SECTION 166)
.01 Change from reserve method to specific charge-off method --
description of change and scope
.02 Reserved

SECTION 1C. AMORTIZABLE BOND PREMIUM (SECTION 171)
.01 Revocation of section 171(c) election
(1) Description of change and scope
(2) Revocation of election
(3) Manner of making the change
(4) Additional requirements
(5) Audit protection
.02 Reserved

SECTION 2. DEPRECIATION OR AMORTIZATION (SECTION 56(a)(1), 56(g)(4)(A),
167, 168, OR 197, OR FORMER SECTION 168)
.01 Impermissible to permissible method of accounting for
depreciation or amortization
(1) Description of change
(2) Scope
(3) Additional requirements
(4) Section 481(a) adjustment
(5) Basis adjustment
(6) Meaning of depreciation allowable
.02 Permissible to permissible method of accounting for depreciation
(1) Description of change
(2) Scope
(3) Changes covered
(4) Additional requirements
(5) Section 481(a) adjustment
.03 Sale or lease transactions
(1) Description of change and scope
(2) Manner of making the change
(3) No audit protection
.04 Modern golf course greens
(1) Description of change and scope
(2) Additional requirements

SECTION 2A. RESEARCH AND EXPERIMENTAL EXPENDITURES (SECTION 174)
.01 Changes to a different method or different amortization period
(1) Description of change
(2) Scope
(3) Manner of making the change
(4) Additional requirement
(5) No audit protection
.02 Reserved

SECTION 2B. COMPUTER SOFTWARE EXPENDITURES (SECTIONS 162, 167, AND 197)
.01 Description of change
.02 Scope
.03 Inapplicability
.04 Statement required

SECTION 3. CAPITAL EXPENDITURES (SECTION 263)
.01 Package design costs
(1) Description of change and scope
(2) Additional requirements
.02 Line pack gas; cushion gas
(1) Description of change and scope
(2) Additional requirements
.03 Removal costs
(1) Description of change
(2) Additional requirements
(3) Scope limitations inapplicable

SECTION 4. UNIFORM CAPITALIZATION (SECTION 263A)
.01 Certain uniform capitalization (UNICAP) methods used by
resellers and reseller-producers
(1) Description of change and scope
(2) Definitions
(3) Section 481(a) adjustment
(4) Multiple changes
(5) Example
.02 Certain uniform capitalization (UNICAP) methods used by producers
(1) Applicability
(2) Inapplicability
(3) Definition
(4) Multiple changes
.03 Certain uniform capitalization (UNICAP) methods used by taxpayers
in a farming business.
(1) Description of change and scope
(2) Year of change
(3) Scope limitations inapplicable
(4) Manner of making change; audit protection
(5) Multiple changes
.04 Change to no longer capitalize research and experimental
expenditures under uniform capitalization (UNICAP)
(1) Description of change and scope
(2) Manner of making the change
(3) No audit protection

SECTION 4A. LOSSES, EXPENSES AND INTEREST WITH RESPECT TO TRANSACTIONS
BETWEEN RELATED TAXPAYERS (SECTION 267)
.01 Change to comply with section 267
.02 Reserved

SECTION 4B. DEFERRED COMPENSATION (SECTION 404)
.01 Change to comply with section 404(a)(11)
(1) Description of change and scope
(2) Section 481(a) adjustment period
(3) No audit protection
.02 Deferred compensation
(1) Applicability
(2) Inapplicability

SECTION 5. METHODS OF ACCOUNTING (SECTION 446)
.01 Cash or hybrid method to accrual method
(1) Description of change and scope
(2) Section 481(a) adjustment
(3) Change to a special method of accounting
(4) Coordination with section 13.01 of the APPENDIX for short-term
obligations
.02 Multi-year service warranty contracts
(1) Description of change and scope
(2) Manner of making the change
.03 Multi-year insurance policies for multi-year service warranty
contracts -- Description of change and scope
(1) Applicability
(2) Inapplicability
(3) Description of method
.04 Interest accruals on short-term consumer loans -- Rule of 78s
method
(1) Description of change and scope
(2) Background
(3) Manner of making the change
.05 Small taxpayers changing to overall cash method
(1) Description of change
(2) Scope limitations inapplicable
(3) Manner of making the change
(4) Automatic changes to treating inventoriable items as
nonincidental materials and supplies under Rev. Proc. 2001-10
.06 Nonaccrual-experience method
(1) Applicability
(2) inapplicability
(3) Scope limitations inapplicable

SECTION 5A. TAXABLE YEAR OF INCLUSION (SECTION 451)
.01 Accrual of interest on nonperforming loans
(1) Description of change and scope
(2) Section 481(a) adjustment
.02 Cash advances on insurance commissions
(1) Description of change
(2) Year of change
(3) Scope limitations inapplicable
(4) Manner of making the change
.03 Advance rentals -- description of change and scope

SECTION 6. OBLIGATIONS ISSUED AT DISCOUNT (SECTION 454)
.01 Series E, EE or I U.S. savings bonds
(1) Description of change and scope
(2) Manner of making the change
.02 Reserved

SECTION 7. PREPAID SUBSCRIPTION INCOME (SECTION 455)
.01 Prepaid subscription income
(1) Description of change and scope
(2) Manner of making the change
.02 Reserved

SECTION 7A. SPECIAL RULES FOR LONG-TERM CONTRACTS (SECTION 460)
.01 Change to comply with final regulations under section 460
(1) Description of change and scope
(2) Year of change
(3) Manner of making change
(4) Scope limitations inapplicable
(5) No audit protection
.02 Change from exempt-contract method to percentage-of-completion
method
(1) Description of change and scope
(2) Manner of making change
(3) No audit protection

SECTION 8. TAXABLE YEAR OF DEDUCTION (SECTION 461)
.01 Timing of incurring liabilities for employee compensation
(1) Self-insured employee medical benefits
(2) Amounts taken into account
.02 Timing of incurring liabilities for real property taxes,
personal property taxes and state income taxes
(1) Description of change
(2) Scope
(3) Amounts taken into account
.03 Timing of incurring liabilities under a workers' compensation act,
tort, breach of contract, or violation of law
(1) Description of change and scope
(2) Amounts taken into account
.04 Timing of incurring liabilities for payroll taxes
(1) Applicability
(2) Inapplicability
(3) Recurring item exception
(4) Amounts taken into account
.05 Cooperative advertising
(1) Description of change and scope
(2) Scope limitations inapplicable
.06 Distributor commissions
(1) Changes made under Rev. Proc. 2000-38.
(2) Changes not made under Rev. Proc. 2000-38

SECTION 9. INVENTORIES (SECTION 471)
.01 Cash discounts
(1) Description of change and scope
(2) Computation of section 481 adjustment for changes to net
invoice method
(3) Computation of section 481 adjustment for changes to gross
invoice method
.02 Estimating inventory
(1) Description of change and scope
(2) Scope limitations inapplicable
(3) Additional requirements
(4) Audit protection
(5) Future change
.03 Small taxpayer exception from requirement to account for
inventories under section 471
(1) Description of change
(2) Scope limitations inapplicable
(3) Manner of making the change
(4) Automatic changes to the cash method under Rev. Proc. 2001-10
.04 "Floor stocks" payments made or received
(1) Description of change and scope
(2) Requirements
(3) Scope limitations inapplicable
(4) Manner of making the change
.05 Qualifying volume-related trade discounts
(1) Description of change and scope
(2) Section 481 adjustment
.06 Impermissible methods of valuation

SECTION 10. LAST-IN, FIRST-OUT (LIFO) INVENTORIES (SECTION 472)
.01 Change from the LIFO inventory method
(1) Description of change and scope
(2) Limitation on LIFO election
(3) Effect of subchapter S election by corporation
(4) Additional requirements
.02 Determining current-year cost under the LIFO inventory method
(1) Description of change and scope
(2) Manner of making the change
.03 Alternative LIFO inventory method for retail automobile dealers
(1) Description of change and scope
(2) Manner of making the change
.04 Used vehicle alternative LIFO method
(1) Description of change and scope
(2) Additional requirements
(3) Scope limitations inapplicable
(4) Manner of making change
(5) Concurrent change available for certain IPIC taxpayers
.05 Determining the cost of used vehicles purchased or taken as a
trade-in
(1) Description of change and scope
(2) Manner of making the change
.06 Change to inventory price index computation (IPIC) method
(1) Description of change and scope
(2) Manner of making the change
(3) Bargain purchase
.07 Changes within inventory price index computation (IPIC) method
(1) Description of change and scope
(2) Manner of making the change

SECTION 10A. MARK-TO-MARKET ACCOUNTING METHOD FOR DEALERS IN SECURITIES
(SECTION 475)
.01 Reserved
.02 Commodities dealers, securities traders, and commodities
traders electing to use the mark-to-market method of accounting
under section 475(e) or (f)
(1) Description of change
(2) Scope

SECTION 11. BANK RESERVES FOR BAD DEBTS (SECTION 585)
.01 Changing from the section 585 reserve method to the section 166
specific charge-off method
(1) Description of change and scope
(2) Section 481(a) adjustment
(3) Change from section 585 required when electing S corporation
status
.02 Reserved

SECTION 11A. INCOME FROM SOURCES WITHIN THE UNITED STATES (SECTION 861)
.01 Transactions involving computer programs
.02 Reserved

SECTION 11B. FUNCTIONAL CURRENCY (SECTION 985)
.01 Change in functional currency
(1) Description of change and scope
(2) Manner of making change
.02 Reserved

SECTION 12. ORIGINAL ISSUE DISCOUNT (SECTIONS 1272, 1273)
.01 De minimis original issue discount (OID)
(1) Description of change and scope
(2) Manner of making the change
(3) Additional requirements
(4) No audit protection
.02 Reserved

SECTION 12A. MARKET DISCOUNT BONDS (SECTION 1278)
.01 Revocation of section 1278(b) election
(1) Description of change and scope
(2) Revocation of election
(3) Manner of making the change
(4) Additional requirements
(5) Audit protection
.02 Reserved

SECTION 13. SHORT-TERM OBLIGATIONS (SECTION 1281)
.01 Interest income on short-term obligations
(1) Description of change and scope
(2) Section 481(a) adjustment period
.02 Stated interest on short-term loans of cash method banks
(1) Description of change and scope
(2) Change for prior taxable years
(3) Section 481(a) adjustment period


SECTION 1. PURPOSE

This revenue procedure provides the procedures by which a taxpayer may
obtain automatic consent to change the methods of accounting described in
the APPENDIX of this revenue procedure. This revenue procedure clarifies,
modifies, amplifies, and supersedes Rev. Proc. 99-49 (1999-2 C.B. 725). It
also consolidates automatic consent procedures for changes in several
methods of accounting that were published subsequent to the publication of
Rev. Proc. 99-49, and provides new automatic consent procedures for
changes in several other methods of accounting. A taxpayer complying with
all the applicable provisions of this revenue procedure has obtained the
consent of the Commissioner of Internal Revenue to change its method of
accounting under section 446(e) of the Internal Revenue Code and the
Income Tax Regulations thereunder.


SECTION 2. BACKGROUND AND CHANGES

.01 CHANGE IN METHOD OF ACCOUNTING DEFINED.

(1) Section 1.446-1(e)(2)(ii)(a) of the Income Tax 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
the item as a deduction. In determining whether a taxpayer's accounting
practice for an item involves timing, generally the relevant question is
whether the practice permanently changes the amount of the taxpayer's
lifetime income. If the practice does not permanently affect the
taxpayer's lifetime income, but does or could change the taxable year in
which income is reported, it involves timing and is therefore a method of
accounting. See Rev. Proc. 91-31 (1991-1 C.B. 566).

(2) 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 adopted 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). 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. If a taxpayer has adopted
a method of accounting under these rules, the taxpayer may not change the
method by amending its prior income tax return(s). See Rev. Rul. 90-38
(1990-1 C.B. 57).

(3) A change in the characterization of an item may also constitute a
change in method of accounting if the change has the effect of shifting
income from one period to another. For example, a change from treating an
item as income to treating the item as a deposit is a change in method of
accounting. See Rev. Proc. 91-31.

(4) A change in method of accounting does not include correction of
mathematical or posting errors, or errors in the computation of tax
liability (such as errors in computation of the foreign tax credit, net
operating loss, percentage depletion, or investment credit). See section
1.446-1(e)(2)(ii)(b).


.02 SECURING PERMISSION TO MAKE A METHOD CHANGE. Sections 446(e) and
1.446-1(e) 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 1.446-1(e)(3)(i)
requires that, in order to obtain the Commissioner's consent to a method
change, a taxpayer must file a Form 3115, Application for Change in
Accounting Method, during the taxable year in which the taxpayer wants to
make the proposed change.

.03 TERMS AND CONDITIONS OF A METHOD CHANGE. Section 1.446-1(e)(3)(ii)
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). The terms and conditions the Commissioner may
prescribe include the year of change, whether the change is to be made
with a section 481(a) adjustment or on a cut-off basis, and the section
481(a) adjustment period.

.04 NO RETROACTIVE METHOD CHANGE. Unless specifically authorized by the
Commissioner, a taxpayer may not request, or otherwise make, a retroactive
change in method of accounting, regardless of whether the change is from a
permissible or an impermissible method. See generally Rev. Rul. 90-38.

.05 METHOD CHANGE WITH SECTION 481(a) ADJUSTMENT.

(1) NEED FOR ADJUSTMENT. Section 481(a) requires those adjustments
necessary to prevent amounts from being duplicated or omitted to 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 taxable 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
taxable years must be determined under the new method of accounting as if
the new method had always been used.

EXAMPLE. A taxpayer that is not required to use inventories uses the
overall cash receipts and disbursements method and changes to an overall
accrual method. The taxpayer has $120,000 of income earned but not yet
received (accounts receivable) and $100,000 of expenses incurred but not
yet paid (accounts payable) as of the end of the taxable year preceding
the year of change. A positive section 481(a) adjustment of $20,000
($120,000 accounts receivable less $100,000 accounts payable) is required
as a result of the change.


(2) ADJUSTMENT PERIOD. Section 481(c) and sections 1.446-1(e)(3)(ii)
and 1.481-4 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.
Generally, in the absence of such an agreement, the section 481(a)
adjustment is taken into account completely in the year of change, subject
to section 481(b) which limits the amount of tax where the section 481(a)
adjustment is substantial. However, under the Commissioner's authority in
section 1.446-1(e)(3)(ii) to prescribe terms and conditions for changes in
methods of accounting, this revenue procedure provides specific adjustment
periods 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.

<<END RULING>>



.06 METHOD CHANGE USING A CUT-OFF METHOD. The Commissioner may
determine that certain changes in methods of accounting will be made
without a section 481(a) adjustment, using a "cut-off method." Under a
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 before the year of change (or
other operative date) continue to be accounted for under the taxpayer's
former method of accounting. See, for example, sections 1.01 and 7A.01 of
the APPENDIX of this revenue procedure. Because no items are duplicated or
omitted from income when a cut-off method is used to effect a change in
accounting method, no section 481(a) adjustment is necessary.

.07 CONSISTENCY AND CLEAR REFLECTION OF INCOME. Methods of accounting
should clearly reflect income on a continuing basis, and the Internal
Revenue Service exercises its discretion under sections 446(e) and 481(c)
in a manner that generally minimizes distortions of income across taxable
years and on an annual basis.

.08 SEPARATE TRADES OR BUSINESSES.

(1) Sections 1.446-1(d)(1) and (2) 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 overall
income of the taxpayer as well as that of each particular trade or
business. No trade or business is separate and distinct unless a complete
and separable set of books and records is kept for that trade or business.

(2) Section 1.446-1(d)(3) 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 are not separate and distinct.


.09 PENALTIES. Any otherwise applicable penalty, addition to the tax, or
additional amount for the failure of a taxpayer to change its method of
accounting (for example, the accuracy-related penalty under section 6662
or the fraud penalty under section 6663) may be imposed if the taxpayer
does not timely file a request to change a method of accounting. See
section 446(f). Additionally, the taxpayer's return preparer may also be
subject to the preparer penalty under section 6694. However, penalties,
additions to the tax, or additional amounts will not be imposed when a
taxpayer changes from an impermissible method of accounting to a
permissible one by complying with all applicable provisions of this
revenue procedure.

.10 CHANGE MADE AS PART OF AN EXAMINATION. Sections 446(b) and
1.446-1(b)(1) provide that if a taxpayer does not regularly employ a
method of accounting that clearly reflects its income, the computation of
taxable income must be made in a manner that, in the opinion of the
Commissioner, does clearly reflect income. If a taxpayer under examination
is not eligible to change a method of accounting under this revenue
procedure, the change may be made by the director. A change resulting in a
positive section 481(a) adjustment will ordinarily be made in the earliest
taxable year under examination with a one-year section 481(a) adjustment
period.

.11 SIGNIFICANT CHANGES. Significant changes to Rev. Proc. 99-49
include:

(1) The term "applicable provisions" is now defined in new section
3.02.

(2) The term "director" as defined in section 3.11 of this revenue
procedure replaces the term "district director" as defined in section 3.11
of Rev. Proc. 99-49.

(3) The scope exclusion in section 4.02(7), relating to a taxpayer
engaging in transactions to which section 381(a) applies, has been
narrowed to exclude certain transactions under section 381(a).

(4) The consent provisions of section 6.01 have been clarified.

(5) A new section 6.02(1), clarifying the form and content of
applications, has been added.

(6) The instructions in section 6.02(6)(c) for hand delivery of
applications to the national office have been modified.

(7) A new section 6.02(9) has been added, which provides that where a
particular change waives the scope limitations of section 4.02 of this
revenue procedure, a taxpayer making such a change that is under
examination, before an appeals office, or before a federal court is
required to provide a copy of its application to the examining agent(s),
appeals officer(s), or counsel(s) for the government, as appropriate. This
requirement was repeated throughout the APPENDIX of Rev. Proc. 99-49 in
each of the various changes that waived the scope limitations of section
4.02. The addition of new section 6.02(9) consolidates these various
requirements into a single uniform provision, and allows the requirements
to be removed throughout the APPENDIX.

(8) A new section 6.03(5) has been added, permitting a taxpayer under
examination to change its method of accounting under this revenue
procedure if the APPENDIX of this revenue procedure provides that the
audit protection provisions of section 7 of this revenue procedure do not
apply to the change made by the taxpayer.

(9) A new section 9.02, relating to taxpayers that have made a change
in method of accounting without complying with all the applicable
provisions of this revenue procedure, has been added.

(10) Section 10.02(2) has been expanded to clarify the procedures
applicable to a taxpayer that does not qualify for automatic consent
procedures of this revenue procedure because the taxpayer has failed to
provide on a timely basis the additional information requested by the
national office.

(11) Section 10.04(1) has been expanded to clarify that in no event
will an application under this revenue procedure be treated as an
application under Rev. Proc. 97-27 (or any successor).

(12) The first sentence of section 13.02, relating to the transition
rules, has been rephrased to express more clearly the intended scope of
the rule.

(13) Section 4.01 of the APPENDIX is modified to include certain
additional uniform capitalization (UNICAP) changes by resellers.

(14) Section 5.01 of the APPENDIX is modified to allow certain
taxpayers producing real or tangible personal property to change from the
cash receipts and disbursements method or a hybrid method to an overall
accrual method (or to the overall accrual method in conjunction with the
recurring item exception under section 461(h)(3)).

(15) Section 8.01 is modified by the removal of provisions relating to
bonuses, which are transferred to section 4B.02 of the APPENDIX.

(16) Section 8.02 of the APPENDIX is modified to include personal
property taxes and state income taxes.

(17) Section 13.02 of the APPENDIX is modified to be applicable to all
cash method banks.

(18) The following changes in method of accounting have been added to
the APPENDIX of this revenue procedure:

(a) Section 1 of the APPENDIX, relating to Commodity Credit Corporation
loans.

(b) Section 1A.03 of the APPENDIX, relating to aircraft maintenance
costs.

(c) Section 1A.04 of the APPENDIX, relating to ISO 9000 costs.

(d) Section 1A.05 of the APPENDIX, relating to railroad track structure
expenditures.

(e) Section 1A.06 of the APPENDIX, relating to restaurant smallwares.

(f) Section 1B.01 of the APPENDIX, relating to bad debts.

(g) Section 2.04 of the APPENDIX, relating to golf course greens.

(h) Section 2B of the APPENDIX, relating to computer software
expenditures.

(i) Section 3.03 of the APPENDIX, relating to costs of retiring or
removing depreciable assets.

(j) Section 4.02 of the APPENDIX, relating to uniform capitalization
(UNI-CAP) changes by producers of real or tangible personal property.

(k) Section 4.03 of the APPENDIX, relating to uniform capitalization
(UNI-CAP) changes by taxpayers engaged in a farming business.

(l) Section 4.04 of the APPENDIX, relating to capitalization of
research and experimental expenditures into inventory under uniform
capitalization (UNICAP).

(m) Section 4A.01 of the APPENDIX, relating to the disallowance or
deferral under section 267 of certain deductions attributable to
transactions between related taxpayers.

(n) Section 4B.02 of the APPENDIX, relating to bonuses and vacation
pay.

(o) Section 5.05 of the APPENDIX, relating to the use of the cash and
disbursements method of accounting by certain small taxpayers.

(p) Section 5.06 of the APPENDIX, relating to the nonaccrual experience
method.

(q) Section 5A.02 of the APPENDIX, relating to cash advances of
insurance commissions.

(r) Section 5A.03 of the APPENDIX, relating to advance rentals.

(s) Sections 7A.01 and 7A.02 of the APPENDIX, relating to long-term
contracts.

(t) Section 8.06 of the APPENDIX, relating to distribution fees of
open-end regulated investment companies.

(u) Section 9.03 of the APPENDIX, relating to an exemption for certain
small taxpayers from the requirement to maintain inventories.

(v) Section 9.04 of the APPENDIX, relating to payments made or received
on "floor stocks."

(w) Section 9.05 of the APPENDIX, relating to volume related trade
discounts.

(x) Section 9.06 of the APPENDIX, relating to certain impermissible
methods of inventory valuation.

(y) Section 10.04 of the APPENDIX, relating to the used vehicle
alternative LIFO method.

(z) Section 10.06 of the APPENDIX, relating to changes to the inventory
price index computation (IPIC) method.

(aa) Section 10.07 of the APPENDIX, relating to changes within the
inventory price index computation (IPIC) method.

(bb) Section 11A.01 of the APPENDIX, relating to transactions involving
computer programs.

(cc) Section 11B.01 of the APPENDIX, relating to functional currency
changes.


(19) The following changes in method of accounting have been removed
from the APPENDIX of this revenue procedure:

(a) Section 8A of the APPENDIX of Rev. Proc. 99-49, relating to rental
agreements.

(b) Section 10A.01 of the APPENDIX of Rev. Proc. 99-49, relating to
mark-to-market accounting for nonfinancial customer paper.

(c) Section 12A.02 of the APPENDIX of Rev. Proc. 99-49, relating to
pools of debt instruments.


SECTION 3. DEFINITIONS

.01 APPLICATION. The term "application" includes a Form 3115, or any
statement that is authorized under the APPENDIX of this revenue procedure
to be filed in lieu of a Form 3115, and any attachments.

.02 APPLICABLE PROVISIONS. The term "applicable provisions" means all
provisions of this revenue procedure pertinent to the taxpayer or its
requested change, including but not limited to:

(1) the scope requirements and limitations of section 4 of this revenue
procedure;

(2) the terms and conditions of change in section 5 of this revenue
procedure;

(3) the requirements regarding the form and content of an application
in section 6 of this revenue procedure;

(4) the filing requirements of section 6 of this revenue procedure; and

(5) the APPENDIX of this revenue procedure, including

(a) the available changes in method of accounting;

(b) any restrictions on the availability of a requested change to the
taxpayer (including provisions that render the change inapplicable to the
taxpayer); and

(c) any special terms and conditions applicable to a change, such as
the use of a cut-off method or a section 481(a) adjustment, the spread
period for any section 481(a) adjustment, and the year of change.


.03 TAXPAYER.

(1) IN GENERAL. The term "taxpayer" has the same meaning as the term
"person" defined in section 7701(a)(1) (rather than the meaning of the
term "taxpayer" defined in section 7701(a)(14)).

(2) CONSOLIDATED GROUP. For purposes of (a) sections 3.08(1), 3.09(1),
and 4.02(1) of this revenue procedure (taxpayer under examination), (b)
sections 3.09(2) and 4.02(2) of this revenue procedure (taxpayer before an
appeals office), or (c) sections 3.09(3) and 4.02(3) of this revenue
procedure (taxpayer before a federal court), the term "taxpayer" includes
a consolidated group.


.04 TIMELY MAILING AS TIMELY FILING. Under the provisions of section
7502, any form (including an application), statement, or other document
required to be filed under this revenue procedure is considered timely
filed if it is timely postmarked and mailed, postage prepaid, to the
proper address (or an address similar enough to complete delivery). If
these requirements are met, the date of filing is the date of the U.S.
postmark or the applicable date recorded or marked by a designated private
delivery service. See Notice 2001-62 (2001-40, I.R.B. 307). If the
requirements of section 7502 are not met, the form, statement, or other
document is considered filed on the date it is delivered to the Service.

.05 TIMELY PERFORMANCE OF ACTS. The rules of section 7503 apply when
the last day for the taxpayer's timely performance of any act (for
example, filing an application or submitting additional information) falls
on a Saturday, Sunday, or legal holiday. The performance of any act is
timely if the act is performed on the next succeeding day that is not a
Saturday, Sunday, or legal holiday.

.06 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 used, even if no affected items are taken
into account for that year.

.07 SECTION 481(a) ADJUSTMENT PERIOD. The section 481(a) adjustment
period is the applicable number of taxable years for taking into account
the section 481(a) adjustment required as a result of the change in method
of accounting. The year of change is the first taxable year in the
adjustment period and the section 481(a) adjustment is taken into account
ratably over the number of taxable years in the adjustment period. The
applicable adjustment periods are set forth in section 5.04 of this
revenue procedure.

.08 UNDER EXAMINATION.

(1) IN GENERAL.

(a) Except as provided in section 3.08(2) of this revenue procedure, an
examination of a taxpayer with respect to a federal income tax return
begins on the date the taxpayer is contacted in any manner by a
representative of the Service for the purpose of scheduling any type of
examination of the return. An examination ends:

(i) in a case in which the Service accepts the return as filed, on the
date of the "no change" letter sent to the taxpayer;

(ii) in a fully agreed case, on the earliest of the date the taxpayer
executes a waiver of restrictions on assessment or acceptance of
overassessment (for example, Form 870, 4549, or 4605), the date the
taxpayer makes a payment of tax that equals or exceeds the proposed
deficiency, or the date of the "closing" letter (for example, Letter
891(IN) or 987(DO)) sent to the taxpayer; or

(iii) in an unagreed or a partially agreed case, on the earliest of the
date the taxpayer (or its representative) is notified by Appeals that the
case has been referred by the examining agent(s) to Appeals, the date the
taxpayer files a petition in the Tax Court, the date on which the period
for filing a petition with the Tax Court expires, or the date of the
notice of claim disallowance.


(b) An examination does not end as a result of the early referral of an
issue to Appeals under the provisions of Rev. Proc. 99-28 (1999-2 C.B.
109).

(c) An examination resumes on the date the taxpayer (or its
representative) is notified by Appeals (or otherwise) that the case has
been referred to the examining agent(s) for reconsideration.



(2) PARTNERSHIPS AND S CORPORATIONS SUBJECT TO TEFRA. For an entity
(including a limited liability company), treated as a partnership or an S
corporation for federal income tax purposes, that is subject to the TEFRA
unified audit and litigation provisions for partnerships and S
corporations, an examination begins on the date of the notice of the
beginning of an administrative proceeding sent to the Tax Matters
Partner/Tax Matters Person (TMP). An examination ends:

(a) in a case in which the Service accepts the partnership or S
corporation return as filed, on the date of the "no adjustments" letter or
the "no change" notice of final administrative adjustment sent to the TMP;

(b) in a fully agreed case, when all the partners, members, or
shareholders execute a Form 870-P, 870-L, or 870-S; or

(c) in an unagreed or a partially agreed case, on the earliest of the
date the TMP (or its representative) is notified by Appeals that the case
has been referred by the examining agent(s) to Appeals, the date the TMP
(or a partner, member, or shareholder) requests judicial review, or the
date on which the period for requesting judicial review expires. But see
section 4.02(5) of this revenue procedure for certain rules that preclude
an entity from requesting a change in accounting method. Also note that S
corporations are not subject to the TEFRA unified audit and litigation
provisions for taxable years beginning after December 31, 1996. See Small
Business Job Protection Act of 1996, Pub. L. No. 104-188, section 1317(a),
110 Stat. 1755, 1787 (1996).


.09 ISSUE UNDER CONSIDERATION.

(1) UNDER EXAMINATION. A taxpayer's method of accounting for an item is
an issue under consideration for the taxable years under examination if
the taxpayer receives written notification (for example, by examination
plan, information document request (IDR), or notification of proposed
adjustments or income tax examination changes) from the examining agent(s)
specifically citing the treatment of the item as an issue under
consideration. For example, a taxpayer's method of pooling under the
dollar-value, last-in, first-out (LIFO) inventory method is an issue under
consideration as a result of an examination plan that identifies LIFO
pooling as a matter to be examined, but it is not an issue under
consideration as a result of an examination plan that merely identifies
LIFO inventories as a matter to be examined. Similarly, a taxpayer's
method of determining inventoriable costs under section 263A is an issue
under consideration as a result of an IDR that requests documentation
supporting the costs included in inventoriable costs, but it is not an
issue under consideration as a result of an IDR that requests
documentation supporting the amount of cost of goods sold reported on the
return. The question of whether a method of accounting is an issue under
consideration may be referred to the national office as a request for
technical advice under the provisions of Rev. Proc. 2001-2 (2001-1 I.R.B.
79) (or any successor).

(2) BEFORE AN APPEALS OFFICE. A taxpayer's method of accounting for an
item is an issue under consideration for the taxable years before an
appeals office if the treatment of the item is included as an item of
adjustment in the examination report referred to Appeals or is
specifically identified in writing to the taxpayer by Appeals.

(3) BEFORE A FEDERAL COURT. A taxpayer's method of accounting for an
item is an issue under consideration for the taxable years before a
federal court if the treatment of the item is included in the statutory
notice of deficiency, the notice of claim disallowance, the notice of
final administrative adjustment, the pleadings (for example, the petition,
complaint, or answer) or amendments thereto, or is specifically identified
in writing to the taxpayer by the counsel for the government.


.10 CHANGE WITHIN THE LIFO INVENTORY METHOD. A change within the LIFO
inventory method is a change from one LIFO inventory method or sub-method
to another LIFO inventory method or sub-method. A change within the LIFO
inventory method does not include a change in method of accounting that
could be made by a taxpayer that does not use the LIFO inventory method
(for example, a method governed by section 471 or 263A).

.11 DIRECTOR. The term "director" has the same meaning as this term has
in Rev. Proc. 2001-1 (2001-1 I.R.B. 1) (or any successor).


SECTION 4. SCOPE

.01 APPLICABILITY. This revenue procedure applies to a taxpayer
requesting the Commissioner's consent to change to a method of accounting
described in the APPENDIX of this revenue procedure. This revenue
procedure is the exclusive procedure for a taxpayer within its scope to
obtain the Commissioner's consent.

.02 INAPPLICABILITY. Except as otherwise provided in the APPENDIX of
this revenue procedure (see, for example, section 1.01 of the APPENDIX of
this revenue procedure), this revenue procedure does not apply in the
following situations:

(1) UNDER EXAMINATION. If, on the date the taxpayer would otherwise
file a copy of the application with the national office, the taxpayer is
under examination (as provided in section 3.08 of this revenue procedure),
except as provided in sections 6.03(2) (90-day window), 6.03(3) (120-day
window), 6.03(4) (director consent) and 6.03(5) (changes lacking audit
protection) of this revenue procedure;

(2) BEFORE AN APPEALS OFFICE. If, on the date the taxpayer would
otherwise file a copy of the application with the national office, the
taxpayer is before an appeals office with respect to any income tax issue
and the method of accounting to be changed is an issue under consideration
by the appeals office (as provided in section 3.09(2) of this revenue
procedure);

(3) BEFORE A FEDERAL COURT. If, on the date the taxpayer would
otherwise file a copy of the application with the national office, the
taxpayer is before a federal court with respect to any income tax issue
and the method of accounting to be changed is an issue under consideration
by the federal court (as provided in section 3.09(3) of this revenue
procedure);

(4) CONSOLIDATED GROUP MEMBER. A corporation that is (or was formerly)
a member of a consolidated group is under examination, before an appeals
office, or before a federal court (for purposes of sections 4.02(1), (2),
and (3) of this revenue procedure) if the consolidated group is under
examination, before an appeals office, or before a federal court for a
taxable year(s) that the corporation was a member of the group;

(5) PARTNERSHIPS AND S CORPORATIONS. For an entity (including a limited
liability company) treated as a partnership or an S corporation for
federal income tax purposes, if, on the date the entity would otherwise
file a copy of the application with the national office, the entity's
accounting method to be changed is an issue under consideration in an
examination of a partner, member, or shareholder's federal income tax
return or an issue under consideration by an appeals office or by a
federal court with respect to a partner, member, or shareholder's federal
income tax return;

(6) PRIOR CHANGE. If the taxpayer, within the last five taxable years
(including the year of change), (a) has made a change in the same method
of accounting (with or without obtaining the Commissioner's consent), or
(b) has applied to change the same method of accounting without effecting
the change (whether, for example, the application to change was withdrawn,
not perfected, not granted, or denied). For purposes of this paragraph
4.02(6), a change in method of accounting does not include the adoption of
a method of accounting in the initial tax return of a taxpayer or in the
first taxable year in which the taxpayer has the item to which the method
of accounting relates;

(7) SECTION 381(a) TRANSACTION. Except as otherwise provided in this
section 4.02(7), if the taxpayer engages in a transaction to which section
381(a) applies within the proposed taxable year of change (determined
without regard to any potential closing of the year under section
381(b)(1)).

(a) NO DIFFERENCES IN METHODS. An acquiring corporation may change its
method of accounting pursuant to this revenue procedure if the acquiring
corporation would be permitted to continue to use its prior method of
accounting under the rules of sections 1.381(c)(4)-1(b)(1) and (3)(i)
(taking into account the third sentence of section 1.381(c)(4)-1(b)(4)
relating to no prior method established by a party to the transaction) or
sections 1.381(c)(5)-1(b)(1) and (3)(i) (taking into account the second
sentence of section 1.381(c)(5)-1(b)(4)(i) relating to no prior inventory
method established by a party to the transaction) because all of the
parties to the transaction used the same method of accounting on the date
of distribution or transfer. The change pursuant to this revenue procedure
is ignored for purposes of determining whether on the date of distribution
or transfer the parties to the transaction used the same methods of
accounting under 1.381(c)(4)-1(b) or section 1.381(c)(5)-1(b), and thus
sections 1.381(c)(4)-1(b)(3)(ii) and (c) and sections
1.381(c)(5)-1(b)(3)(ii) and (c) will not apply.

(b) SEPARATE TRADES OR BUSINESSES. An acquiring corporation may change
pursuant to this revenue procedure a method of accounting used by a trade
or business operated by such corporation if the trade or business would be
permitted to continue to use its prior method of accounting under the
rules of sections 1.381(c)(4)-1(b)(2) or sections 1.381(c)(5)-1(b)(2). The
change pursuant to this revenue procedure is ignored for purposes of
determining whether on the date of distribution or transfer the parties to
the transaction used the same methods of accounting under section
1.381(c)(4)-1(b) or section 1.381(c)(5)-1(b), and thus sections
1.381(c)(4)-1(b)(3) and (c) and sections 1.381(c)(5)-1(b)(3) and (c) will
not apply.


(8) FINAL YEAR OF TRADE OR BUSINESS. If the taxpayer would be required
by section 5.04(3)(c) of this revenue procedure to take the entire amount
of the section 481(a) adjustment into account in computing taxable income
for the year of change.


.03 NONAUTOMATIC CHANGES. If a taxpayer is precluded by other than
sections 4.02(1) through 4.02(5) of this revenue procedure from using this
revenue procedure to make a change in method of accounting, the taxpayer
requesting such a change must file a Form 3115 with the Commissioner in
accordance with the requirements of section 1.446-1(e)(3)(i) and Rev.
Proc. 97-27 (1997-1 C.B. 680) (or any other applicable Code, regulation,
or administrative provision).


SECTION 5. TERMS AND CONDITIONS OF CHANGE

.01 IN GENERAL. An accounting method change filed under this revenue
procedure must be made pursuant to the terms and conditions provided in
this revenue procedure.

.02 YEAR OF CHANGE. The year of change is the taxable year designated
on the application and for which the application is timely filed under
section 6.02(3).

.03 SECTION 481(a) ADJUSTMENT. Unless otherwise provided in this
revenue procedure, a taxpayer making a change in method of accounting
under this revenue procedure must take into account a section 481(a)
adjustment in the manner provided in section 5.04 of this revenue
procedure.

.04 SECTION 481(a) ADJUSTMENT PERIOD.

(1) IN GENERAL. Except as otherwise provided in section 5.04(3) or the
APPENDIX of this revenue procedure, the section 481(a) adjustment period
for positive and negative section 481(a) adjustments is four taxable
years.

(2) SHORT PERIOD AS A SEPARATE TAXABLE YEAR. If the year of change, or
any taxable year during the section 481(a) adjustment period, is a short
taxable year, the section 481(a) adjustment must be included in income as
if that short taxable year were a full 12-month taxable year. See Rev.
Rul. 78-165 (1978-1 C.B. 276).

EXAMPLE 1. A calendar year taxpayer received permission to change an
accounting method beginning with the 2001 calendar year. The section
481(a) adjustment is $30,000 and the adjustment period is four taxable
years. The taxpayer subsequently receives permission to change its annual
accounting period to September 30, effective for the taxable year ending
September 30, 2002. The taxpayer must include $7,500 of the section 481(a)
adjustment in gross income for the short period from January 1, 2002,
through September 30, 2002.

EXAMPLE 2. Corporation X, a calendar year taxpayer, received permission
to change an accounting method beginning with the 2001 calendar year. The
section 481(a) adjustment is $30,000 and the adjustment period is four
taxable years. On July 1, 2003, Corporation Z acquires Corporation X in a
transaction to which section 381(a) applies. Corporation Z is a calendar
year taxpayer that uses the same method of accounting to which Corporation
X changed in 2001. Corporation X must include $7,500 of the section 481(a)
adjustment in gross income for its short period income tax return for
January 1, 2003, through June 30, 2003. In addition, Corporation Z must
include $7,500 of the section 481(a) adjustment in gross income in its
income tax return for calendar year 2003.


(3) SHORTENED OR ACCELERATED ADJUSTMENT PERIODS. The section 481(a)
adjustment period provided in section 5.04(1) or the APPENDIX of this
revenue procedure will be shortened or accelerated in the following
situations.

(a) DE MINIMIS RULE. A taxpayer may elect to use a one-year adjustment
period in lieu of the section 481(a) adjustment period otherwise provided
by this revenue procedure if the entire section 481(a) adjustment is less
than $25,000 (either positive or negative). A taxpayer makes an election
under this de minimis rule by so indicating on the application. For
example, for a taxpayer filing a Form 3115, the taxpayer must complete the
appropriate line on the Form 3115 to elect this de minimis rule.

(b) COOPERATIVES. A cooperative within the meaning of section 1381(a)
generally must take the entire amount of a 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).

(c) CEASING TO ENGAGE IN THE TRADE OR BUSINESS OR TERMINATING
EXISTENCE.

(i) IN GENERAL. A taxpayer that ceases to engage in a trade or business
or terminates its existence must take the remaining balance of any section
481(a) adjustment relating to the trade or business into account in
computing taxable income in the taxable year of the cessation or
termination. Except as provided in sections 5.04(3)(c)(iv) and (v) of this
revenue procedure, 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 the assets of the trade or business are transferred to
another taxpayer. For this purpose, "substantially all" has the same
meaning as in section 3.01 of Rev. Proc. 77-37 (1977-2 C.B. 568).

(ii) EXAMPLES OF TRANSACTIONS THAT ARE TREATED AS THE CESSATION OF A
TRADE OR BUSINESS. 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 under section 5.04(3)(c) of
this revenue procedure:

(A) the trade or business to which the section 481(a) adjustment
relates is incorporated;

(B) the trade or business to which the section 481(a) adjustment
relates is purchased by another taxpayer in a transaction to which section
1060 applies;

(C) the trade or business to which the section 481(a) adjustment
relates is terminated or transferred pursuant to a taxable liquidation;

(D) a division of a corporation ceases to operate the trade or business
to which the section 481(a) adjustment relates; or

(E) the assets of a trade or business to which the section 481(a)
adjustment relates are contributed to a partnership.


(iii) CONVERSION TO OR FROM S CORPORATION STATUS. Except as provided in
section 10.01 of the APPENDIX of this revenue procedure, no acceleration
of a section 481(a) adjustment is required under section 5.04(3)(c) of
this revenue procedure 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.

(iv) CERTAIN TRANSFERS TO WHICH SECTION 381(a) APPLIES. No acceleration
of the section 481(a) adjustment is required under section 5.04(3)(c) of
this revenue procedure when a taxpayer transfers substantially all the
assets of the trade or business that gave rise to the section 481(a)
adjustment to another taxpayer in a transfer to which section 381(a)
applies and the accounting method (the change to which gave rise to the
section 481(a) adjustment) is a tax attribute that is carried over and
used by the acquiring corporation immediately after the transfer pursuant
to section 381(c). The acquiring corporation is 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.

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

(A) IN GENERAL. No acceleration of the section 481(a) adjustment is
required under section 5.04(3)(c) of this revenue procedure when one
member of an affiliated group filing a consolidated return transfers
substantially all the assets of the trade or business that gave rise to
the section 481(a) adjustment to another member of the same consolidated
group in an exchange qualifying under section 351 and the transferee
member adopts and uses the same method of accounting (the change to which
gave rise to the section 481(a) adjustment) used by the transferor member.
The transferor member must continue to take the section 481(a) adjustment
into account pursuant to the terms and conditions set forth in this
revenue procedure. The transferor member must take into account activities
of the transferee member (or any successor) in determining whether
acceleration of the section 481(a) adjustment is required. For example,
except as provided in the following sentence, the transferor member must
take any remaining 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 section 481(a) adjustment
relates. The section 481(a) adjustment is not accelerated when the
transferee member engages in a transaction described in section
5.04(3)(c)(iv) or 5.04(3)(c)(v)(A) of this revenue procedure.

(B) EXCEPTION. The provisions of section 5.04(3)(c)(v)(A) of this
revenue procedure cease to apply and the transferor member must take any
remaining balance of the section 481(a) adjustment into account in the
taxable year immediately preceding any of the following: (1) the taxable
year the transferor member ceases to be a member of the group; (2) the
taxable year any transferee member owning substantially all the assets of
the trade or business which gave rise to the 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 rules
of paragraphs (j)(2), (j)(5), and (j)(6) of section 1.1502-13 apply, but
only if the method of accounting to which the transferor member changed
and to which the section 481(a) adjustment relates is adopted, carried
over, or used by any transferee member acquiring the assets of the trade
or business that gave rise to the section 481(a) adjustment immediately
after acquisition of such assets. For example, the transferor member is
not required to accelerate the section 481(a) adjustment if a transferee
member ceases to be a member of a consolidated group by reason of an
acquisition to which section 381(a) applies and the acquiring corporation
(1) is a member of the same group as the transferor member, and (2)
continues, under section 381(c)(4) and the regulations thereunder, to use
the same method of accounting as that used by the transferor member with
respect to the assets of the trade or business to which the section 481(a)
adjustment relates.


.05 NOL CARRYBACK LIMITATION FOR TAXPAYER SUBJECT TO CRIMINAL
INVESTIGATION. Generally, no portion of any net operating loss that is
attributable to a negative section 481(a) adjustment may be carried back
to a taxable year prior to the year of change that is the subject of any
pending or future criminal investigation or proceeding concerning (1)
directly or indirectly, any issue relating to the taxpayer's federal tax
liability, or (2) the possibility of false or fraudulent statements made
by the taxpayer with respect to any issue relating to its federal tax
liability.

.06 CHANGE TREATED AS INITIATED BY THE TAXPAYER. For purposes of
section 481, a change in method of accounting made under this revenue
procedure is a change in method of accounting initiated by the taxpayer.



SECTION 6. GENERAL APPLICATION PROCEDURES

.01 CONSENT. Pursuant to section 1.446-1(e)(2)(i), the consent of the
Commissioner is hereby granted to any taxpayer within the scope of this
revenue procedure to change its method(s) of accounting as described in
the APPENDIX to this revenue procedure. Such consent is granted only for
the change(s) of accounting method and the affected item(s) that are
clearly and expressly identified in the taxpayer's application. Such
consent is granted only to the extent that the taxpayer complies with all
the applicable provisions of this revenue procedure and implements the
change in method of accounting for the requested year of change.

.02 FILING REQUIREMENTS.

(1) APPLICATIONS.

(a) FORM. Ordinarily, a taxpayer applies for consent to change a method
of accounting pursuant to this revenue procedure by completing a Form
3115. In some cases, however, the provisions of this revenue procedure
applicable to a particular change may require or allow a taxpayer to file
a statement in lieu of a Form 3115 as an application for consent to make
such change. See, for example, section 5.02 of the APPENDIX of this
revenue procedure.

(b) SEPARATE APPLICATIONS. Ordinarily, a taxpayer must submit a
separate application for each change in method of accounting. In some
cases, however, the provisions of this revenue procedure applicable to
particular changes may require or allow a taxpayer to file a single
application with respect to two or more changes. See, for example, section
5.05 of the APPENDIX of this revenue procedure.

(c) CONTENTS. The taxpayer must submit a complete and accurate
application. The application must clearly and expressly identify the
method(s) of accounting to be changed and the item(s) to which the
change(s) applies.


(2) WAIVER OF TAXABLE YEAR FILING REQUIREMENT. The requirement under
section 1.446-1(e)(3)(i) to file a Form 3115 within the taxable year for
which the change is requested is waived for any application for a change
in method of accounting filed pursuant to this revenue procedure. See
section 1.446-1(e)(3)(ii).

(3) TIMELY DUPLICATE FILING REQUIREMENT.

(a) IN GENERAL. A taxpayer changing a method of accounting pursuant to
this revenue procedure must complete and file an application in duplicate.
The original must be attached to the taxpayer's timely filed (including
extensions) original federal income tax return for the year of change, and
a copy (with signature) of the application must be filed with the national
office (see section 6.02(6) of this revenue procedure for the address) no
earlier than the first day of the year of change and no later than when
the original is filed with the federal income tax return for the year of
change.

(b) LIMITED RELIEF FOR LATE APPLICATION.

(i) AUTOMATIC EXTENSION. An automatic extension of 6 months from the
due date of the return for the year of change (excluding extensions) is
granted to file an application, provided the taxpayer (A) timely filed
(including extensions) its federal income tax return for the year of
change, (B) files an amended return within the 6-month extension period in
a manner that is consistent with the new method of accounting, (C)
attaches the original application to the amended return, (D) files a copy
of the application with the national office no later than when the
original is filed with the amended return, and (E) writes at the top of
the application "FILED PURSUANT TO section 301.9100-2."

(ii) OTHER EXTENSIONS. A taxpayer that fails to file the application
for the year of change as provided in section 6.02(3)(a) or 6.02(3)(b)(i)
of this revenue procedure will not be granted an extension of time to file
under section 301.9100 of the Procedure and Administration Regulations,
except in unusual and compelling circumstances. See section
301.9100-3(c)(2).


(4) LABEL.

(a) In order to assist in processing an application under this revenue
procedure, the section of the APPENDIX of this revenue procedure
describing the specific change in method of accounting should be included
in the application. For example, a phrase such as "Section 1.01 of the
APPENDIX of Rev. Proc. 2002-9" should be included on the appropriate line
on the Form 3115.

(b) If a taxpayer is authorized under the APPENDIX of this revenue
procedure to file a statement in lieu of a Form 3115, the taxpayer must
include the taxpayer's name and employer identification number (or social
security number in the case of an individual) at the top of the first page
of the statement underneath any other required label.


(5) SIGNATURE REQUIREMENTS. The copy of the application 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 state law partnership, a member-manager on behalf of a limited
liability company, a trustee on behalf of a trust, or an individual
taxpayer on behalf of a sole proprietorship. If the taxpayer is a member
of a consolidated group, an application submitted on behalf of the
taxpayer must be signed by a duly authorized officer of the common parent.
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 application,
or perform any other act(s) regarding the application filed on behalf of
the taxpayer, a power of attorney reflecting such authorization(s) must be
attached to the copy of the application. In addition, the taxpayer must
attach to the application either a power of attorney reflecting such
authorization(s) or a statement thoroughly describing such
authorizations(s). A taxpayer's representative without a power of attorney
to represent the taxpayer as indicated in this section will not be given
any information regarding the application.

(6) WHERE TO FILE COPY.

(a) For a taxpayer other than an exempt organization, the copy of the
application must be addressed to the Commissioner of Internal Revenue,
Attention: CC:IT&A (Automatic Rulings Branch), P.O. Box 7604, Benjamin
Franklin Station, Washington, D.C. 20044 (or, in the case of a designated
private delivery service: Commissioner of Internal Revenue, Attention:
CC:IT&A (Automatic Rulings Branch), 1111 Constitution Avenue, NW,
Washington, D.C. 20224).

(b) For an exempt organization, the copy of the application must be
addressed to the Commissioner, Tax Exempt and Government Entities,
Attention: TEGE:EO, P.O. Box 27720, McPherson Station, Washington, D.C.
20038 (or, in the case of a designated private delivery service:
Commissioner, Tax Exempt and Government Entities, Attention: TEGE:EO, 1111
Constitution Avenue, NW, Washington, D.C. 20224).

(c) The copy of the application may also be hand delivered between the
hours of 7:00 a.m. and 4:00 p.m., to the courier's desk at the 12th Street
entrance of 1111 Constitution Avenue, NW, Washington, D.C. A receipt will
be given at the courier's desk. For a taxpayer other than an exempt
organization, the copy of the application must be addressed to the
Commissioner of Internal Revenue, Attention: CC:IT&A (Automatic Rulings
Branch), 1111 Constitution Avenue, NW, Washington, D.C. 20224. For an
exempt organization, the copy of the application must be addressed to the
Commissioner, Tax Exempt and Government Entities, Attention: TEGE:EO, 1111
Constitution Avenue, NW, Washington, D.C. 20224.

(7) NO USER FEE. A user fee is not required for an application filed
under this revenue procedure, and, except as provided in section
6.02(6)(c) of this revenue procedure, the receipt of an application filed
under this revenue procedure will not be acknowledged.

(8) SINGLE APPLICATION FOR CERTAIN CONSOLIDATED GROUPS. A parent
corporation may file a single application to change an identical method of
accounting on behalf of more than one member of a consolidated group. To
qualify, the taxpayers in the consolidated group must be members of the
same affiliated group under section 1504(a) that join in the filing of a
consolidated tax return, and they must be changing from the identical
present method of accounting to the identical proposed method of
accounting. All aspects of the change in method of accounting, including
the present and proposed methods, the underlying facts, and the authority
for the change, must be identical, except for the section 481(a)
adjustment. See section 15.07(3) of Rev. Proc. 2001-1 (2001-1 I.R.B. at
53) (or any successor) for the information required to be submitted with
the application.

(9) ADDITIONAL COPIES REQUIRED WHERE SCOPE RESTRICTIONS WAIVED. If (a)
one or more of the scope limitation provisions of section 4.02 this
revenue procedure would otherwise preclude a taxpayer from making a change
under this revenue procedure, but (b) the scope limitation provisions of
section 4.02 of this revenue procedure do not apply to the change sought
by the taxpayer (see, for example section 1.01 of the APPENDIX of this
revenue procedure), and (c) the taxpayer is under examination (as provided
in section 3.08 of this revenue procedure), before an appeals office, or
before a federal court on the date it files the copy of its application
with the national office, then the taxpayer must provide a copy of the
application to the examining agent(s), appeals officer(s), or counsel(s)
for the government, as appropriate, at the same time that it files a copy
of the application with the national office. The application must contain
the name(s) and telephone number(s) of the examining agent(s), appeals
officer(s) or counsel(s) for the government, as appropriate.


.03 TAXPAYER UNDER EXAMINATION.

(1) IN GENERAL. Except as otherwise provided in the APPENDIX of this
revenue procedure (see, for example, section 1.01 of the APPENDIX of this
revenue procedure), a taxpayer that is under examination may file an
application to change a method of accounting under section 6 of this
revenue procedure only if the taxpayer is within the provisions of section
6.03(2) (90-day window), 6.03(3) (120-day window), 6.03(4) (director
consent), or 6.03(5) (changes lacking audit protection) of this revenue
procedure. A taxpayer that files an application beyond the time periods
provided in the 90-day and 120-day windows is not eligible for the
automatic extension of time and will not be granted an extension of time
to file under section 301.9100, except in unusual and compelling
circumstances.

(2) 90-DAY WINDOW PERIOD.

(a) A taxpayer may file a copy of the application with the national
office to change a method of accounting under this revenue procedure
during the first 90-days of any taxable year (the "90-day window") if the
taxpayer has been under examination for at least 12 consecutive months as
of the first day of the taxable year. This 90-day window is not available
if the method of accounting the taxpayer is changing is an issue under
consideration at the time the copy of the application is filed or an issue
the examining agent(s) has placed in suspense at the time the copy of the
application is filed.

(b) A taxpayer changing a method of accounting under this 90-day window
must provide a copy of the application to the examining agent(s) at the
same time it files the copy of the application with the national office.
The application must contain the name(s) and telephone number(s) of the
examining agent(s). The taxpayer must attach to the application a separate
statement certifying that, to the best of the taxpayer's knowledge, the
same method of accounting is not an issue under consideration or an issue
placed in suspense by the examining agent(s).


(3) 120-DAY WINDOW PERIOD.

(a) A taxpayer may file a copy of the application with the national
office to change a method of accounting under this revenue procedure
during the 120-day period following the date an examination ends (the
"120-day window"), regardless of whether a subsequent examination has
commenced. This 120-day window is not available if the method of
accounting the taxpayer is changing is an issue under consideration at the
time a copy of the application is filed or an issue the examining agent(s)
has placed in suspense at the time the copy of the application is filed.

(b) A taxpayer changing a method of accounting under this 120-day
window must provide a copy of the application to the examining agent(s)
for any examination that is in process at the same time it files the copy
of the application with the national office. The application must contain
the name(s) and telephone number(s) of the examining agent(s). The
taxpayer must attach to the application a separate statement certifying
that, to the best of the taxpayer's knowledge, the same method of
accounting is not an issue under consideration or an issue placed in
suspense by the examining agent(s).


(4) CONSENT OF DIRECTOR.

(a) A taxpayer under examination may change its method of accounting
under this revenue procedure if the director consents to the filing of the
application. The director will consent to the filing of the application
unless, in the opinion of the director, the method of accounting to be
changed would ordinarily be included as an item of adjustment in the
year(s) for which the taxpayer is under examination. For example, the
director will consent to the filing of an application to change from a
clearly permissible method of accounting, or from an impermissible method
of accounting where the impermissible method was adopted subsequent to the
years under examination. The question of whether the method of accounting
from which the taxpayer is changing is permissible or was adopted
subsequent to the years under examination may be referred to the national
office as a request for technical advice under the provisions of Rev.
Proc. 2001-2 (or any successor).

(b) A taxpayer changing a method of accounting under this revenue
procedure with the consent of the director must attach to the copy of the
application a statement from the director consenting to the filing of the
application. In addition, the taxpayer must attach to its application a
statement certifying that it has obtained the written consent of the
director to the filing of the application and that the taxpayer will
maintain a copy of such consent available for inspection. The taxpayer
must provide a copy of the application to the director at the same time it
files a copy of the application with the national office. The application
must contain the name(s) and telephone number(s) of the examining
agent(s).


(5) CHANGES LACKING AUDIT PROTECTION.

(a) A taxpayer under examination may change its method of accounting
under this revenue procedure if the description of the change in the
APPENDIX of this revenue procedure provides that the change is not subject
to the audit protection provisions of section 7 of this revenue procedure.

(b) A taxpayer changing a method of accounting under this section
6.03(5) must provide a copy of the application to the examining agent(s)
for any examination that is in process at the same time it files the copy
of the application with the national office. The application must contain
the name(s) and telephone number(s) of the examining agent(s).


.04 TAXPAYER BEFORE AN APPEALS OFFICE. Except as otherwise provided in
the APPENDIX of this revenue procedure (see, for example, section 1.01 of
the APPENDIX of this revenue procedure), a taxpayer that is before an
appeals office must attach to the application a separate statement
certifying that, to the best of the taxpayer's knowledge, the same method
of accounting is not an issue under consideration by the appeals office.
The taxpayer must provide a copy of the application to the appeals officer
at the same time it files a copy of the application with the national
office. The application must contain the name and telephone number of the
appeals officer.

.05 TAXPAYER BEFORE A FEDERAL COURT. Except as otherwise provided in
the APPENDIX of this revenue procedure (see, for example, section 1.01 of
the APPENDIX of this revenue procedure), a taxpayer that is before a
federal court must attach to the application a separate statement
certifying that, to the best of the taxpayer's knowledge, the same method
of accounting is not an issue under consideration by the federal court.
The taxpayer must provide a copy of the application to the counsel for the
government at the same time it files a copy of the application with the
national office. The application must contain the name and telephone
number of the counsel for the government.

.06 COMPLIANCE WITH PROVISIONS. If a taxpayer to which this revenue
procedure applies changes to a method of accounting without complying with
all the applicable provisions of this revenue procedure (for example, the
taxpayer changes to a method of accounting that varies from the applicable
accounting method described in this revenue procedure or the taxpayer is
outside the scope of this revenue procedure), the taxpayer has initiated a
change in method of accounting without obtaining the consent of the
Commissioner as required by section 446(e). See sections 9.02 and 10.04 of
this revenue procedure.



SECTION 7. AUDIT PROTECTION FOR TAXABLE YEARS PRIOR TO YEAR OF CHANGE

.01 IN GENERAL. Except as provided in sections 6.03(5) or 7.02 or in
the APPENDIX of this revenue procedure, when a taxpayer timely files a
copy of the application with the national office in compliance with all
the applicable provisions of this revenue procedure, the Service will not
require the taxpayer to change its method of accounting for the same item
for a taxable year prior to the year of change.

.02 EXCEPTIONS.

(1) CHANGE NOT MADE OR MADE IMPROPERLY. The Service may change a
taxpayer's method of accounting for prior taxable years if (a) the
taxpayer fails to implement the change, (b) the taxpayer implements the
change but does not comply with all the applicable provisions of this
revenue procedure, or (c) the method of accounting is changed or modified
because there has been a misstatement or omission of material facts (see
section 8.02(2) of this revenue procedure).

(2) CHANGE IN SUB-METHOD. The Service may change a taxpayer's method of
accounting for prior taxable years if the taxpayer is changing a
sub-method of accounting within the method. For example, an examining
agent may propose to terminate the taxpayer's use of the LIFO inventory
method during a prior taxable year even though the taxpayer changes its
method of valuing increments in the current year.

(3) PRIOR YEAR SERVICE-INITIATED CHANGE. The Service may make
adjustments to the taxpayer's returns for the same item for taxable years
prior to the requested year of change to reflect a prior year
Service-initiated change reported as an issue pending or in a Revenue
Agent's Report.

(4) CRIMINAL INVESTIGATION. The Service may change a taxpayer's method
of accounting for the same item for taxable years prior to the year of
change if there is any pending or future criminal investigation or
proceeding concerning (a) directly or indirectly, any issue relating to
the taxpayer's federal tax liability for any taxable year prior to the
year of change, or (b) the possibility of false or fraudulent statements
made by the taxpayer with respect to any issue relating to its federal tax
liability for any taxable year prior to the year of change.


SECTION 8. EFFECT OF CONSENT

.01 IN GENERAL. A taxpayer that changes to a method of accounting
pursuant to this revenue procedure may be required to change or modify
that method of accounting for the following reasons:

(1) the enactment of legislation;

(2) a decision of the United States Supreme Court;

(3) the issuance of temporary or final regulations;

(4) the issuance of a revenue ruling, revenue procedure, notice, or
other statement published in the Internal Revenue Bulletin;

(5) the issuance of written notice to the taxpayer that the change in
method of accounting is not in accord with the current views of the
Service; or

(6) a change in the material facts on which the consent was based.


.02 RETROACTIVE CHANGE OR MODIFICATION. Except in rare or unusual
circumstances, if a taxpayer that changes its method of accounting under
this revenue procedure is subsequently required under section 8.01 of this
revenue procedure to change or modify that method of accounting, the
required change or modification will not be applied retroactively,
provided that:

(1) the taxpayer complied with all the applicable provisions of this
revenue procedure;

(2) there has been no misstatement or omission of material facts;

(3) there has been no change in the material facts on which the consent
was based;

(4) there has been no change in the applicable law; and

(5) the taxpayer to whom consent was granted acted in good faith in
relying on the consent, and applying the change or modification
retroactively would be to the taxpayer's detriment.


SECTION 9. REVIEW BY DIRECTOR

.01 IN GENERAL. The director must apply a change in method of
accounting made in compliance with all the applicable provisions of this
revenue procedure in determining the taxpayer's liability, unless the
director recommends that the change in method of accounting should be
modified or revoked. (See section 9.02 of this revenue procedure if a
change in method of accounting is made without complying with all the
applicable provisions of this revenue procedure.) The director will
ascertain if the change in method of accounting was made in compliance
with all the applicable provisions of this revenue procedure, including
whether:

(1) the representations on which the change was based reflect an
accurate statement of the material facts;

(2) the amount of the section 481(a) adjustment was properly
determined;

(3) the change in method of accounting was implemented in compliance
with all the applicable provisions of this revenue procedure. The director
will also ascertain whether:

(4) there has been any change in the material facts on which the change
was based during the period the method of accounting was used; and

(5) there has been any change in the applicable law during the period
the method of accounting was used.


.02 CHANGES NOT MADE IN COMPLIANCE WITH ALL APPLICABLE PROVISIONS. If
the director determines that the taxpayer has not complied with all of the
other applicable provisions of this revenue procedure, the director may:

(1) deny the change in method of accounting and require the taxpayer to
continue to use the prior method of accounting;

(2) deny the change in method of accounting and place the taxpayer on a
proper method of accounting (see section 2.10 of this revenue procedure);
or

(3) make any adjustments (including the amount of any section 481(a)
adjustment) that are necessary to bring the change in method of accounting
into compliance with all applicable provisions of this revenue procedure.


The director may impose any otherwise applicable penalty, addition to
tax, or additional amount on the understatement of tax attributable to the
change in method of accounting.

.03 NATIONAL OFFICE CONSIDERATION. If the director recommends that a
change in method of accounting (other than the section 481(a) adjustment)
made in compliance with all the applicable provisions of this revenue
procedure should be modified or revoked, the director will forward the
matter to the national office for consideration before any further action
is taken. Such a referral to the national office will be treated as a
request for technical advice, and the provisions of Rev. Proc. 2001-2 (or
any successor) will be followed.


SECTION 10. REVIEW BY NATIONAL OFFICE

.01 IN GENERAL. Any application filed under this revenue procedure may
be reviewed by the national office. If the application is reviewed by the
national office, the procedures in sections 10.02 through 10.04 of this
revenue procedure apply.

.02 INCOMPLETE APPLICATION.

(1) 30-DAY RULE. If the national office reviews an application and
determines that the application is not properly completed in accordance
with the instructions of the Form 3115 or the provisions of this revenue
procedure, or if supplemental information is needed, the national office
will notify the taxpayer. The notification will specify the information
that needs to be provided, and the taxpayer will be permitted 30 days from
the date of the notification to furnish the necessary information. The
national office reserves the right to impose shorter reply periods if
subsequent requests for additional information are made. An extension of
the 30-day period to furnish information, not to exceed 30 days, may be
granted to a taxpayer. A request for an extension of the 30-day period
must be made in writing and submitted within the initial 30-day period. If
the extension request is denied, there is no right of appeal.

(2) FAILURE TO PROVIDE ADDITIONAL INFORMATION. Ordinarily, if the
taxpayer fails to provide the additional information on a timely basis,
the application does not qualify for the automatic consent procedures of
this revenue procedure. If the national office determines that the
application does not qualify for the automatic consent procedures of this
revenue procedure because the taxpayer has failed to provide the
additional information on a timely basis, the national office will notify
the taxpayer that consent to make the change in method of accounting is
not granted.

.03 CONFERENCE IN THE NATIONAL OFFICE. If the national office
tentatively determines that the taxpayer has changed its method of
accounting without complying with all the applicable provisions of this
revenue procedure (for example, the taxpayer changed to a method of
accounting that varies from the applicable accounting method described in
this revenue procedure or the taxpayer is outside the scope of this
revenue procedure), the national office will notify the taxpayer of its
tentative adverse determination and will offer the taxpayer a conference
of right, if the taxpayer has requested a conference. For conference
procedures for taxpayers other than exempt organizations, see section 11
of Rev. Proc. 2001-1 (or any successor). For conference procedures for
exempt organizations, see section 12 of Rev. Proc. 2001-4, 2001-1 I.R.B.
121 (or any successor).

.04 NATIONAL OFFICE DETERMINATION.

(1) CONSENT NOT GRANTED. Except as provided in section 10.04(2) of this
revenue procedure, if the national office determines that a taxpayer has
changed its method of accounting without complying with all the applicable
provisions of this revenue procedure, the national office will notify the
taxpayer that consent to make the change in method of accounting is not
granted. In no event will an application under this revenue procedure be
treated as an application under Rev. Proc. 97-27 (or any successor).

(2) APPLICATION CHANGED. If the national office determines that a
taxpayer has changed its method of accounting without complying with all
the applicable provisions of this revenue procedure, the national office,
in its discretion, may allow the taxpayer (a) to make appropriate
adjustments to conform its change in method of accounting to the
applicable provisions of this revenue procedure, and (b) to make
conforming amendments to any federal income tax returns filed for the year
of change and subsequent taxable years. Any application changed under
section 10.04(2) of this revenue procedure is subject to review by the
director as provided in section 9 of this revenue procedure.


SECTION 11. APPLICABILITY OF REV. PROCS. 2001-1 AND 2001-4

Rev. Procs. 2001-1 and 2001-4 (or any successors) are applicable to
applications filed under this revenue procedure, unless specifically
excluded or overridden by other published guidance (including the special
procedures in this document).


SECTION 12. INQUIRIES

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


SECTION 13. EFFECTIVE DATE

.01 IN GENERAL. Except as provided in sections 13.02 and 13.03 of this
revenue procedure, this revenue procedure is effective for taxable years
ending on or after January 7, 2002. The Service will return any
application that is filed on or after December 31, 2001, if the
application is filed with the national office pursuant to the Code,
regulations, or administrative guidance other than this revenue procedure
and the change in method of accounting is within the scope of this revenue
procedure.

.02 TRANSITION RULES. If a taxpayer filed an application or ruling
request with the national office to make a change in method of accounting
described in the APPENDIX of this revenue procedure for a year of change
for which this revenue procedure is effective (see section 13.01 of this
revenue procedure), and the application or ruling request is pending with
the national office on January 7, 2002, the taxpayer may make the change
under this revenue procedure. However, the national office will process
the application or ruling request in accordance with the authority under
which it was filed, unless prior to the later of February 15, 2002, or the
issuance of the letter ruling granting or denying consent to the change,
the taxpayer notifies the national office that it wants to make the change
under this revenue procedure. If the taxpayer timely notifies the national
office that it wants to make the method change under this revenue
procedure, the national office will require the taxpayer to make
appropriate modifications to the application or ruling request to comply
with the applicable provisions of this revenue procedure. In addition, any
user fee that was submitted with the application or ruling request will be
returned to the taxpayer.

.03 SPECIAL RULES.

(1) CERTAIN UNIFORM CAPITALIZATION (UNICAP) METHODS USED BY TAXPAYERS
IN A FARMING BUSINESS. For a change in method of accounting described in
section 4.03 of the APPENDIX of this revenue procedure, this revenue
procedure is effective for the taxpayer's first taxable year ending after
August 21, 2000 (in the case of property that is not inventory in the
hands of the taxpayer), or the first taxable year beginning after August
21, 2000 (in the case of property that is inventory in the hands of the
taxpayer), whichever is applicable.

(2) STATED INTEREST ON SHORT-TERM LOANS OF CASH BANKS. For a change in
method of accounting described in section 13.02(1)(a) of the APPENDIX of
this revenue procedure, this revenue procedure is effective for taxable
years ending on or after December 31, 2001, and for any taxable year
ending before December 31, 2000, for which the requirements of section
13.02(2) of the APPENDIX of this revenue procedure are satisfied.


SECTION 14. EFFECT ON OTHER DOCUMENTS

.01 Rev. Proc. 99-49 is clarified, modified, amplified, and superseded.

.02 Reserved


SECTION 15. PAPERWORK REDUCTION ACT

The collections of information contained in this revenue procedure have
been reviewed and approved by the Office of Management and Budget in
accordance with the Paperwork Reduction Act (44 U.S.C. 3507) under control
number 1545-1551. An agency may not conduct or sponsor, and a person is
not required to respond to, a collection of information unless the
collection of information displays a valid OMB control number.

The collections of information in this revenue procedure are in
sections 6, 10, and sections 1C, 2, 2B, 3, 4, 5, 5A, 6, 7, 9, 10, 10A, 12,
12A and 13 of the APPENDIX. This information is necessary and will be used
to determine whether the taxpayer properly changed to a permitted method
of accounting. The collections of information are required for the
taxpayer to obtain consent to change its method of accounting. The likely
respondents are the following: individuals, farms, business or other
for-profit institutions, nonprofit institutions, and small businesses or
organizations.

The estimated total annual reporting and/or recordkeeping burden is
13,804 hours. The estimated annual burden per respondent/recordkeeper
varies from 1/6 hour to 8 1/2 hours, depending on individual
circumstances, with an estimated average of 1 1/2 hours. The estimated
number of respondents is 13,195. The estimated annual frequency of
responses is on occasion.

Books or records relating to a collection of information must be
retained as long as their contents may become material in the
administration of any internal revenue law. Generally tax returns and tax
return information are confidential, as required by 26 U.S.C. 6103.



DRAFTING INFORMATION

The principal author of this revenue procedure is Grant D. Anderson of
the Office of Associate Chief Counsel (Income Tax and Accounting). For
further information regarding this revenue procedure, contact Mr. Anderson
at (202) 622-4930 (not a toll-free call). For further information
regarding the APPENDIX of this revenue procedure, contact the following
individuals (calls are not toll-free): (1) for changes in method of
accounting under sections 1A.03 and 3.03 of the APPENDIX of this revenue
procedure, Merrill D. Feldstein of the Office of Associate Chief Counsel
(Income Tax & Accounting) at (202) 622-4950; (2) for changes in method of
accounting under section 1A.05 of the APPENDIX of this revenue procedure,
Kimberly L. Koch of the Office of Associate Chief Counsel (Income Tax and
Accounting) at (202) 622-5020; (3) for changes in method of accounting
under section 1A.06 of the APPENDIX of this revenue procedure, Angella L.
Warren of the Office of the Associate Chief Counsel (Income Tax and
Accounting) at (202) 622-4950; (4) for changes in methods of accounting
under sections 1C.01 and 12A.01 of the APPENDIX of this revenue procedure,
Christina Morrison of the Office of Associate Chief Counsel (Financial
Institutions and Products) at (202) 622-3950; (5) for changes in methods
of accounting under sections 2.01, 2.02, 2.04 and 2B of the APPENDIX of
this revenue procedure, Douglas Kim of the Office of Associate Chief
Counsel (Passthroughs and Special Industries) at (202) 622-3110; (6) for
changes in methods of accounting under section 2A.01 of the APPENDIX of
this revenue procedure, Lisa Shuman of the Office of Associate Chief
Counsel (Passthroughs and Special Industries) at (202) 622-3120; (7) for
changes in methods of accounting under section 4B of the APPENDIX of this
revenue procedure, Norm Paul of the Office of the Division
Counsel/Associate Chief Counsel (Tax Exempt and Government Entities) at
(202) 622-6060; (8) for changes in methods of accounting under sections
5.04, 6, 12, and 13 of the APPENDIX of this revenue procedure, William E.
Blanchard of the Office of Associate Chief Counsel (Financial Institutions
and Products) at (202) 622-3950; (9) for changes in method of accounting
under sections 5.05 and 9.03, Cheryl Lynn Oseekey of the Office of
Associate Chief Counsel (Income Tax and Accounting) at (202) 622-4960;
(10) for changes in methods of accounting under section 5A.01 of the
APPENDIX of this revenue procedure, Timothy Sebastian of the Office of
Associate Chief Counsel (Financial Institutions and Products) at (202)
622-3920; (11) for changes in methods of accounting under section 5A.02 of
the APPENDIX of this revenue procedure, Leo F. Nolan II of the Office of
Associate Chief Counsel (Income Tax and Accounting) at (202) 622-4970;
(12) for changes in methods of accounting under sections 9.04, 10.06, and
10.07 of the APPENDIX of this revenue procedure, Jeffery G. Mitchell or
Leo F. Nolan II of the Office of Associate Chief Counsel (Income Tax and
Accounting) at (202) 622-4930; (13) for changes in methods of accounting
under section 11 of the APPENDIX of this revenue procedure, Craig R. Wojay
of the Office of Associate Chief Counsel (Financial Institutions and
Products) at (202) 622-3920 (not a toll-free call); (14) for changes in
method of accounting under section 11B of the APPENDIX of this revenue
procedure, Milton Cahn of the Office of the Associate Chief Counsel
(International) at (202) 622-3870; (15) for changes in methods of
accounting under section 13.02 of the APPENDIX of this revenue procedure,
William E. Blanchard or Marsha A. Sabin of the Office of the Associate
Chief Counsel (Financial Institutions and Products) at (202) 622-3950; and
for all other sections, Mr. Anderson at (202) 622-4930.


APPENDIX -- CHANGES IN METHODS OF ACCOUNTING TO WHICH THIS REVENUE
PROCEDURE APPLIES

SECTION 1. COMMODITY CREDIT LOANS (SECTION 77)

.01 TREATING AMOUNTS RECEIVED AS LOANS.

(1) DESCRIPTION OF CHANGE AND SCOPE. This change applies to a taxpayer
that wants to change its method of accounting for loans received from the
Commodity Credit Corporation from including the loan amount in gross
income for the taxable year in which the loan is received to treating the
loan amount as a loan.

(2) SCOPE LIMITATIONS INAPPLICABLE. A taxpayer that wants to make this
change is not subject to the scope limitations of section 4.02 of this
revenue procedure.

(3) MANNER OF MAKING CHANGE. This change is made on a cut-off basis.
Accordingly, a § 481(a) adjustment is neither permitted nor required.


.02 RESERVED


SECTION 1A. TRADE OR BUSINESS EXPENSES (SECTION 162)

.01 ADVANCES MADE BY A LAWYER ON BEHALF OF CLIENTS -- DESCRIPTION OF
CHANGE AND SCOPE. This change applies to a lawyer handling cases on a
contingent fee basis that advances money to pay for costs of litigation or
for other expenses on behalf of clients and that wants to change the
method of accounting for such advances from treating them as deductible
business expenses to treating them as loans. See Boccardo v. United
States, 12 Cl. Ct. 184 (1987); Canelo v. Commissioner, 53 T.C. 217 (1969),
aff'd per curiam, 447 F.2d 484 (9th Cir. 1971).

.02 YEAR 2000 COSTS -- DESCRIPTION OF CHANGE AND SCOPE. This change
applies to a taxpayer that wants to change its method of accounting for
Year 2000 costs (as defined in Rev. Proc. 97-50, 1997-2 C.B. 525) to
conform to the method described in section 3 of Rev. Proc. 97-50. Section
3 of Rev. Proc. 97-50 provides that Year 2000 costs fall within the
purview of Rev. Proc. 69-21 (1969-2 C.B. 303), superceded by Rev. Proc.
2000-50 (2000-52 I.R.B. 601), and that the Service will not disturb a
taxpayer's treatment of its Year 2000 costs as deductible expenses or
capital expenditures if the taxpayer treats these costs in accordance with
Rev. Proc. 2000-50.

.03 AIRCRAFT MAINTENANCE COSTS.

(1) DESCRIPTION OF CHANGE. This change applies to a taxpayer that wants
to change its method of accounting for costs incurred to perform work on
aircraft airframes during heavy maintenance visits to conform with Rev.
Rul. 2001-4 (2001-3 I.R.B. 295) and Notice 2001-23 (2001-12 I.R.B. 911).

(2) YEAR OF CHANGE. This change applies only to the taxpayer's first or
second taxable year ending after December 21, 2000.

(3) SCOPE LIMITATIONS INAPPLICABLE. The scope limitations in section
4.02 of this revenue procedure are not applicable to this change unless
the taxpayer's method of accounting for costs incurred to perform work on
its aircraft airframes is an issue pending, within the meaning of section
6.01(6) of Rev. Proc. 2000-38 (2000-40 I.R.B. 310), at the time the copy
of its application is filed with the national office.

(4) TRANSITION RULE. If a taxpayer filed an application to make this
change under Rev. Proc. 97-27, and the application was pending with the
national office on February 16, 2001, the taxpayer may change its method
under Rev. Proc. 97-27 or this revenue procedure. However, the national
office will process the application in accordance with the procedure under
which it was filed, unless, prior to the later of April 1, 2001, or the
issuance of the letter ruling granting or denying consent to the change,
the taxpayer notifies the national office that it wants to change its
method of accounting under this revenue procedure. If the taxpayer timely
notifies the national office that it wants to change its method under this
revenue procedure, the taxpayer must make appropriate modifications to
comply with the applicable provisions of this revenue procedure. In
addition, any application fee that was submitted with the application will
be returned to the taxpayer.


.04 ISO 9000 COSTS.

(1) DESCRIPTION OF CHANGE. This change applies to a taxpayer that wants
to change its method of accounting for costs incurred to obtain, maintain
and renew ISO 9000 certification to conform with Rev. Rul. 2000-4 (2000-4
I.R.B. 331).

(2) SCOPE LIMITATIONS INAPPLICABLE. The scope limitations in section
4.02 of this revenue procedure are not applicable to this change.


.05 TRACK STRUCTURE EXPENDITURES.

(1) DESCRIPTION OF CHANGE AND SCOPE. This change applies to a taxpayer
that wants to change its method of accounting for track structure
expenditures (as defined by section 4.02 of Rev. Proc. 2001-46, 2001-37
I.R.B. 263) to the track maintenance allowance method described in Rev.
Proc. 2001-46.

(2) YEAR OF CHANGE. This change may be made for the taxpayer's first or
second taxable year ending on or after December 31, 2000.

(3) SCOPE LIMITATIONS INAPPLICABLE. The scope limitations in section
4.02 of this revenue procedure do not apply to this change.

(4) SPECIAL FILING REQUIREMENTS FOR CERTAIN TAXPAYERS. A taxpayer that
wants to make this change for its first taxable year ending on or after
December 31, 2000, and that files its return for such taxable year on or
before October 22, 2001, is not subject to the filing requirements in
section 6.02(2)(a) of this revenue procedure, provided that it complies
with the following filing requirements. The original application must be
attached to the taxpayer's amended federal income tax return for its first
taxable year ending on or after December 31, 2000. This amended return
must be filed no later than January 28, 2002. A copy of the application
must be filed with the national office no later than when the taxpayer's
amended return is filed.

(5) MANNER OF MAKING CHANGE.

(a) SECTION 481(a) ADJUSTMENT. If a taxpayer wants to make this change
and the taxpayer's treatment of its track structure expenditures is not an
issue under consideration in examination, before an area appeals office,
or before a federal court (within the meaning of section 3.08 of Rev.
Proc. 97-27, 1997-1 C.B. 680) on August 21, 2001, the taxpayer must make
the change using an adjustment under section 481(a). If the taxpayer did
not file Form R-1 for one or more of the taxable years to which the
section 481(a) adjustment relates, the taxpayer must compute the section
481(a) adjustment based on information equivalent to that required by Form
R-1.

(b) CUT-OFF METHOD. If a taxpayer wants to make this change and the
taxpayer's treatment of its track structure expenditures is an issue under
consideration in examination, before an area appeals office, or before a
federal court (within the meaning of section 3.08 of Rev. Proc. 97-27,
1997-1 C.B. 680) on August 21, 2001, the taxpayer must make the change
using a cut-off method. Under a cut-off method, only the items arising on
or after the beginning of the year of change are accounted for under the
track maintenance allowance method. Any items arising before the year of
change continue to be accounted for under the taxpayer's former method of
accounting. Because no items are duplicated or omitted from income when a
cut-off method is used to effect a change in accounting method, no section
481(a) adjustment is necessary.


(6) AUDIT PROTECTION. If a taxpayer's treatment of its track structure
expenditures is an issue under consideration in examination, before an
area appeals office, or before a federal court (within the meaning of
section 3.08 of Rev. Proc. 97-27, 1997-1 C.B. 680) on August 21, 2001, the
taxpayer does not receive audit protection under the provisions of section
7 of this revenue procedure.

(7) EFFECT OF CONSENT. For purposes of section 8.01 of this revenue
procedure, a change in the material fact on which the consent was based
includes a material change in how a taxpayer reports amounts on the Form
R-1 or a change in the taxpayer's obligation to file a Form R-1.


.06 RESTAURANT SMALLWARES PACKAGES.

(1) DESCRIPTION OF CHANGE. This change applies to a taxpayer engaged in
the trade or business of operating a restaurant or tavern (within the
meaning of section 4.01 of Rev. Proc. 2002-12, 2002-3 I.R.B. 374) who
wants to change its method of accounting for the cost of restaurant
smallwares to the smallwares method described in Rev. Proc. 2002-12 (i.e.,
as materials and supplies that are not incidental under section 1.162-3).

(2) SCOPE LIMITATIONS INAPPLICABLE. The scope limitations in section
4.02 of this revenue procedure are not applicable to this change.

(3) SECTION 481(a) ADJUSTMENT. A taxpayer changing its method of
accounting for restaurant smallwares under this section must take the
entire section 481(a) adjustment into account in computing taxable income
in the year of change.


SECTION 1B. BAD DEBTS (SECTION 166)

.01 CHANGE FROM RESERVE METHOD TO SPECIFIC CHARGE-OFF METHOD
DESCRIPTION OF CHANGE AND SCOPE. This change applies to a taxpayer (other
than a bank as defined in section 585(a)(2)) that wants to change its
method of accounting for bad debts from a reserve method (or other
improper method) to a specific charge-off method that complies with
section 166. For procedures applicable to banks, see section 585(c) (and
the regulations thereunder) and section 11 of the APPENDIX of this revenue
procedure.

.02 RESERVED.


SECTION 1C. AMORTIZABLE BOND PREMIUM (SECTION 171)

.01 REVOCATION OF SECTION 171(c) ELECTION.

(1) DESCRIPTION OF CHANGE AND SCOPE. This change applies to a taxpayer
that wants to change its method of accounting for amortizable bond premium
by revoking its section 171(c) election. Under section 171(c), a taxpayer
that holds certain taxable bonds may elect to amortize any bond premium on
the bonds in accordance with regulations prescribed by the Secretary.
Sections 1.171-1 through 1.171-5 provide rules relating to the
amortization of bond premium by a taxpayer. Section 1.171-4 provides the
procedures to make a section 171(c) election to amortize bond premium.

(2) REVOCATION OF ELECTION. The revocation of a section 171(c) election
applies to all taxable bonds that are held by the taxpayer on the first
day of the first taxable year for which the revocation is effective (year
of change), and to all taxable bonds that are subsequently acquired by the
taxpayer.

(3) MANNER OF MAKING THE CHANGE. This change is made using a cut-off
method and applies only to taxable bonds held during or after the year of
change. Consequently, for taxable bonds held at the beginning of the year
of change, the taxpayer may not amortize any remaining bond premium on the
bonds. Because cutoff treatment is prescribed for this change, the basis
of any bond, adjusted for amounts previously amortized during the period
of the election, is not affected by the revocation.

(4) ADDITIONAL REQUIREMENTS. On a statement attached to the
application, the taxpayer must provide:

(a) the reason(s) for revoking the election; and

(b) a description of the method by which, and the date on which, the
taxpayer made the section 171(c) election that is proposed to be revoked.


(5) AUDIT PROTECTION. A taxpayer receives audit protection under
section 7 of this revenue procedure in connection with this change.
However, the audit protection applicable to this change does not preclude
the Commissioner from examining the method used by the taxpayer to
determine the amount of amortizable bond premium under section 171(b) for
a taxable year prior to the year of change.


.02 RESERVED.


SECTION 2. DEPRECIATION OR AMORTIZATION (SECTION 56(a)(1), 56(g)(4)(A),
167, 168, OR 197, OR FORMER SECTION 168)

.01 IMPERMISSIBLE TO PERMISSIBLE METHOD OF ACCOUNTING FOR DEPRECIATION
OR AMORTIZATION.


(1) DESCRIPTION OF CHANGE.

(a) This change applies to a taxpayer that wants to change from an
impermissible method of accounting for depreciation or amortization
(depreciation) under which the taxpayer did not claim the depreciation
allowable, to a permissible method of accounting for depreciation under
which the taxpayer will claim the depreciation allowable.

(b) A change from a taxpayer's impermissible method of accounting for
depreciation under which the taxpayer did not claim the depreciation
allowable to a permissible method of accounting for depreciation under
which the taxpayer will claim the depreciation allowable is a change in
method of accounting for which the consent of the Commissioner is
required. Sections 1.167(e)-1(a) and 1.446-1(e)(2)(ii)(b). This method
change, however, does not include any correction of mathematical or
posting errors. Section 1.446-1(e)(2)(ii)(b).


(2) SCOPE.

(a) APPLICABILITY. This change applies to any taxpayer that has used an
impermissible method of accounting for depreciation in at least the two
taxable years immediately preceding the year of change, and is changing
that accounting method to a permissible method of accounting for
depreciation, for any item of property:

(i) for which, under the taxpayer's impermissible method of accounting,
the taxpayer has not taken into account any depreciation allowance or has
taken into account some depreciation but less than or more than the
depreciation allowable (claimed less than or more than the depreciation
allowable);

(ii) for which depreciation is determined under-56(a)(1), 56(g)(4)(A),
167, 168, 197, or 168 prior to its amendment in 1986 (former section 168);
and

(iii) that is owned by the taxpayer at the beginning of the year of
change.


(b) CERTAIN SCOPE LIMITATIONS INAPPLICABLE. The scope limitations in
sections 4.02(7) and 4.02(8) of this revenue procedure are not applicable
to this change.

(c) INAPPLICABILITY. This change does not apply to:

(i) any property to which section 1016(a)(3) (regarding property held
by a tax-exempt organization) applies;

(ii) any taxpayer that is subject to section 263A and that is required
to capitalize the costs with respect to which the taxpayer wants to change
its method of accounting under section 2.01 of this APPENDIX, if the
taxpayer is not capitalizing the costs as required;

(iii) any intangible property subject to section 56(g)(4)(A) or 167,
except for property subject to section 167(f) (regarding certain property
excluded from section 197);

(iv) any property subject to section 167(g) (regarding property
depreciated under the income forecast method);

(v) any section 1250 property that a taxpayer is reclassifying to an
asset class of Rev. Proc. 87-56 (1987-2 C.B. 674), or Rev. Proc. 83-35
(1983-1 C.B. 745), as appropriate, that does not explicitly include
section 1250 property (for example, asset class 57.0, Distributive Trades
and Services);

(vi) any property for which a taxpayer is revoking a timely valid
election, or making a late election, under section 167, 168, former
section 168, or section 13261(g)(2) or (3) of the Revenue Reconciliation
Act of 1993 (1993 Act), 1993-3 C.B. 1, 128 (relating to amortizable
section 197 intangibles). A taxpayer may request consent to revoke or make
the election by submitting a request for a letter ruling under Rev. Proc.
2001-1 (2001-1 I.R.B. 1) (or any successor);

(vii) any property subject to section 56(g)(4)(A) or 167 (other than
section 167(f), regarding certain property excluded from section 197), for
which a taxpayer is changing only the estimated useful life of the
property. A change in the estimated useful life of property for which
depreciation is determined under section 56(g)(4)(A) or 167 (other than
section 167(f)) must be made prospectively (see, for example, section
1.167(b)-2(c)). (In contrast, section 2.01 of this APPENDIX generally
applies to a change in the recovery period of property for which
depreciation is determined under section 56(a)(1), 56(g)(4)(A), 168 or
former section 168);

(viii) any depreciable property that changes use but continues to be
owned by the same taxpayer (see, for example, section 168(i)(5));

(ix) any property for which depreciation is determined in accordance
with section 1.167(a)-11 (regarding the Class Life Asset Depreciation
Range System (ADR));

(x) any change in method of accounting involving a change from
deducting the cost or other basis of any property as an expense to
capitalizing and depreciating the cost or other basis;

(xi) any change in method of accounting involving a change from one
permissible method of accounting for the property to another permissible
method of accounting for the property. For example:

(A) a change from the straight-line method of depreciation to the
income forecast method of depreciation for videocassettes. See Rev. Rul.
89-62 (1989-1 C.B. 78); or

(B) a change from charging the depreciation reserve with costs of
removal and crediting the depreciation reserve with salvage proceeds to
deducting costs of removal as an expense (provided the costs of removal
are not required to be capitalized under any provision of the Code, such
as, section 263(a)) and including salvage proceeds in taxable income (see
section 2.02 of this APPENDIX for making this change for property for
which depreciation is determined under section 167);


(xii) any change in method of accounting involving both a change from
treating the cost or other basis of the property as nondepreciable
property to treating the cost or other basis of the property as
depreciable property and the adoption of a method of accounting for
depreciation requiring an election under section 167, 168, former section
168, or section 13261(g)(2) or (3) of the 1993 Act (for example, a change
in the treatment of the space consumed in landfills placed in service in
1990 from nondepreciable to depreciable property (assuming section
2.01(2)(c)(xiii) of the APPENDIX does not apply) and the making of an
election under section 168(f)(1) to depreciate this property under the
unit-of-production method of depreciation under section 167);

(xiii) any change in method of accounting for an item of income or
deduction other than depreciation, even if a taxpayer's present method of
accounting may have resulted in the taxpayer claiming less than or more
than the depreciation allowable. For example, a change in method of
accounting involving:

(A) a change in inventory costs (for example, when property is
reclassified from inventory property to depreciable property, or vice
versa) (but see section 3.02 of this APPENDIX for making a change from
inventory property to depreciable property for unrecoverable line pack gas
or unrecoverable cushion gas); or

(B) a change in the character of a transaction from sale to lease, or
vice versa (but see section 2.03 of this APPENDIX for making this change);
or


(xiv) a change from determining depreciation under section 168 to
determining depreciation under former section 168 for any property subject
to the transition rules in section 203(b) or 204(a) of the Tax Reform Act
of 1986, 1986-3 (Vol. 1) C.B. 1, 60-80.


(3) ADDITIONAL REQUIREMENTS. A taxpayer also must comply with the
following:

(a) PERMISSIBLE DEPRECIATION METHOD. A taxpayer must change to a
permissible method of accounting for depreciation for the item of
property. This method is the same method that determines the depreciation
allowable for the item of property (as provided in section 2.01(6) of this
APPENDIX).

(b) STATEMENTS REQUIRED. A taxpayer must provide the following
statements, if applicable, and attach them to the completed application:

(i) a detailed description of the former and new methods of accounting.
A general description of these methods of accounting is unacceptable (for
example, MACRS to MACRS or erroneous method to proper method);

(ii) to the extent not provided elsewhere on the application, a
statement describing the taxpayer's business or income-producing
activities. Also, if the taxpayer has more than one business or
income-producing activity, a statement describing the taxpayer's business
or income-producing activity in which the item of property at issue is
primarily used by the taxpayer;

(iii) to the extent not provided elsewhere on the application, a
statement of the facts and law supporting the new method of accounting,
new classification of the item of property, and new asset class in, as
appropriate, Rev. Proc. 87-56 or Rev. Proc. 83-35. If the taxpayer is the
owner and lessor of the item of property at issue, the statement of the
facts and law supporting the new asset class also must describe the
business or income-producing activity in which that item of property is
primarily used by the lessee;

(iv) to the extent not provided elsewhere on the application, a
statement identifying the year in which the item of property was placed in
service;

(v) if the item of property is depreciated under former section 168, a
statement identifying the asset class in Rev. Proc. 83-35 that applies
under the taxpayer's former and new methods of accounting (if none, state
and explain);

(vi) if any item of property is public utility property within the
meaning of section 168(i)(10) or former section 167(l)(3)(A), as
applicable, a statement providing that the taxpayer agrees to the
following additional terms and conditions:

(A) a normalization method of accounting (within the meaning of former
section 167(l)(3)(G), former section 168(e)(3)(B), or section 168(i)(9),
as applicable) will be used for the public utility property subject to the
application;

(B) as of the beginning of the year of change, the taxpayer will adjust
its deferred tax reserve account or similar reserve account in the
taxpayer's regulatory books of account by the amount of the deferral of
federal income tax liability associated with the section 481(a) adjustment
applicable to the public utility property subject to the application; and

(C) within 30 calendar days of filing the federal income tax return for
the year of change, the taxpayer will provide a copy of the completed
application to any regulatory body having jurisdiction over the public
utility property subject to the application;


(vii) if the taxpayer is changing the classification of an item of
section 1250 property placed in service after August 19, 1996, to a retail
motor fuels outlet under section 168(e)(3)(E)(iii), a statement containing
the following representation: "For purposes of section 168(e)(3)(E)(iii)
of the Internal Revenue Code, the taxpayer represents that (A) 50 percent
or more of the gross revenue generated from the item of section 1250
property is from the sale of petroleum products (not including gross
revenue from related services, such as the labor cost of oil changes and
gross revenue from the sale of nonpetroleum products such as tires and oil
filters), (B) 50 percent or more of the floor space in the item of
property is devoted to the sale of petroleum products (not including floor
space devoted to related services, such as oil changes and floor space
devoted to nonpetroleum products such as tires and oil filters), or (C)
the item of section 1250 property is 1,400 square feet or less."; and

(viii) if the taxpayer is changing the classification of an item of
property from section 1250 property to section 1245 property under section
168 or former section 168, a statement of the facts and law supporting the
new section 1245 property classification, and a statement containing the
following representation: "Each item of property that is the subject of
the application filed under section 2.01 of the APPENDIX of Rev. Proc.
2002-9 for the year of change beginning [Insert the date], and that is
reclassified from [Insert, as appropriate: nonresidential real property,
residential rental property, 19-year real property, 18-year real property,
or 15-year real property] to an asset class of [Insert, as appropriate,
either: Rev. Proc. 87-56, 1987-2 C.B. 674, or Rev. Proc. 83-35, 1983-1
C.B. 745] that does not explicitly include section 1250 property, is
section 1245 property for depreciation purposes."


(4) SECTION 481(a) ADJUSTMENT. Because the adjusted basis of the
property is changed as a result of a method change made under section 2.01
of this APPENDIX (see section 2.01(5) of this APPENDIX), items are
duplicated or omitted. Accordingly, this change is made with a section
481(a) adjustment. This adjustment may result in either a negative section
481(a) adjustment (a decrease in taxable income) or a positive section
481(a) adjustment (an increase in taxable income) and may be a different
amount for regular tax, alternative minimum tax, and adjusted current
earnings purposes. This section 481(a) adjustment equals the difference
between the total amount of depreciation taken into account in computing
taxable income for the property under the taxpayer's former method of
accounting, and the total amount of depreciation allowable for the
property under the taxpayer's new method of accounting (as determined
under section 2.01(6) of this APPENDIX), for open and closed years prior
to the year of change. However, the amount of the section 481(a)
adjustment must be adjusted to account for the proper amount of the
depreciation allowable that is required to be capitalized under any
provision of the Code (for example, section 263A) at the beginning of the
year of change.

(5) BASIS ADJUSTMENT. As of the beginning of the year of change, the
basis of depreciable property to which section 2.01 of this APPENDIX
applies must reflect the reductions required by section 1016(a)(2) for the
depreciation allowable for the property (as determined under section
2.01(6) of this APPENDIX).

(6) MEANING OF DEPRECIATION ALLOWABLE.

(a) IN GENERAL. Section 2.01(6) of this APPENDIX provides the amount of
the depreciation allowable, determined under section 56(a)(1),
56(g)(4)(A), 167, 168, 197, or former section 168. This amount, however,
may be limited by other provisions of the Code (for example, section
280F).

(b) SECTION 56(a)(1) PROPERTY. The depreciation allowable for any
taxable year for property for which depreciation is determined under
section 56(a)(1) is determined by using the depreciation method, recovery
period, and convention provided for under section 56(a)(1) that applies
for the property's placed-in-service date.

(c) SECTION 56(g)(4)(A) PROPERTY. The depreciation allowable for any
taxable year for property for which depreciation is determined under
section 56(g)(4)(A) is determined by using the depreciation method,
recovery period or useful life, as applicable, and convention provided for
under section 56(g)(4)(A) that applies for the property's
placed-in-service date.

(d) SECTION 167 PROPERTY. Generally, for any taxable year, the
depreciation allowable for property for which depreciation is determined
under section 167, is determined either:

(i) under the depreciation method adopted by a taxpayer for the
property; or

(ii) if that depreciation method does not result in a reasonable
allowance for depreciation or a taxpayer has not adopted a depreciation
method for the property, under the straight-line depreciation method.


For determining the estimated useful life and salvage value of the
property, see sections 1.167(a)-1(b) and (c), respectively. The
depreciation allowable for any taxable year for property subject to
section 167(f) (regarding certain property excluded from section 197) is
determined by using the depreciation method and useful life prescribed in
section 167(f).

(e) SECTION 168 PROPERTY. The depreciation allowable for any taxable
year for property for which depreciation is determined under section 168,
is determined by using either:

(i) the general depreciation system in section 168(a); or

(ii) the alternative depreciation system in section 168(g) if the
property is required to be depreciated under the alternative depreciation
system pursuant to section 168(g)(1) or other provisions of the Code (for
example, property described in section 263A(e)(2)(A) or 280F(b)(1)).
Property required to be depreciated under the alternative depreciation
system pursuant to section 168(g)(1) includes property in a class (as set
out in section 168(e)) for which the taxpayer made a timely election under
section 168(g)(7).


(f) SECTION 197 PROPERTY. The depreciation allowable for any taxable
year for an amortizable section 197 intangible (including any property for
which a timely election under section 13261(g)(2) of the 1993 Act was
made) is determined in accordance with section 1.197-2(f) of the Income
Tax Regulations.

(g) FORMER SECTION 168 PROPERTY. The depreciation allowable for any
taxable year for property subject to former section 168 is determined by
using either:

(i) the accelerated method of cost recovery applicable to the property
(for example, for 5-year property, the recovery method under former
section 168(b)(1)); or

(ii) the straight-line method applicable to the property if the
property is required to be depreciated under the straight-line method (for
example, property described in former section 168(f)(12) or former section
280F(b)(2)) or if the taxpayer elected to determine the depreciation
allowance under the optional straight-line percentage (for example, the
straight-line method in former section 168(b)(3)).


.02 PERMISSIBLE TO PERMISSIBLE METHOD OF ACCOUNTING FOR DEPRECIATION.

(1) DESCRIPTION OF CHANGE. This change applies to a taxpayer that wants
to change from a permissible method of accounting for depreciation under
section 56(g)(4)(A)(iv) or 167 to another permissible method of accounting
for depreciation under section 56(g)(4)(A)(iv) or 167. Pursuant to
sections 1.167(a)-7(a) and (c), a taxpayer may account for depreciable
property either by treating each individual asset as an account or by
combining two or more assets in a single account and, for each account,
depreciation allowances are computed separately.


(2) SCOPE.

(a) APPLICABILITY. This change applies to any taxpayer wanting to make
a change in method of accounting for depreciation specified in section
2.02(3) of this APPENDIX for the property in an account:

(i) for which the present and proposed methods of accounting for
depreciation specified in section 2.02(3) of this APPENDIX are permissible
methods for the property under section 56(g)(4)(A)(iv) or 167; and

(ii) that is owned by the taxpayer at the beginning of the year of
change.


(b) CERTAIN SCOPE LIMITATIONS INAPPLICABLE. The scope limitations in
sections 4.02(7) and 4.02(8) of this revenue procedure are not applicable
to this change.

(c) INAPPLICABILITY. This change does not apply to:

(i) any taxpayer that is subject to section 263A and that is required
to capitalize the costs with respect to which the taxpayer wants to change
its method of accounting under section 2.02 of this APPENDIX, if the
taxpayer is not capitalizing the costs as required;

(ii) any property to which section 1016(a)(3) (regarding property held
by a tax-exempt organization) applies;

(iii) any intangible property, except distributor commissions (as
defined by section 2 of Rev. Proc. 2000-38, 2000-40 I.R.B. 310) that are
not amortizable section 197 intangibles and for which the taxpayer is
making the change in method of accounting for depreciation specified in
section 2.02(3)(l) or (m) of this APPENDIX;

(iv) any property described in section 167(f) (regarding certain
property excluded from section 197);

(v) any property subject to section 167(g) (regarding property
depreciated under the income forecast method);

(vi) any property for which depreciation is determined under section
56(a)(1), 56(g)(4)(A)(i), (ii), (iii), or (v), 168 or section 168 prior to
its amendment in 1986 (former section 168);

(vii) any property that the taxpayer elected under section 168(f)(1) or
former section 168(e)(2) to exclude from the application of, respectively,
section 168 or former section 168;

(viii) any property for which depreciation is determined in accordance
with section 1.167(a)-11 (regarding the Class Life Asset Depreciation
Range System (ADR));

(ix) any depreciable property for which the taxpayer is changing the
depreciation method pursuant to section 1.167(e)-1(b) (change from
declining-balance method to straight-line method), section 1.167(e)-1(c)
(certain changes for section 1245 property), or section 1.167(e)-1(d)
(certain changes for section 1250 property). These changes must be made
prospectively and are not permitted under the cited regulations for
property for which the depreciation is determined under section 168 or
former section 168; or

(x) any distributor commissions (as defined by section 2 of Rev. Proc.
2000-38, 2000-40 I.R.B. 310) for which the taxpayer is changing the useful
life under the distribution fee period method or the useful life method
(both described in Rev. Proc. 2000-38). A change in this useful life must
be made prospectively (see, for example, section 1.167(b)-2(c)).


(3) CHANGES COVERED. Section 2.02 of this APPENDIX only applies to the
following changes in methods of accounting for depreciation:

(a) a change from the straight-line method to the
sum-of-the-years-digits method, the sinking fund method, the
unit-of-production method, or the declining-balance method using any
proper percentage of the straight-line rate;

(b) a change from the declining-balance method using any percentage of
the straight-line rate to the sum-of-the-years-digits method, the sinking
fund method, or the declining-balance method using a different proper
percentage of the straight-line rate;

(c) a change from the sum-of-the-years-digits method to the sinking
fund method, the declining-balance method using any proper percentage of
the straight-line rate, or the straight-line method;

(d) a change from the unit-of-production method to the straight-line
method;

(e) a change from the sinking fund method to the straight-line method,
the unit-of-production method, the sum-of-the-years-digits method, or the
declining-balance method using any proper percentage of the straight-line
rate;

(f) a change in the interest factor used in connection with a compound
interest method or sinking fund method;

(g) a change in averaging convention as set forth in section
1.167(a)-10(b). However, as specifically provided in section
1.167(a)-10(b), in any taxable year in which an averaging convention
substantially distorts the depreciation allowance for the taxable year, it
may not be used (see Rev. Rul. 73-202, 1973-1 C.B. 81);

(h) a change from charging the depreciation reserve with costs of
removal and crediting the depreciation reserve with salvage proceeds to
deducting costs of removal as an expense and including salvage proceeds in
taxable income as set forth in section 1.167(a)-8(e)(2). See Rev. Rul.
74-455, 1974-2 C.B. 63. This change, however, may be made under this
revenue procedure only if:

(i) the change is applied to all items in the account for which the
change is being made; and

(ii) the removal costs are not required to be capitalized under any
provision of the Code (for example, section 263(a), 263A, or 280B);


(i) a change from crediting the depreciation reserve with the salvage
proceeds realized on normal retirement sales to computing and recognizing
gains and losses on such sales (see Rev. Rul. 70-165, 1970-1 C.B. 43);

(j) a change from crediting ordinary income (including the combination
method of crediting the lesser of estimated salvage value or actual
salvage proceeds to the depreciation reserve, with any excess of salvage
proceeds over estimated salvage value credited to ordinary income) with
the salvage proceeds realized on normal retirement sales, to computing and
recognizing gains and losses on such sales (see Rev. Rul. 70-166, 1970-1
C.B. 45);

(k) a change from item accounting for specific assets to multiple asset
accounting for the same assets, or vice versa;

(l) a change from one method described in Rev. Proc. 2000-38 for
amortizing distributor commissions (as defined by section 2 of Rev. Proc.
2000-38, 2000-40 I.R.B. 310) to another method described in Rev. Proc.
2000-38 for amortizing distributor commissions; or

(m) a change from pooling to a single asset, or vice versa, for
distributor commissions (as defined by section 2 of Rev. Proc. 2000-38,
2000-40 I.R.B. 310) for which the taxpayer is using the distribution fee
period method or the useful life method (both described in Rev. Proc.
2000-38).


(4) ADDITIONAL REQUIREMENTS. A taxpayer also must comply with the
following:

(a) BASIS FOR DEPRECIATION. At the beginning of the year of change, the
basis for depreciation of property to which this change applies is the
adjusted basis of the property as provided in section 1011 at the end of
the taxable year immediately preceding the year of change (determined
under the taxpayer's present method of accounting for depreciation). If
applicable under the taxpayer's proposed method of accounting for
depreciation, this adjusted basis is reduced by the estimated salvage
value of the property (for example, a change to the straight-line method).

(b) RATE OF DEPRECIATION. The rate of depreciation for property changed
to:

(i) the straight-line or sum-of-the-years-digits method of depreciation
must be based on the remaining useful life of the property as of the
beginning of the year of change; or

(ii) the declining-balance method of depreciation must be based on the
useful life of the property measured from the placed-in-service date, and
not the expected remaining life from the date the change becomes
effective.


(c) REGULATORY REQUIREMENTS. For changes in method of depreciation to
the sum-of-the-years-digits or declining-balance method, the property must
meet the requirements of section 1.167(b)-0 or 1.167(c)-1, as appropriate.

(d) PUBLIC UTILITY PROPERTY. If any item of property is public utility
property within the meaning of former section 167(l)(3)(A), the taxpayer
must attach to the application a statement providing that the taxpayer
agrees to the following additional terms and conditions:

(i) a normalization method of accounting within the meaning of former
section 167(l)(3)(G) will be used for the public utility property subject
to the application; and

(ii) within 30 calendar days of filing the federal income tax return
for the year of change, the taxpayer will provide a copy of the completed
application to any regulatory body having jurisdiction over the public
utility property subject to the application.


(5) SECTION 481(a) ADJUSTMENT. Because the adjusted basis of the
property is not changed as a result of a method change made under section
2.02 of this APPENDIX, no items are being duplicated or omitted.
Accordingly, the section 481(a) adjustment is zero.


.03 SALE OR LEASE TRANSACTIONS.

(1) DESCRIPTION OF CHANGE AND SCOPE.

(a) APPLICABILITY. This change applies to a taxpayer that wants to
change its method of accounting from:

(i) improperly treating property as sold by the taxpayer to properly
treating property as leased by the taxpayer;

(ii) improperly treating property as leased by the taxpayer to properly
treating property as sold by the taxpayer;

(iii) improperly treating property as purchased by the taxpayer to
properly treating property as leased by the taxpayer; and

(iv) improperly treating property as leased by the taxpayer to properly
treating property as purchased by the taxpayer.


(b) INAPPLICABILITY. This change does not apply to:

(i) a rent-to-own dealer that wants to change its method of accounting
for rent-to-own contracts described in section 3 of Rev. Proc. 95-38
(1995-2 C.B. 397); or

(ii) a taxpayer that holds assets for sale or lease, if any asset so
held is not the subject of a sale or lease transaction as of the beginning
of the year of change.


(2) MANNER OF MAKING THE CHANGE.

(a) The change in method of accounting under section 2.03 of this
APPENDIX is made using a cut-off method and applies to transactions
entered into on or after the beginning of the year of change. See section
2.06 of this revenue procedure.

(b) If a taxpayer wants to change its method of accounting for existing
sale or lease transactions, the taxpayer must file an application with the
Commissioner in accordance with the requirements of section
1.446-1(e)(3)(i) and Rev. Proc. 97-27. A change involving existing sale or
lease transactions will require a section 481(a) adjustment. Consent to
change a method of accounting for an existing sale or lease transaction is
granted only in unusual and compelling circumstances.


(3) NO AUDIT PROTECTION. A taxpayer does not receive audit protection
under section 7 of this revenue procedure in connection with this change.


.04 MODERN GOLF COURSE GREENS.

(1) DESCRIPTION OF CHANGE AND SCOPE. This change applies to a taxpayer
wanting to change the method of accounting for the cost of modern golf
course greens owned by the taxpayer at the beginning of the year of change
to conform with the holding in Rev. Rul. 2001-60 (2001-51 I.R.B. 587).
Rev. Rul. 2001-60 holds that the costs of land preparation undertaken by a
taxpayer in the original construction or reconstruction of modern greens
(as described in Rev. Rul. 2001-60) that is so closely associated with
depreciable assets, such as a network of underground drainage tiles or
pipes, that the land preparation will be retired, abandoned, or replaced
contemporaneously with those depreciable assets are to be capitalized and
depreciated over the recovery period of the depreciable assets with which
the land preparation is associated. However, the general earthmoving,
grading, and initial shaping of the area surrounding and underneath the
modern green that occur before the construction are inextricably
associated with the land and, therefore, the costs attributable to this
land preparation are added to the taxpayer's cost basis in the land and
are not depreciable.

(2) ADDITIONAL REQUIREMENTS. A taxpayer that changes its method of
accounting for the cost of modern golf course greens under section 2.04 of
this APPENDIX must change to a permissible method of accounting for
depreciation of modern greens. For purposes of section 168, the modern
green is includible in asset class 00.3, Land Improvements, of Rev. Proc.
87-56 (1987-2 C.B. 674).


SECTION 2A. RESEARCH AND EXPERIMENTAL EXPENDITURES (SECTION 174)

.01 CHANGES TO A DIFFERENT METHOD OR DIFFERENT AMORTIZATION PERIOD.

(1) DESCRIPTION OF CHANGE.

(a) This change applies to a taxpayer that wants to change the
treatment of expenditures that qualify as research and experimental
expenditures under section 174.

(b) Section 174 and the regulations thereunder provide the specific
rules for changing a method of accounting under section 174 for research
and experimental expenditures. Under section 174, a taxpayer may treat
research and experimental expenditures that are paid or incurred by the
taxpayer during the taxable year in connection with the taxpayer's trade
or business as expenses under section 174(a) or as deferred expenses
amortizable ratably over a period of not less than 60 months under section
174(b). Pursuant to section 1.174-1, research and experimental
expenditures that are not treated as expenses or deferred expenses under
section 174 must be treated as capital expenditures. Further, section
1.174-1 provides that the expenditures to which section 174 applies may
relate either to a general research program or to a particular project.

(c) If a taxpayer has not treated research and experimental
expenditures as expenses under section 174(a), sections 174(a)(2)(B) and
1.174-3(b)(2) provide that the taxpayer may, with consent, adopt the
expense method at any time.

(d) If a taxpayer has treated research and experimental expenditures as
expenses under section 174(a), sections 174(a)(3) and 1.174-3(b)(3)
provide that the taxpayer may, with consent, change to a different method
of treating research and experimental expenditures.

(e) If a taxpayer has treated research and experimental expenditures as
deferred expenses under section 174(b), sections 174(b)(2) and
1.174-4(b)(2) provide that the taxpayer may, with consent, change to a
different method of treating research or experimental expenditures or to a
different period of amortization for deferred expenses.


(2) SCOPE.

(a) APPLICABILITY. This change applies to any taxpayer that is
changing:

(i) from treating research and experimental expenditures for a
particular project or projects as expenses under section 174(a) to
treating such expenditures as deferred expenses under section 174(b), or
vice versa;

(ii) to a different period of amortization for research and
experimental expenditures for a particular project or projects that are
being treated as deferred expenses under section 174(b); or

(iii) from treating research and experimental expenditures for a
particular project or projects as expenses under section 174(a) or
deferred expenses under section 174(b) to treating such expenditures as a
capital expenditure under section 263(a), or vice versa.


(b) SCOPE LIMITATIONS CLARIFIED. The scope limitation under section
4.02(6) of this revenue procedure is applied on a project by project
basis.

(c) INAPPLICABILITY. This change does not apply to:

(i) a portion of the research and experimental expenditures paid or
incurred for a particular project during the year of change or in
subsequent taxable years (that is, the change must apply to all of such
expenditures; see sections 1.174-3(a) and 1.174-4(a)(5));

(ii) a change in the treatment of computer software costs under Rev.
Proc. 2000-50 (2000-52 I.R.B. 601) (but see section 2B of this APPENDIX
for making this change); or

(iii) a change in the treatment of Year 2000 costs under Rev. Proc.
97-50 (1997-2 C.B. 525) (but see section 1A.02 of this APPENDIX for making
this change).



(3) MANNER OF MAKING THE CHANGE.

(a) This change is made using a cutoff method and applies to all
research and experimental expenditures paid or incurred for a particular
project or projects during the year of change and in subsequent taxable
years. See section 2.06 of this revenue procedure and sections 174(b)(2),
1.174-3(a), 1.174-3(b)(2), and 1.174-4(a)(5).

(b) The requirement under sections 1.174-3(b)(2), 1.174-3(b)(3), and
1.174-4(b)(2) to file an application no later than the end of the first
taxable year in which the different method or different amortization
period is to be used is waived for this change. However, see section 6 of
this revenue procedure for filing requirements applicable under this
revenue procedure.

(c) The consent granted under this revenue procedure satisfies the
consent required under sections 174(a)(2)(B), 174(a)(3), 174(b)(2),
1.174-3(b)(2), 1.174-3(b)(3), and 1.174-4(b)(2).


(4) ADDITIONAL REQUIREMENT. A taxpayer must attach to the application a
written statement providing:

(a) the information required in section 1.174-3(b)(2) if the taxpayer
is changing to treating research and experimental expenditures as expenses
under section 174(a);

(b) the information required in section 1.174-3(b)(3) if the taxpayer
is changing from treating research and experimental expenditures as
expenses under section 174(a); or

(c) the information required in section 1.174-4(b)(2) if the taxpayer
is changing from treating research and experimental expenditures as
deferred expenses method under section 174(b) or is changing to a
different period of amortization for research and experimental
expenditures being treated as deferred expenses under section 174(b).


(5) NO AUDIT PROTECTION. A taxpayer does not receive audit protection
under section 7 of this revenue procedure in connection with this change.


.02 RESERVED.


SECTION 2B. COMPUTER SOFTWARE EXPENDITURES (SECTIONS 162, 167, AND 197)

.01 DESCRIPTION OF CHANGE. This change applies to a taxpayer that wants
to change its method of accounting for the costs of computer software to a
method described in Rev. Proc. 2000-50 (2000-52 I.R.B. 601). Section 5 of
Rev. Proc. 2000-50 describes the methods applicable to the costs of
developing computer software. Section 6 of Rev. Proc. 2000-50 describes
the method applicable to the costs of acquired computer software. Section
7 of Rev. Proc. 2000-50 describes the method applicable to leased or
licensed computer software. If a taxpayer treats the costs of computer
software in accordance with the applicable method described in Rev. Proc.
2000-50, the Service will not disturb the taxpayer's treatment of its
costs of computer software.

.02 SCOPE. This change applies to all costs of computer software as
defined in section 2 of Rev. Proc. 2000-50. However, this change does not
apply to any computer software that is subject to amortization as an
"amortizable section 197 intangible" as defined in section 197(c) and the
regulations thereunder, or to costs that a taxpayer has treated as
research and experimentation expenditures under section 174.

.03 INAPPLICABILITY. This change does not apply to a change in useful
life under the method described in sections 5.01(2) or 6.01(2) of Rev.
Proc. 2000-50.

.04 STATEMENT REQUIRED. If a taxpayer is changing to the method
described in section 5.01(2) of Rev. Proc. 2000-50, the taxpayer must
attach to the application a statement providing the information required
in section 8.02(2) of Rev. Proc. 2000-50.


SECTION 3. CAPITAL EXPENDITURES (SECTION 263)

.01 PACKAGE DESIGN COSTS.

(1) DESCRIPTION OF CHANGE AND SCOPE.

(a) APPLICABILITY. This change applies to a taxpayer that wants to
change its method of accounting for package design costs that are within
the scope of Rev. Proc. 97-35 (1997-2 C.B. 448) to one of the three
alternative methods of accounting for package design costs described in
section 5 of Rev. Proc. 97-35. The three alternative methods of accounting
for package design costs described are: (1) the capitalization method, (2)
the design-by-design capitalization and 60-month amortization method, and
(3) the pool-of-cost capitalization and 48-month amortization method.

(b) INAPPLICABILITY. This change does not apply to a taxpayer that
wants to change to the capitalization method for costs of developing (or
modifying) any package design that has an ascertainable useful life.


(2) ADDITIONAL REQUIREMENTS. If a taxpayer is changing its method of
accounting for package design costs to the capitalization method or the
design-by-design capitalization and 60-month amortization method, the
taxpayer must attach a statement to its timely filed application. The
statement must provide a description of each package design, the date on
which each was placed in service, and the cost basis of each (as
determined under sections 5.01(2) or 5.02(2) of Rev. Proc. 97-35).


.02 LINE PACK GAS; CUSHION GAS.

(1) DESCRIPTION OF CHANGE AND SCOPE. This change applies to a taxpayer
that wants to change its method of accounting for line pack gas or cushion
gas to a method consistent with the holding in Rev. Rul. 97-54 (1997-2
C.B. 23). Rev. Rul. 97-54 holds that the cost of line pack gas or cushion
gas is a capital expenditure under section 263, the cost of recoverable
line pack gas or recoverable cushion gas is not depreciable, and the cost
of unrecoverable line pack gas or unrecoverable cushion gas is depreciable
under sections 167 and 168.

(2) ADDITIONAL REQUIREMENTS. A taxpayer that changes its method of
accounting for unrecoverable line pack gas or unrecoverable cushion gas
under section 3.02 of this APPENDIX must change to a permissible method of
accounting for depreciation for the cost of that gas.


.03 REMOVAL COSTS.

(1) DESCRIPTION OF CHANGE. This change applies to a taxpayer that wants
to change its method of accounting for certain costs incurred in the
retirement and removal of depreciable assets to conform with Rev. Rul.
2000-7 (2000-9 I.R.B. 712).

(2) ADDITIONAL REQUIREMENTS.

(a) Except for assets for which depreciation is determined in
accordance with section 1.167(a)-11(ADR), the taxpayer's new method of
treating removal costs for assets accounted for in a multiple asset
account must be consistent with the taxpayer's method of treating salvage
proceeds. See Rev. Rul. 74-455 (1974-2 C.B. 63). (See section 2.02 of the
APPENDIX of this revenue procedure for changing a taxpayer's present
method of treating salvage proceeds.)

(b) If this change involves assets that are public utility property
within the meaning of section 168(i)(10) or former section 167(l)(3)(A),
the taxpayer must comply with the terms and conditions in section
2.01(3)(b)(vi) of the APPENDIX of this revenue procedure.


(3) SCOPE LIMITATIONS INAPPLICABLE. The scope limitations in section
4.02 of this revenue procedure are not applicable to this change.


SECTION 4. UNIFORM CAPITALIZATION (SECTION 263A)

.01 CERTAIN UNIFORM CAPITALIZATION (UNICAP) METHODS USED BY RESELLERS
AND RESELLER-PRODUCERS.

(1) DESCRIPTION OF CHANGE AND SCOPE.
(a) APPLICABILITY. This change applies to:

(i) a small reseller of personal property changing from a permissible
UNICAP method to a permissible non-UNICAP inventory capitalization method
in any taxable year that it qualifies as a small reseller;

(ii) a formerly small reseller changing from a permissible non-UNICAP
inventory capitalization method to a permissible UNICAP method in the
first taxable year that it does not qualify as a small reseller;

(iii) a reseller-producer changing from a permissible UNICAP method for
both its production and resale activities to a permissible simplified
resale method described in section 1.263A-3(d)(3) in any taxable year that
it qualifies to use a simplified resale method for both its production and
resale activities under section 1.263A-3(a)(4) (resellers with de minimis
production activities);

(iv) a reseller-producer changing from a permissible simplified resale
method described in section 1.263A-3(d)(3) for both its production and
resale activities to a permissible UNICAP method for both its production
and resale activities in the first taxable year that it does not qualify
to use a simplified resale method for both its production and resale
activities under section 1.263A-3(a)(4);

(v) a reseller that wants to change its permissible UNICAP method to
include a special reseller cost allocation rule; or

(vi) a reseller changing from a non-UNICAP method to a UNICAP method
specifically described in the regulations in any taxable year, other than
the first taxable year, that it does not qualify as a small reseller.


(b) SCOPE LIMITATIONS INAPPLICABLE. A taxpayer that wants to make a
change described in sections 4.01(1)(a)(i) through 4.01(1)(a)(iv) of this
APPENDIX is not subject to the scope limitations in section 4.02 of this
revenue procedure.

(c) INAPPLICABILITY. This change does not apply to a taxpayer making an
historic absorption ratio election under sections 1.263 A-2(b)(4) or
1.263A-3(d)(4), or to a taxpayer that wants to revoke an election to use
the historic absorption ratio with the simplified resale method (see
section 1.263A-3(d)(4)(iii)(B)).


(2) DEFINITIONS.

(a) "Reseller" means a taxpayer that acquires real or personal property
described in section 1221(1) for resale.

(b) "Small reseller" means a reseller whose average annual gross
receipts for the three immediately preceding taxable years (or fewer, if
the taxpayer has not been in existence during the three preceding taxable
years) do not exceed $10,000,000. See section 263A(b)(2)(B).

(c) "Formerly small reseller" means a reseller that no longer qualifies
as a small reseller.

(d) "Producer" means a taxpayer that produces real or tangible personal
property.

(e) "Reseller-producer" means a taxpayer that is both a producer and a
reseller.

(f) "Permissible UNICAP method" means a method of capitalizing costs
that is permissible under section 263A.

(g) "UNICAP method specifically described in the regulations" includes
the simplified service cost method using a labor-based allocation ratio
(section 1.263A-1(h)) and the simplified resale method without an historic
absorption ratio election (section 1.263A-3(d)), but does not include any
other reasonable allocation method within the meaning of section
1.263A-1(f)(4).

(h) "Special reseller cost allocation rule" means the 90-10 de minimis
rule to allocate a mixed service department's costs to property acquired
for resale (section 1.263A-1(g)(4)(ii)), the 1/3 - 2/3 rule to allocate
labor costs of personnel to purchasing activities (section
1.263A-3(c)(3)(ii)(A)), and the 90-10 de minimis rule to allocate a
dual-function storage facility's costs to property acquired for resale
(section 1.263A-3(c)(5)(iii)(C)).

(i) "Permissible non-UNICAP inventory capitalization method" means a
method of capitalizing inventory costs that is permissible under section
471.


(3) SECTION 481(a) ADJUSTMENT. Beginning with the year of change, a
taxpayer changing its method of accounting for costs pursuant to sections
4.01(1)(a)(i), 4.01(1)(a)(iii), or 4.01(1)(a)(iv) of this APPENDIX
generally must take any applicable section 481(a) adjustment into account
ratably over the same number of taxable years, not to exceed four, that
the taxpayer used its former method of accounting. A taxpayer changing its
method of accounting for costs pursuant to sections 4.01(1)(a)(ii),
4.01(1)(a)(v), or 4.01(1)(a)(vi) of this APPENDIX generally must taken any
applicable section 481(a) adjustment into account ratably over four
taxable years. See section 5.04(3) of this revenue procedure for
exceptions to this general rule.

(4) MULTIPLE CHANGES. Taxpayers making both this change and another
change in method of accounting in the same year of change must comply with
the ordering rules of section 1.263A-7(b)(2).

(5) EXAMPLE. The following example illustrates the principles of
section 4.01 of this APPENDIX for small resellers and formerly small
resellers. Assume X, a corporate reseller of personal property,
incorporated January 2, 1991, adopted a taxable year ending December 31. X
determines that its average annual gross receipts for the three taxable
years (or fewer, if applicable) immediately preceding taxable years 1991
through 2000 are as shown in the table below:

Average Annual Gross
Receipts for
the Three Taxable
Years Immediately
Preceding the
Current Taxable Year
--------------------
1991 $0
1992 5,000,000
1993 6,000,000
1994 7,000,000
1995 11,000,000
1996 11,000,000
1997 9,000,000
1998 8,000,000
1999 11,000,000
2000 12,000,000


Furthermore, X, which adopted the dollar-value LIFO inventory method,
has the following LIFO inventory balances determined without considering
the effects of the UNICAP method:

Beginning Ending
--------- ------
1995 $1,000,000 $1,100,000
1996 1,100,000 1,200,000
1997 1,200,000 1,300,000
1998 1,300,000 1,400,000
1999 1,400,000 1,500,000
2000 1,500,000 1,600,000


X was required by section 263A to change to the UNICAP method for 1995
because its average annual gross receipts for the three taxable years
immediately preceding 1995 were $11,000,000, which exceeded the
$10,000,000 ceiling permitted by the small reseller exception. Assume that
X was required to capitalize $80,000 of "additional section 263A costs" to
the cost of its 1995 beginning inventory because of this change in
inventory method. In addition, X was required to include one-fourth of the
section 481(a) adjustment when computing taxable income for each of the
four taxable years beginning with 1995. Thus, X was required to include a
$20,000 positive section 481(a) adjustment in its 1995 taxable income.

X elected to use the simplified resale method without an historic
absorption ratio election under section 1.263A-3(d)(3) for determining the
amount of additional section 263A costs to be capitalized to each LIFO
layer. Assume that X was required to add $10,000 of additional section
263A costs to the cost of its 1995 ending inventory because of the
$100,000 increment for 1995.

X's 1995 Ending Inventory:
--------------------------
Beginning Inventory (Without UNICAP costs) $1,000,000
1995 Increment 100,000
Additional section 263A Costs in Beginning Inventory 80,000
Additional section 263A Costs in 1995 Increment 10,000
----------
Total 1995 Ending Inventory $1,190,000
==========

X's Unamortized 1995 section 481(a) adjustment:
-----------------------------------------------
1995 section 481(a) Adjustment $80,000
Amount Included in 1995 Taxable Income <20,000>
-----------
Unamortized 1995 section 481(a) Adjustment -- 12/31/95 $60,000
===========


Because X failed to satisfy the small reseller exception for 1996, X
was required to continue using the UNICAP method for its inventory costs.
Furthermore, X was required to include $20,000 of the unamortized 1995
positive section 481(a) adjustment in 1996 taxable income. Assume that X
was required to add $10,000 of additional section 263A costs to the cost
of its 1996 ending inventory because of the $100,000 increment for 1996.



X's 1996 Ending Inventory:
--------------------------
Beginning Inventory (With UNICAP costs) $1,190,000
1996 Increment 100,000
Additional section 263A Costs in 1996 Increment 10,000
----------
Total 1996 Ending Inventory $1,300,000
==========

X's Unamortized 1995 section 481(a) Adjustment:
-----------------------------------------------
Unamortized 1995 section 481(a) Adjustment -- 12/31/95 $60,000
Amount Included in 1996 Taxable Income <20,000>
-----------
Unamortized 1995 section 481(a) Adjustment -- 12/31/96 $40,000
===========


Because X satisfies the small reseller exception for 1997, X may change
voluntarily from the UNICAP method to a permissible non-UNICAP inventory
capitalization method under section 4.01 of this APPENDIX. To reflect the
removal of the additional section 263A costs from the cost of its 1997
beginning inventory, X must compute a corresponding section 481(a)
adjustment, which is a negative $100,000 ($1,200,000 - $1,300,000).
Because X used the UNICAP method for only two years (that is, 1995 and
1996), X must include one-half of the section 481(a) adjustment when
computing taxable income for each of the two taxable years beginning with
1997. Thus, X must include a $50,000 negative section 481(a) adjustment in
1997 taxable income. In addition, X must include $20,000 of the
unamortized 1995 section 481(a) adjustment in 1997 taxable income.

X's 1997 Ending Inventory:
--------------------------
Beginning Inventory (With UNICAP costs) $1,300,000
1997 Increment 100,000
1997 section 481(a) Adjustment <Negative> <100,000>
-----------
Total 1997 Ending Inventory $1,300,000
===========

X's Unamortized 1995 section 481(a) Adjustment:
-----------------------------------------------
Unamortized 1995 section 481(a) Adjustment -- 12/31/96 $40,000
Amount Included in 1997 Taxable Income <20,000>
-----------
Unamortized 1995 section 481(a) Adjustment -- 12/31/97 $20,000
===========

X's Unamortized 1997 section 481(a) Adjustment:
-----------------------------------------------
1997 section 481(a) Adjustment <Negative> $<100,000>
Amount Included in 1997 Taxable Income 50,000
-----------
Unamortized 1997 section 481(a) Adjustment -- 12/31/97 $<50,000>
===========


X also satisfies the small reseller exception for 1998 and, therefore,
is not required to return to the UNICAP method for 1998. X, however, must
include $20,000 of the unamortized 1995 positive section 481(a) adjustment
and $50,000 of the unamortized 1997 negative section 481(a) adjustment in
1998 taxable income.

X's 1998 Ending Inventory:
==========================
Beginning Inventory (Without UNICAP costs) $1,300,000
1998 Increment 100,000
----------
Total 1998 Ending Inventory 1,400,000
==========

X's Unamortized 1995 section 481(a) Adjustment:
-----------------------------------------------
Unamortized 1995 section 481(a) Adjustment -- 12/31/97 $20,000
Amount Included in 1998 Taxable Income <20,000>
-----------
Unamortized 1995 section 481(a) Adjustment -- 12/31/98 $0
===========

X's Unamortized 1997 section 481(a) Adjustment:
-----------------------------------------------
Unamortized 1997 section 481(a) Adjustment -- 12/31/97 <50,000>
Amount Included in 1998 Taxable Income 50,000
-----------
Unamortized 1997 section 481(a) Adjustment -- 12/31/98 $0
===========


In 1999, X fails to satisfy the small reseller exception and,
therefore, must return to the UNICAP method as provided under section 4.01
of this APPENDIX. X changes to the simplified resale method without a
historic absorption ratio election under section 1.263A-3(d)(3). Assume
that X must capitalize $120,000 of additional section 263A costs to the
cost of its 1999 beginning inventory because of this change in inventory
method. In addition, X must include one-fourth of the section 481(a)
adjustment when computing taxable income for each of the four taxable
years beginning with 1999. Thus, X must include a $30,000 positive section
481(a) adjustment in its 1999 taxable income. Assume that X must add
$10,000 of additional section 263A costs to the cost of its 1999 ending
inventory because of the $100,000 increment for 1999.

X's 1999 Ending Inventory:
--------------------------
Beginning Inventory (Without UNICAP costs) $1,400,000
1999 Increment 100,000
Additional section 263A costs in Beginning Inventory 120,000
Additional section 263A costs in 1999 Increment 10,000
----------
Total 1999 Ending Inventory $1,630,000
==========

X's Unamortized 1999 section 481(a) adjustment:
-----------------------------------------------
1999 section 481(a) Adjustment $120,000
Amount Included in 1999 Taxable Income <30,000>
-----------
Unamortized 1999 section 481(a) Adjustment -- 12/31/99 $90,000
===========


Because X fails to satisfy the small reseller exception for 2000, X
must continue using the UNICAP method for its inventory costs.
Furthermore, X is required to include $30,000 of the unamortized 1999
positive section 481(a) adjustment in 2000 taxable income. Assume that X
is required to add $10,000 of additional section 263A costs to the cost of
its 2000 ending inventory because of the $100,000 increment for 2000.

X's 2000 Ending Inventory:
--------------------------
Beginning Inventory (With UNICAP costs) $1,630,000
2000 Increment 100,000
Additional section 263A Costs in 2000 Increment 10,000
----------
Total 2000 Ending Inventory $1,740,000
==========

X's Unamortized 1999 section 481(a) Adjustment:
-----------------------------------------------
Unamortized 1999 section 481(a) Adjustment -- 12/31/99 $90,000
Amount Included in 2000 Taxable Income <30,000>
-----------
Unamortized 1999 section 481(a) Adjustment -- 12/31/00 $60,000
===========


.02 CERTAIN UNIFORM CAPITALIZATION (UNICAP) METHODS USED BY PRODUCERS.

(1) APPLICABILITY. This change applies to a producer of real or
tangible personal property described in section 1.263A-2 that wants to
change to a UNICAP method (or methods) specifically described in the
regulations.

(2) INAPPLICABILITY. This change does not apply to a producer of real
or tangible personal property described in section 1.263A-2 that wants to
revoke an election to use the historic absorption ratio with the
simplified production method (see section 1.263A-2(b)(4)(iii)(B)).

(3) DEFINITION. A "UNICAP method specifically described in the
regulations" includes the specific identification method (section
1.263A-1(f)(2)), the burden rate method (section 1.263A-1(f)(3)), the
standard cost method (section 1.263A-1(f)(3)), the direct reallocation
method (section 1.263A-1(g)(4)(iii)(A)), the step-allocation method
(section 1.263A-1(g)(4)(iii)(B)), the simplified service-cost method
(section 1.263A-1(h)), and the simplified production method without the
historic absorption ratio election (section 1.263A-2(b)), but does not
include any other reasonable allocation method within the meaning of
section 1.263A-1(f)(4).

(4) MULTIPLE CHANGES. Taxpayers making both this change and another
change in method of accounting in the same year of change must comply with
the ordering rules of section 1.263A-7(b)(2).


.03 CERTAIN UNIFORM CAPITALIZATION (UNICAP) METHODS USED BY TAXPAYERS
IN A FARMING BUSINESS.

(1) DESCRIPTION OF CHANGE AND SCOPE. This change applies to a taxpayer
in a farming business that wants to change its method or methods of
accounting to comply with section 1.263A-4.

(2) YEAR OF CHANGE. This change only applies to the taxpayer's first
taxable year ending after August 21, 2000 (in the case of property that is
not inventory in the hands of the taxpayer), or the first taxable year
beginning after August 21, 2000 (in the case of property that is inventory
in the hands of the taxpayer), whichever is applicable.

(3) SCOPE LIMITATIONS INAPPLICABLE. The scope limitations in section
4.02 of this revenue procedure do not apply, provided the taxpayer's
method of accounting for property produced in a farming business is not an
issue under consideration within the meaning of section 3.09 of this
revenue procedure.

(4) MANNER OF MAKING CHANGE; AUDIT PROTECTION.

(a) NON-INVENTORY PROPERTY. In the case of property that is not
inventory in the hands of the taxpayer, the change applies to costs
incurred after August 21, 2000, is made on a cut-off basis as described in
section 2.06 of this revenue procedure, and is not subject to the audit
protection provisions of section 7 of this revenue procedure. However, a
taxpayer may receive such audit protection for non-inventory property by
taking into account any section 481(a) adjustment that results from the
change in method of accounting for non-inventory property to comply with
section 1.263A-4. A taxpayer that opts to determine a section 481(a)
adjustment (and, thus, obtain audit protection) for non-inventory property
must take into account only additional section 263A costs incurred after
December 31, 1986, in taxable years ending after December 31, 1986.

(b) INVENTORY PROPERTY. In the case of property that is inventory in
the hands of the taxpayer, the change applies to costs incurred after
December 31, 1986, in taxable years ending after December 31, 1986, and is
made by taking into account an adjustment under section 481(a). Such
adjustment must take into account only additional section 263A costs
incurred after December 31, 1986, in taxable years ending after December
31, 1986.


(5) MULTIPLE CHANGES. Taxpayers making both this change and another
change in method of accounting in the same year of change must comply with
the ordering rules of section 1.263A-7(b)(2).


.04 CHANGE TO NO LONGER CAPITALIZE RESEARCH AND EXPERIMENTAL
EXPENDITURES UNDER UNIFORM CAPITALIZATION (UNICAP)

(1) DESCRIPTION OF CHANGE AND SCOPE. This change applies to a taxpayer
who no longer wants to capitalize research and experimental expenditures
to inventory under section 263A and the regulations thereunder. A taxpayer
making this change must be in compliance with all other aspects of section
263A and the regulations thereunder and must have an effective election
under either section 174(a) or section 174(b).

(2) MANNER OF MAKING THE CHANGE. A taxpayer must attach to the
application the following:

(a) a representation that the section 174 costs the taxpayer proposes
not to capitalize to inventory under section 263A and the regulations
thereunder are costs that are subject to the taxpayer's effective election
under either section 174(a) or section 174(b) and the regulations
thereunder (Indicate which section applies to the taxpayer); and

(b) for the section 174 costs that it proposes to remove from inventory
costs, a representation that the taxpayer had identified the section 174
costs as section 174 costs at the time that the costs were capitalized to
inventory under section 263A and the regulations thereunder.


(3) NO AUDIT PROTECTION. A taxpayer does not receive audit protection
under section 7 of this revenue procedure in connection with this change.


SECTION 4A. LOSSES, EXPENSES AND INTEREST WITH RESPECT TO TRANSACTIONS
BETWEEN RELATED TAXPAYERS (SECTION 267)

.01 CHANGE TO COMPLY WITH SECTION 267. This change applies to a
taxpayer that wants to change its method or methods of accounting to
comply with the requirements of section 267, which disallows or defers
certain deductions attributable to transactions between related taxpayers.
However, this change applies to a change for stated interest only to the
extent the stated interest is qualified stated interest (as defined in
section 1.1273-1(c)).

.02 RESERVED.


SECTION 4B. DEFERRED COMPENSATION (SECTION 404)

.01 CHANGE TO COMPLY WITH SECTION 404(a)(11).

(1) DESCRIPTION OF CHANGE AND SCOPE.

(a) APPLICABILITY. This change applies to a taxpayer required to change
its method of accounting for its first taxable year ending after July 22,
1998, to comply with section 404(a)(11). Section 404(a)(11) provides that,
for purposes of determining under section 404 whether compensation of an
employee is deferred compensation and when deferred compensation is paid,
no amount is treated as received by the employee, or paid, until it is
actually received by the employee. Section 404(a)(11) overturns the
decision in Schmidt Baking Co. v. Commissioner, 107 T.C. 271 (1996), in
which the court held that a section 83(a) income inclusion event upon
securitization of vacation and severance pay benefits with a letter of
credit constitutes receipt of those benefits by employees for purposes of
determining whether an employer's deduction for the benefits is subject to
section 404. See Notice 99-16 (1999-1 C.B. 687) (March 29, 1999).

(b) SCOPE LIMITATIONS INAPPLICABLE. A taxpayer changing its method of
accounting to comply with section 404(a)(11) is not subject to the scope
limitations in section 4.02 of this revenue procedure.


(2) SECTION 481(a) ADJUSTMENT PERIOD. A taxpayer must take the section
481(a) adjustment into account ratably over three taxable years.

(3) NO AUDIT PROTECTION. A taxpayer does not receive audit protection
under section 7 of this revenue procedure in connection with this change.


.02 DEFERRED COMPENSATION.

(1) APPLICABILITY. This change applies to an accrual method taxpayer
that wants to change its method of accounting to treat bonuses or vacation
pay as follows (see section 404(a)(5) and section 1.404(b)-1T, Q&A 2):

(a) BONUSES.

(i) BONUSES NOT SUBJECT TO CAPITALIZATION UNDER SECTION 263A. If by the
end of the taxable year all the events have occurred that establish the
fact of the liability to pay a bonus and the amount of the liability can
be determined with reasonable accuracy (see section 1.446-1(c)(1)(ii)),
and the bonus is otherwise deductible, but the bonus is received by the
employee after the 15th day of the 3rd calendar month after the end of
that taxable year, to treat the bonus as deductible in the taxable year of
the employer in which or with which ends the taxable year of the employee
in which the bonus is includible in the gross income of the employee; or

(ii) BONUSES THAT ARE SUBJECT TO CAPITALIZATION UNDER SECTION 263A. If
by the end of the taxable year all the events have occurred that establish
the fact of the liability to pay a bonus and the amount of the liability
can be determined with reasonable accuracy (see section
1.446-1(c)(1)(ii)), and the bonus is otherwise deductible (without regard
to section 263A), but the bonus is received by the employee after the 15th
day of the 3rd calendar month after the end of that taxable year, to treat
the bonus as capitalizable (within the meaning of section 1.263A-1(c)(3))
in the taxable year of the employer in which or with which ends the
taxable year of the employee in which the bonus is includible in the gross
income of the employee; or


(b) VACATION PAY.


(i) VACATION PAY NOT SUBJECT TO CAPITALIZATION UNDER SECTION 263A. If
by the end of the taxable year all the events have occurred that establish
the fact of the liability to pay vacation pay and the amount of the
liability can be determined with reasonable accuracy (see section
1.446-1(c)(1)(ii)), and the vacation pay is otherwise deductible, but the
vacation pay is received by the employee after the 15th day of the 3rd
calendar month after the end of that taxable year, to treat the vacation
pay as deductible in the taxable year of the employer in which the
vacation pay is paid to the employee; or

(ii) VACATION PAY THAT IS SUBJECT TO CAPITALIZATION UNDER SECTION 263A.
If by the end of the taxable year all the events have occurred that
establish the fact of the liability to pay vacation pay and the amount of
the liability can be determined with reasonable accuracy (see section
1.446-1(c)(1)(ii)), and the vacation pay is otherwise deductible (without
regard to section 263A), but the vacation pay is received by the employee
after the 15th day of the 3rd calendar month after the end of that taxable
year, to treat the vacation pay as capitalizable (within the meaning of
section 1.263A-1(c)(3)) in the taxable year of the employer in which the
vacation pay is paid to the employee.


(2) INAPPLICABILITY. This change does not apply to the extent that it
is also described in section 4B.01 of this APPENDIX. This change also does
not apply to a taxpayer that is subject to section 263A and that is
required to capitalize the costs with respect to which the taxpayer wants
to change its method of accounting if the taxpayer is not capitalizing the
costs as required.


SECTION 5. METHODS OF ACCOUNTING (SECTION 446)

.01 CASH OR HYBRID METHOD TO ACCRUAL METHOD.

(1) DESCRIPTION OF CHANGE AND SCOPE.

(a) APPLICABILITY. This change applies to:

(i) a taxpayer that wants to change to an overall accrual method, or to
an overall accrual method in conjunction with the recurring item exception
under section 461(h)(3), from the cash receipts and disbursements method
(cash method), or from a hybrid method (the use of a combination of
accounting methods under which an item or items of income or expense are
reported on the cash method and another item or other items of income or
expense are reported on an accrual method); or

(ii) a taxpayer that is required to change to an overall accrual method
under section 448, but is ineligible to make the change under section
1.448-1(h)(2) (relating to the "first section 448 year").


(b) INAPPLICABILITY. This change does not apply to:

(i) a farmer;

(ii) a cooperative organization described in section 501(c)(12), 521,
or 1381;

(iii) an individual taxpayer, except for activities conducted as a sole
proprietorship;

(iv) a taxpayer required to use an inventory method of accounting,
unless:

(A) the taxpayer is using or adopts a proper inventory method under
section 471 and the regulations thereunder, the taxpayer is a small
reseller within the meaning of section 1.263A-3(a), and, if the taxpayer
has production activities, the taxpayer's production activities qualify
under the de minimis presumption of section 1.263A-3(a)(2)(iii);

(B) the taxpayer is using or adopts a proper inventory method under
section 471 and the regulations thereunder, the taxpayer is a reseller
eligible to use the simplified resale method under section 1.263A-3(d),
and the taxpayer is using or adopts a proper method under that section for
the year of change;

(C) the taxpayer is a producer of real or tangible personal property
described in section 1.263A-2, and is using both a proper inventory method
under section 471 and the regulations thereunder and a proper
capitalization method under section 263A and the regulations thereunder;
or

(D) the taxpayer is a producer of real or tangible personal property
described in section 1.263A-2, is using or adopts a proper inventory
method under section 471 and the regulations thereunder, and adopts a
UNICAP method or methods specifically described in the regulations. A
"UNICAP method specifically described in the regulations" includes the
specific identification method (section 1.263A-1(f)(2)), the burden rate
method (section 1.263A-1(f)(2)), the standard cost method (section
1.263A-1(f)(3)), the direct reallocation method (section
1.263A-1(g)(4)(iii)(A)), the step-allocation method (section
1.263A-1(g)(4)(iii)(B)), the simplified service cost method (section
1.263A-1(h)), or the simplified production method without the historic
absorption ratio election (section 1.263A-2(b)), but does not include any
other reasonable allocation method within the meaning of section
1.263A-1(f)(4).


(v) a taxpayer required or wanting to use a special method of
accounting, unless the taxpayer is permitted to change automatically to
the special method under this revenue procedure. A special method of
accounting is a method that deviates from the normal tax accounting rules,
such as the method of accounting for advance payments pursuant to either
Rev. Proc. 71-21 (1971-2 C.B. 549), or section 1.451-5, the installment
method of accounting under section 453, or a long-term contract method,
such as the percentage of completion method or the completed contract
method;

(vi) a taxpayer required to change to an overall accrual method under
section 448 and eligible to make the change under section 1.448-1(h)(2).
See section 1.448-1(h)(2), which provides an automatic consent procedure
for a taxpayer changing for the first taxable year that it is subject to
section 448. See also section 1.448-1(h)(1), which provides that section
1.448-1(h) does not apply to a change required under any Code section (or
regulations thereunder) other than section 448 (for example, a taxpayer
with inventories); or

(vii) a taxpayer engaged in two or more trades or businesses, unless
the taxpayer uses or adopts the same overall accrual method for each such
trade or business.


(2) SECTION SECTION 481(a) ADJUSTMENT.

(a) IN GENERAL. The section 481(a) adjustment takes into account the
accounts receivable, accounts payable, inventory, and any other item
determined to be necessary in order to prevent items from being duplicated
or omitted. The section 481(a) adjustment does not include any item of
income accrued but not received that was worthless or partially worthless
(within the meaning of section 166(a)) on the last day of the year
preceding the year of change.

(b) RECURRING ITEM EXCEPTION. As part of the change to an overall
accrual method, a taxpayer may adopt the recurring item exception for the
year of change if the taxpayer is eligible and follows the procedures of
section 1.461-5(d). If the taxpayer is eligible and wants to adopt this
method as specified in section 461(h)(3), the amount of the section 481(a)
adjustment must be modified to account for the amount of any additional
deduction.


(3) CHANGE TO A SPECIAL METHOD OF ACCOUNTING. If a taxpayer that wants
to change to an accrual method in conjunction with a change to a special
method of accounting is not permitted to make the change under this
revenue procedure, the taxpayer may request to make both changes only by
filing one application under the provisions of Rev. Proc. 97-27 (1997-1
C.B. 680). Only one user fee will be required for these changes.

(4) COORDINATION WITH SECTION 13.01 OF THE APPENDIX FOR SHORT-TERM
OBLIGATIONS. If a taxpayer subject to section 1281 wants to change its
method of accounting under this section 5.01 of the APPENDIX and, as part
of the change, is changing its method of accounting for interest income on
short-term obligations, then the change for interest income on short-term
obligations should be made under section 13.01 of the APPENDIX of this
revenue procedure and not under this section 5.01 of the APPENDIX.


.02 MULTI-YEAR SERVICE WARRANTY CONTRACTS.

(1) DESCRIPTION OF CHANGE AND SCOPE.

(a) APPLICABILITY. This change applies to an eligible accrual method
manufacturer, wholesaler, or retailer of motor vehicles or other durable
consumer goods that wants to change to the service warranty income method
described in section 5 of Rev. Proc. 97-38 (1997-2 C.B. 479). Under the
service warranty income method, a qualifying taxpayer may, in certain
specified and limited circumstances, include a portion of an advance
payment related to the sale of a multi-year service warranty contract in
gross income generally over the life of the service warranty obligation.

(b) INAPPLICABILITY. This change does not apply to a taxpayer outside
the scope of Rev. Proc. 97-38.


(2) MANNER OF MAKING THE CHANGE.

(a) This change is made using a cutoff method, under which the taxpayer
begins the use of the service warranty income method for all qualified
advance payment amounts received in the year of change and thereafter. See
section 2.06 of this revenue procedure.

(b) In accordance with section 1.446-1(e)(3)(ii), the requirement of
section 1.446-1(e)(3)(i) to file an application on Form 3115 is waived and
a statement in lieu of the Form 3115 is authorized for this change. The
statement must be identified at the top as follows: "CHANGE TO THE SERVICE
WARRANTY INCOME METHOD UNDER SECTION 5.02 OF THE APPENDIX OF REV. PROC.
2002-9." The statement must set forth the information required under
section 6.03 of Rev. Proc. 97-38, except that the statement under section
6.03(2) (that the taxpayer agrees to all of the terms and conditions of
the revenue procedure) also should refer to Rev. Proc. 2002-9.

(c) A taxpayer changing to the service warranty income method of
accounting under section 5.02 of this APPENDIX must satisfy the annual
reporting requirement set forth in section 6.04 of Rev. Proc. 97-38.


.03 MULTI-YEAR INSURANCE POLICIES FOR MULTI-YEAR SERVICE WARRANTY
CONTRACTS -- DESCRIPTION OF CHANGE AND SCOPE.

(1) APPLICABILITY. This change applies to a manufacturer, wholesaler,
or retailer of motor vehicles or other durable consumer goods that wants
to change its method of accounting for insurance costs paid or incurred to
insure its risks under multi-year service warranty contracts to the method
described in section 5.03(3) of this APPENDIX. Multi-year service warranty
contracts to which this change applies include only those separately
priced contracts sold by a manufacturer, wholesaler, or retailer also
selling the motor vehicles or other durable consumer goods (to the
ultimate customer or to an intermediary) underlying the contracts. The
classification of goods as "durable consumer goods" for purposes of this
change depends on the common usage of the goods, rather than the
purchaser's actual intended use of the goods.

(2) INAPPLICABILITY. This change does not apply to a taxpayer that
covers its risks under its multi-year service warranty contracts through
arrangements not constituting insurance.

(3) DESCRIPTION OF METHOD. If a taxpayer purchases a multi-year service
warranty insurance policy (in connection with its sale of multi-year
service warranty contracts to customers) by paying a lump-sum premium in
advance, the taxpayer must capitalize the amount paid or incurred and may
only obtain deductions for that amount by prorating (or amortizing) it
over the life of the insurance policy (whether the cash method or an
accrual method of accounting is used to account for service warranty
transactions).


.04 INTEREST ACCRUALS ON SHORT-TERM CONSUMER LOANS -- RULE OF 78s
METHOD.

(1) DESCRIPTION OF CHANGE AND SCOPE. This change applies to a taxpayer
that wants to change its method of accounting from the Rule of 78s method
to the constant yield method for stated interest (including stated
interest that is original issue discount) on short-term consumer loans
described in Rev. Proc. 83-40, 1983-1 C.B. 774, which was obsoleted by
Rev. Proc. 97-37 (1997-2 C.B. 455). However, this change only applies to
loans issued on or after the first day of the taxpayer's first taxable
year that begins on or after January 1, 1999.

(2) BACKGROUND.

(a) A short-term consumer loan is described in Rev. Proc. 83-40,
provided:

(i) the loan is a self-amortizing loan that requires level payments, at
regular intervals at least annually, over a period not in excess of five
years (with no balloon payment at the end of the loan term); and

(ii) the loan agreement between the borrower and the lender provides
that interest is earned, or upon the prepayment of the loan interest is
treated as earned, in accordance with the Rule of 78s method.


(b) In general, the Rule of 78s method allocates interest over the term
of a loan based, in part, on the sum of the periods' digits for the term
of the loan. See Rev. Rul. 83-84 (1983-1 C.B. 97) for a description of the
Rule of 78s method.

(c) In general, the constant yield method allocates interest and
original issue discount over the term of a loan based on a constant yield.
See section 1.1272-1(c) for a description of the constant yield method.
The Rule of 78s method generally front-loads interest as compared to the
constant yield method.

(d) Rev. Proc. 83-40 was obsoleted because, under sections 1.446-2 and
1.1272-1 (which were effective for debt instruments issued on or after
April 4, 1994), taxpayers generally must account for stated interest and
original issue discount on a debt instrument (loan) by using a constant
yield method. As a result, the Rule of 78s method is no longer an
acceptable method of accounting for federal income tax purposes.

(e) Notwithstanding sections 1.446-2 and 1.1272-1, as a matter of
administrative convenience, the Service will allow a taxpayer to use the
Rule of 78s method for stated interest on short-term consumer loans
described in Rev. Proc. 83-40 if the loans were issued prior to the first
day of the taxpayer's first taxable year that begins on or after January
1, 1999.


(3) MANNER OF MAKING THE CHANGE. This change applies to loans issued on
or after the first day of the taxpayer's first taxable year that begins on
or after January 1, 1999. As a result, any section 481 adjustment will be
computed only with respect to those loans.


.05 SMALL TAXPAYERS CHANGING TO OVERALL CASH METHOD.

(1) DESCRIPTION OF CHANGE. This change applies to a taxpayer (other
than a taxpayer described in section 448(a)(3)) with "average annual gross
receipts" (as defined in section 5.01 of Rev. Proc. 2001-10, 2001-2 I.R.B.
272) of $1,000,000 or less that wants to change to the overall cash method
of accounting as described in Rev. Proc. 2001-10.

(2) SCOPE LIMITATIONS INAPPLICABLE. The scope limitations in section
4.02 of this revenue procedure do not apply to this change.

(3) MANNER OF MAKING THE CHANGE. Taxpayers making this change are urged
to consult Rev. Proc. 2001-10 for additional guidance on the computation
of the section 481(a) adjustment and the completion of the application.

(4) AUTOMATIC CHANGES TO TREATING INVENTORIABLE ITEMS AS NONINCIDENTAL
MATERIALS AND SUPPLIES UNDER REV. PROC. 2001-10. A taxpayer desiring to
make both this change and the change to treating inventoriable items as
materials and supplies that are not incidental under section 1.162-3 (see
section 9.03 of the APPENDIX of this revenue procedure) may file a single
application for both changes.


.06 NONACCRUAL-EXPERIENCE METHOD.

(1) APPLICABILITY. This change applies to a taxpayer using an overall
accrual method that wants to change, and is eligible to change, to the
nonaccrual-experience method of accounting under section 448(d)(5) and
regulations thereunder for amounts to be received for the performance of
services by the taxpayer which (on the basis of experience) will not be
collected.

(2) INAPPLICABILITY. This change does not apply to any amount:

(a) if interest is required to be paid on such amount; or

(b) if a penalty is imposed for failure to timely pay such amount.


(3) SCOPE LIMITATIONS INAPPLICABLE. The scope limitations in section
4.02 of this revenue procedure are not applicable to this change.


SECTION 5A. TAXABLE YEAR OF INCLUSION (SECTION 451)

.01 ACCRUAL OF INTEREST ON NONPERFORMING LOANS.

(1) DESCRIPTION OF CHANGE AND SCOPE.

(a) This change applies to an accrual method taxpayer that is a bank as
defined in section 581 (or whose primary business is making or managing
loans) and wants to change its method of accounting to comply with
sections 451 and 1.451-1(a) for qualified stated interest (as defined in
section 1.1273-1(c)) on nonperforming loans.

(b) Section 1.451-1(a) requires income to be accrued when all the
events have occurred that fix the right to receive the income and the
amount thereof can be determined with reasonable accuracy. A taxpayer may
not stop accruing qualified stated interest on a nonperforming loan for
federal income tax purposes merely because payments on the loan are
overdue by a certain length of time, such as 90 days, even if a federal,
state, or other regulatory authority having jurisdiction over the taxpayer
permits or requires that the overdue interest not be accrued for
regulatory purposes.

(c) Under sections 451 and 1.451-1(a), a taxpayer must continue
accruing qualified stated interest on any nonperforming loan until either
(i) the loan is worthless under section 166 and charged off as a bad debt,
or (ii) the interest is determined to be uncollectible. In order for
interest to be determined uncollectible, the taxpayer must substantiate,
taking into account all the facts and circumstances, that it has no
reasonable expectation of payment of the interest. This substantiation
requirement is applied on a loan by loan basis.

(d) A taxpayer that changes its method of accounting under section
5A.01 of this APPENDIX must do so for all of its loans.


(2) SECTION 481(a) ADJUSTMENT. In general, the section 481(a)
adjustment for a method change under section 5A.01 of this APPENDIX
represents the amount of qualified stated interest, on the taxpayer's
nonperforming loans outstanding as of the beginning of the year of change,
that should have been accrued under sections 451 and 1.451-1(a) and was
not accrued. Interest for which the taxpayer, as of the beginning of the
year of change, has no reasonable expectation of payment is not taken into
account in determining the amount of the section 481(a) adjustment.



.02 CASH ADVANCES ON INSURANCE COMMISSIONS.

(1) DESCRIPTION OF CHANGE.

(a) This change applies to an insurance company that wishes to change
its method of accounting for cash advances on commissions paid to its
agents from deducting a cash advance in the taxable year in which the
advance is paid to the agent to deducting a cash advance in the taxable
year in which the advance is earned by the agent. This change applies only
to cash advances qualifying as loans under Rev. Proc. 2001-24 (2001-10
I.R.B. 788). An insurance company making this change must comply with all
other applicable provisions of Rev. Proc. 2001-24.

(b) An agent of an insurance company making this change is granted
consent to change the agent's method of accounting to report cash advances
in the year earned rather than in the year paid, so long as the agent's
change in method of accounting is consistent with the insurance company's
reporting. No separate filing is required by an agent.


(2) YEAR OF CHANGE. This change applies only to the insurance company's
first or second taxable year beginning after December 31, 1999.

(3) SCOPE LIMITATIONS INAPPLICABLE. The scope limitations in section
4.02 of this revenue procedure do not apply.

(4) MANNER OF MAKING THE CHANGE.

(a) The insurance company must attach to the application a statement
that complies with section 4.03 of Rev. Proc. 2001-24.

(b) This change is effected on a cutoff basis. See section 2.06 of this
revenue procedure. If the insurance company previously changed its method
of accounting for cash advances from "loan" to "earned cash advances" and
that change resulted in a section 481(a) adjustment that has not been
fully included in the insurance company's taxable income, the insurance
company must include the remaining section 481(a) adjustment in taxable
income in the year of change. Similarly, if the insurance company
previously changed its method of accounting for cash advances from "loans"
to "earned cash advances" and that change resulted in a section 481(a)
adjustment that has not been fully included in the agent's reported
income, the insurance company must include the remaining section 481(a)
adjustment on the agent's applicable Form 1099-MISC, Miscellaneous Income,
or Form W-2, Wage and Tax Statement, for the year of change.


.03 ADVANCE RENTALS -- DESCRIPTION OF CHANGE AND SCOPE. This change
applies to a taxpayer that wishes to change its method of accounting for
advance rentals (other than advance rentals subject to section 467 and the
regulations thereunder) to include such advance rentals in gross income in
the taxable year received. See section 1.61-8(b).


SECTION 6. OBLIGATIONS ISSUED AT DISCOUNT (SECTION 454)

.01 SERIES E, EE OR I U.S. SAVINGS BONDS.

(1) DESCRIPTION OF CHANGE AND SCOPE. This change applies to a cash
method taxpayer that wants to change its method of accounting for interest
income on Series E, EE, or I U.S. savings bonds. However, this change only
applies to a taxpayer that has previously made an election under section
454 to report as interest income the increase in redemption price on a
bond occurring in a taxable year, and that now wants to report this income
in the taxable year in which the bond is redeemed, disposed of, or finally
matures, whichever is earliest.

(2) MANNER OF MAKING THE CHANGE.

(a) This change is made using a cutoff method and is effective for any
increase in redemption price occurring after the beginning of the year of
change for all Series E, EE and I U.S. savings bonds held by the taxpayer
on or after the beginning of the year of change. See section 2.06 of this
revenue procedure.

(b) In accordance with section 1.446-1(e)(3)(ii), the requirement of
section 1.446-1(e)(3)(i) to file an application on Form 3115 is waived and
a statement in lieu of the Form 3115 is authorized for this change. The
statement must be identified at the top as follows: "CHANGE IN METHOD OF
ACCOUNTING UNDER SECTION 6.01 OF THE APPENDIX OF REV. PROC. 2002-9." The
statement must set forth:

(i) the Series E, EE, or I U.S. savings bonds for which this change in
accounting method is requested;

(ii) an agreement to report all interest on any bonds acquired during
or after the year of change when the interest is realized upon
disposition, redemption, or final maturity, whichever is earliest; and

(iii) an agreement to report all interest on the bonds acquired before
the year of change when the interest is realized upon disposition,
redemption, or final maturity, whichever is earliest, with the exception
of any interest income previously reported in prior taxable years.


.02 RESERVED.


SECTION 7. PREPAID SUBSCRIPTION INCOME (SECTION 455)

.01 PREPAID SUBSCRIPTION INCOME.

(1) DESCRIPTION OF CHANGE AND SCOPE. This change applies to an accrual
method taxpayer that wants to change its method of accounting for prepaid
subscription income to the method described in section 455 and the
regulations thereunder, including an eligible taxpayer that wants to make
the "within 12 months" election under section 1.455-2.

(2) MANNER OF MAKING THE CHANGE.

(a) This change is made using a cutoff method and does not apply to any
prepaid subscription income received before the first taxable year to
which the change applies. Any prepaid subscription income arising prior to
the year of change is accounted for under the taxpayer's former method of
accounting. See section 2.06 of this revenue procedure.

(b) In accordance with section 1.446-1(e)(3)(ii), the requirement of
section 1.446-1(e)(3)(i) to file an application on Form 3115 is waived and
a statement in lieu of the Form 3115 is authorized for this change. The
statement must be identified at the top as follows: "CHANGE IN METHOD OF
ACCOUNTING FOR PREPAID SUBSCRIPTION INCOME UNDER SECTION 7.01 OF THE
APPENDIX OF REV. PROC. 2002-9." The statement must set forth the
information required under section 1.455-6(b).

(c) The consent granted under this revenue procedure satisfies the
consent required under sections 455(c)(3) and 1.455-6(b).


.02 RESERVED.


SECTION 7A. SPECIAL RULES FOR LONG-TERM CONTRACTS (SECTION 460)

.01 CHANGE TO COMPLY WITH FINAL REGULATIONS UNDER SECTION 460.

(1) DESCRIPTION OF CHANGE AND SCOPE.

(a) APPLICABILITY. This change applies to taxpayers that must change
their methods of accounting to comply with the provisions of sections
1.460-1 through 1.460-5 for long-term contracts entered into on or after
January 11, 2001. See section 1.460-1(c)(2) for a description of when a
contract is viewed as "entered into."

(b) INAPPLICABILITY. This change does not apply to a taxpayer that
wishes to change its exempt-contract method of accounting (as defined in
section 1.460-4(c)). A taxpayer desiring to change its exempt-contract
method of accounting must obtain consent for such change by filing an
application under Rev. Proc. 97-27 (or successor).


(2) YEAR OF CHANGE. The year of change for this change is the
taxpayer's taxable year that includes January 11, 2001.

(3) MANNER OF MAKING CHANGE. This change is made on a cut-off basis.
Accordingly, a section 481(a) adjustment is neither permitted nor
required.

(4) SCOPE LIMITATIONS INAPPLICABLE. The scope limitations in section
4.02 of this revenue procedure do not apply to this change.

(5) NO AUDIT PROTECTION. A taxpayer does not receive audit protection
under section 7 of this revenue procedure in connection with this change.


.02 CHANGE FROM EXEMPT-CONTRACT METHOD TO PERCENTAGE-OF-COMPLETION
METHOD.

(1) DESCRIPTION OF CHANGE AND SCOPE. This change applies to a taxpayer
that

(a) is not required by section 460 and regulations thereunder to use
the percentage-of-completion method to account for its long-term
contracts, and

(b) wants to change its method of accounting for long-term contracts
from an exempt-contract method (see section 1.460-4(c)) to the percentage
of completion method (see section 1.460-4(b)).


(2) MANNER OF MAKING CHANGE. This change is made on a cut-off basis.
Accordingly, a section 481(a) adjustment is neither permitted nor
required. This change does not apply to any long-term contract entered
into before the year of change. See section 1.460-1(c)(2) for a
description of when a contract is viewed as "entered into."

(3) NO AUDIT PROTECTION. A taxpayer does not receive audit protection
under section 7 of this revenue procedure in connection with this change.


SECTION 8. TAXABLE YEAR OF DEDUCTION (SECTION 461)

.01 TIMING OF INCURRING LIABILITIES FOR EMPLOYEE COMPENSATION.

(1) SELF-INSURED EMPLOYEE MEDICAL BENEFITS.

(a) APPLICABILITY. This change applies to an accrual method taxpayer
that wants to change its method of accounting to treat an obligation to
pay an employee's medical expenses that is neither insured nor paid from a
welfare benefit fund within the meaning of section 419(e) as a liability
incurred in the taxable year in which the employee files the claim with
the employer. See United States v. General Dynamics Corp., 481 U.S. 239
(1987) (1987-2 C.B. 134).

(b) INAPPLICABILITY. This change does not apply to a taxpayer that is
subject to section 263A and that is required to capitalize the costs with
respect to which the taxpayer wants to change its method of accounting
under section 8.01 of this APPENDIX, if the taxpayer is not capitalizing
the costs as required.


(2) AMOUNTS TAKEN INTO ACCOUNT. Applicable provisions of the Code,
regulations, and other published guidance prescribe the manner in which a
liability that has been incurred is taken into account. For example, for a
taxpayer with inventories, direct labor costs must be included in
inventory costs and may be recovered through cost of goods sold. See
section 1.263A-1(e)(2)(i)(B). A taxpayer may not rely on the provisions
of section 8.01 of this APPENDIX to take a current year deduction.


.02 TIMING OF INCURRING LIABILITIES FOR REAL PROPERTY TAXES, PERSONAL
PROPERTY TAXES AND STATE INCOME TAXES.

(1) DESCRIPTION OF CHANGE. An accrual method taxpayer generally incurs
a liability in the taxable year that all the events have occurred that
establish the fact of the liability, the amount of the liability can be
determined with reasonable accuracy, and economic performance has occurred
with respect to the liability. See section 1.446-1(c)(1)(ii). Under
section 1.461-4(g)(6), if the liability of the taxpayer is to pay a tax,
economic performance occurs as the tax is paid to the government authority
that imposed the tax.

(2) SCOPE.

(a) APPLICABILITY. This change applies to an accrual method taxpayer
that wants to change its method of accounting to:

(i) treat liabilities (for which the all events test of section
461(h)(4) is otherwise met) for real property taxes, personal property
taxes, or state income taxes as incurred in the taxable year in which the
taxes are paid, under sections 461 and 1.461-4(g)(6);

(ii) account for real property taxes, personal property taxes or state
income taxes under the recurring item exception to the economic
performance rules under sections 461(h)(3) and 1.461-5(b)(1); or

(iii) revoke an election under section 461(c) (ratable accrual
election).


(b) INAPPLICABILITY. This change does not apply to a taxpayer that is
subject to section 263A and that is required to capitalize the costs with
respect to which the taxpayer wants to change its method of accounting
under section 8.02 of this APPENDIX, if the taxpayer is not capitalizing
the costs as required.


(3) AMOUNTS TAKEN INTO ACCOUNT. Applicable provisions of the Code,
regulations, and other published guidance prescribe the manner in which a
liability that has been incurred is taken into account. For example, for a
taxpayer with inventories, certain real property taxes must be included in
inventory costs and may be recovered through cost of goods sold. See
section 1.263A-1(e)(3)(ii)(L). A taxpayer may not rely on the
provisions of section 8.02 of this APPENDIX to take a current year
deduction.


.03 TIMING OF INCURRING LIABILITIES UNDER A WORKERS' COMPENSATION ACT,
TORT, BREACH OF CONTRACT, OR VIOLATION OF LAW.

(1) DESCRIPTION OF CHANGE AND SCOPE.

(a) APPLICABILITY. This change applies to an accrual method taxpayer
that wants to change its method of accounting for self-insured liabilities
(including any amounts not covered by insurance, such as a "deductible"
amount under an insurance policy) arising under any workers' compensation
act or out of any tort, breach of contract, or violation of law, to
treating the liability for the workers' compensation, tort, breach of
contract, or violation of law as being incurred in the taxable year in
which all the events have occurred which establish the fact of the
liability, the amount of the liability can be determined with reasonable
accuracy, and payment is made to the person to which the liability is
owed. See sections 461 and 1.461-4(g)(2).

(b) INAPPLICABILITY. This change does not apply:

(i) to a taxpayer that is subject to section 263A and that is required
to capitalize the costs with respect to which the taxpayer wants to change
its method of accounting under section 8.03 of this APPENDIX, if the
taxpayer is not capitalizing the costs as required;

(ii) if payment is made to a third party rather than to the person to
which the liability is owed. See section 1.461-4(g)(1); or

(iii) if payment is made by a third party.


(2) AMOUNTS TAKEN INTO ACCOUNT. Applicable provisions of the Code,
regulations, and other published guidance prescribe the manner in which a
liability that has been incurred is taken into account. For example, for a
taxpayer with inventories, certain employee benefit costs (including
workers' compensation) must be included in inventory costs and may be
recovered through costs of goods sold. See section 1.263A-1(e)(3)(ii)(D).
A taxpayer may not rely on the provisions of section 8.03 of this APPENDIX
to take a current year deduction.


.04 TIMING OF INCURRING LIABILITIES FOR PAYROLL TAXES.

(1) APPLICABILITY. This change applies to:

(a) an accrual method employer that wants to change its method of
accounting for

(i) FICA and FUTA taxes to a method consistent with the holding in Rev.
Rul. 96-51 (1996-2 C.B. 36) (Rev. Rul. 96-51 holds that, under the all
events test of section 461, an accrual method employer may deduct in Year
1 its otherwise deductible FICA and FUTA taxes imposed with respect to
year-end wages properly accrued in Year 1, but paid in Year 2, if the
requirements of the recurring item exception are met); and

(ii) state unemployment taxes and, in the event the taxpayer is an
employer within the meaning of the Railroad Retirement Tax Act (see
section 3231(a)), railroad retirement taxes to a method under which the
taxpayer may deduct in Year 1 its otherwise deductible state unemployment
taxes and railroad retirement taxes (if applicable) imposed with respect
to year-end wages properly accrued in Year 1, but paid in Year 2, if the
requirements of the recurring item exception are met (including the
requirement that, as of the end of the taxable year, all events have
occurred that establish the fact of the liability and the amount of the
liability can be determined with reasonable accuracy, see section
1.461-5(b)); or


(b) an accrual method employer that utilizes a method of accounting for
FICA and FUTA taxes that is consistent with the holding in Rev. Rul. 96-51
(1996-2 C.B. 36) and wishes to change its method of accounting for state
unemployment taxes and, in the event the employer is an employer within
the meaning of the Railroad Retirement Tax Act (see section 3231(a)),
railroad retirement taxes to a method under which the taxpayer may deduct
in Year 1 its otherwise deductible state unemployment taxes and railroad
retirement taxes (if applicable) imposed with respect to year-end wages
properly accrued in Year 1, but paid in Year 2, if the requirements of the
recurring item exception are met (including the requirement that, as of
the end of the taxable year, all events have occurred that establish the
fact of the liability and the amount of the liability can be determined
with reasonable accuracy, see section 1.461-5(b)).



(2) INAPPLICABILITY. This change does not apply to a taxpayer that is
subject to section 263A and that is required to capitalize the costs with
respect to which the taxpayer wants to change its method of accounting
under section 8.04 of this APPENDIX, if the taxpayer is not capitalizing
the costs as required.

(3) RECURRING ITEM EXCEPTION. A taxpayer that previously has not
changed to or adopted the recurring item exception for FICA, FUTA, state
unemployment taxes and railroad retirement taxes (if applicable) must
change to the recurring item exception method for FICA, FUTA, state
unemployment taxes and railroad retirement taxes (if applicable) as
specified in section 461(h)(3) as part of this change.

(4) AMOUNTS TAKEN INTO ACCOUNT. Applicable provisions of the Code,
regulations, and other published guidance prescribe the manner in which a
liability that has been incurred is taken into account. For example, for a
taxpayer with inventories, certain taxes must be included in inventory
costs and may be recovered through cost of goods sold. See section
1.263A-1(e)(3)(ii)(L). A taxpayer may not rely on the provisions of
section 8.04 of this APPENDIX to take a current year deduction.


.05 COOPERATIVE ADVERTISING.

(1) DESCRIPTION OF CHANGE AND SCOPE. This change applies to a taxpayer
that wants to change its method of accounting for cooperative advertising
costs to a method consistent with the holding in Rev. Rul. 98-39 (1998-2
C.B. 198). Rev. Rul. 98-39 generally provides that, under the all events
test of section 461, an accrual method manufacturer's liability to pay a
retailer for cooperative advertising services is incurred in the year in
which the services are performed, provided the manufacturer is able to
reasonably estimate this liability, and even though the retailer does not
submit the required claim form until the following year.

(2) SCOPE LIMITATIONS INAPPLICABLE. A taxpayer that wants to make this
change for its first or second taxable year ending on or after August 17,
1998, is not subject to the scope limitations in section 4.02 of this
revenue procedure.


.06 DISTRIBUTOR COMMISSIONS.

(1) CHANGES MADE UNDER REV. PROC. 2000-38.

(a) DESCRIPTION OF CHANGE AND SCOPE. This change applies to taxpayers
that wish to change their method of accounting for distributor commissions
(as defined by section 2 of Rev. Proc. 2000-38, 2000-40 I.R.B. 310) to the
distribution fee period method, the 5-year method, or the useful life
method (all described in Rev. Proc. 2000-38) for the taxpayer's taxable
year that includes January 1, 2001.

(b) INAPPLICABILITY. This change does not apply to an amortizable
section 197 intangible (including any property for which a timely election
under section 13261(g)(2) of the 1993 Act was made).

(c) SCOPE LIMITATIONS.

(i) A taxpayer that files a copy of its application for this change
with the national office on or before April 2, 2001 is not subject to the
scope limitations in section 4.02 of this revenue procedure, unless the
taxpayer's method of accounting for distributor commissions is an issue
under consideration before a federal court within the meaning of section
3.09(3) of this revenue procedure.

(ii) If the taxpayer's method of accounting for distributor commissions
is an issue pending at the time that a Form 3115 is filed with the
national office, the taxpayer also must provide to the examining agent or
appeals officer, as appropriate, an executed closing agreement
substantially in the form set forth in APPENDIX A of Rev. Proc. 2000-38.
For purposes of this change, the taxpayer's method of accounting for
distributor commissions is an issue pending if the Service has given the
taxpayer written notification indicating an adjustment is being made or
will be proposed with respect to the taxpayer's method of accounting for
distributor commissions. This will normally occur after the Service has
gathered information sufficient to determine that a proposed adjustment is
appropriate and justified, although the exact amount of the adjustment may
not yet be determined.


(d) MANNER OF MAKING THE CHANGE.

(i) CUT-OFF METHOD. The change must be made using a cut-off method, and
applies only to distributor commissions paid or incurred on or after
January 1, 2001. Because no items are duplicated or omitted from income
when a cut-off method is used, a section 481(a) adjustment described in
section 5.03 of this revenue procedure is not necessary. See section 2.06
of this revenue procedure.

(ii) YEAR OF CHANGE. The year of change is the taxpayer's taxable year
that includes January 1, 2001.

(iii) FILING REQUIREMENTS. Notwithstanding section 6.02(3)(a) of this
revenue procedure, a taxpayer making this change may file the required
copy of its application with the national office before the first day of
the year of change if the taxpayer otherwise properly files its
application under Rev. Proc. 2000-38.


(e) AUDIT PROTECTION. If a taxpayer complies with the requirements of
Rev. Proc. 2000-38 and this revenue procedure for changing its method of
accounting for distributor commissions to any of the three methods of
accounting described in Rev. Proc. 2000-38, the treatment of distributor
commissions will not be raised as an issue in any taxable year before the
year of change and, if the treatment of distributor commissions has
already been raised as an issue in a taxable year before the year of
change, the treatment of distributor commissions will not be further
pursued.


(2) CHANGES NOT MADE UNDER REV. PROC. 2000-38.

(a) CHANGE FROM DEDUCTING TO CAPITALIZING DISTRIBUTOR COMMISSIONS.

(i) DESCRIPTION OF CHANGE AND SCOPE. This section 8.06(2)(a) applies to
a taxpayer that wishes to change from currently deducting distributor
commissions (as defined by section 2 of Rev. Proc. 2000-38, 2000-40 I.R.B.
310) to a method of capitalizing and amortizing distributor commissions
using the distribution fee period method, the 5-year method, or the useful
life method (all described in Rev. Proc. 2000-38) for a taxable year other
than the taxpayer's taxable year that includes January 1, 2001).

(ii) INAPPLICABILITY. This change does not apply to an amortizable
section 197 intangible (including any property for which a timely election
under section 13261(g)(2) of the 1993 Act was made.

(iii) MANNER OF MAKING THE CHANGE. The change under this section
8.06(2)(a) must be made using the cut-off method, and applies only to
distributor commissions paid or incurred on or after the first day of the
year of change. Because no items are duplicated or omitted from income
when a cut-off method is used, a section 481(a) adjustment described in
section 5.03 of this revenue procedure is not necessary. See section 2.06
of this revenue procedure.


(b) OTHER CHANGES. See section 2.02 of this APPENDIX for (i) changing
from one method described in Rev. Proc. 2000-38 for amortizing distributor
commissions (as defined by section 2 of Rev. Proc. 2000-38, 2000-40 I.R.B.
310) to another method described in Rev. Proc. 2000-38 for amortizing
distributor commissions, or (ii) changing from pooling to a single asset,
or vice versa, for distributor commissions for which the taxpayer is using
the distribution fee period method or the useful life method (both
described in Rev. Proc. 2000-38).


SECTION 9. INVENTORIES (SECTION 471)

.01 CASH DISCOUNTS

(1) DESCRIPTION OF CHANGE AND SCOPE. This change applies to a taxpayer
that wants to change its method of accounting for cash discounts
(discounts granted for timely payment) when they approximate a fair
interest rate, from a method of consistently including the price of the
goods before discount in the cost of the goods and including in gross
income any discounts taken (the "gross invoice method"), to a method of
reducing the cost of the goods by the cash discounts and deducting as an
expense any discounts not taken (the "net invoice method"), or vice versa.
See Rev. Rul. 73-65 (1973-1 C.B. 216).

(2) COMPUTATION OF SECTION 481 ADJUSTMENT FOR CHANGES TO NET INVOICE
METHOD. In the case of a taxpayer changing from the gross invoice method
to the net invoice method, a negative adjustment must be made to prevent
duplications arising from the fact that the gross invoice method reported
income upon timely payment for some or all of the goods that remain in
inventory, and a positive adjustment must be made to prevent omissions
arising from the fact that the gross method included the invoice price,
unadjusted for the cash discounts, of some or all goods in cost of goods
sold and the discount will be earned by payment in a subsequent taxable
year. The net section 481 adjustment can be computed by deducting the
"Applicable Discount" at the beginning of the year of change from the
"Available Discount" at the beginning of the year of change. The Available
Discount is equal to the difference between the accounts payable balance
under the gross invoice method and the net invoice method. The Applicable
Discount is equal to the difference between the beginning inventory value
under the gross invoice method and the net invoice method.

EXAMPLE. Taxpayer's accounts payable balance at the beginning of the
year of change was $1,000x under the gross invoice method and $980x under
the net invoice method. Taxpayer's inventory value was $3,000x under the
gross invoice method and $2,955x under the net invoice method. The
Available Discount is $20 ($1,000x - $980x) and the Applicable Discount is
$45 ($3,000x - $2,955x). Thus, Taxpayer's net section 481(a) adjustment is
a negative $25 ($20 - $45).


(3) COMPUTATION OF SECTION 481 ADJUSTMENT FOR CHANGES TO GROSS INVOICE
METHOD. IN the case of a taxpayer changing from the net invoice method to
the gross invoice method, a positive adjustment must be made to prevent
omissions arising from the fact that the net invoice method did not report
income upon timely payment for some or all of the goods that remain in
inventory, and a negative adjustment must be made to prevent duplications
arising from the fact that the net method included the invoice price,
adjusted for the cash discounts, of some or all goods in cost of goods
sold and the discount will be earned by payment in a subsequent taxable
year. The net section 481 adjustment can be computed by deducting the
"Applicable Discount" at the beginning of the year of change from the
"Available Discount" at the beginning of the year of change. The Available
Discount is equal to the difference between the accounts payable balance
under the gross invoice method and the net invoice method. The Applicable
Discount is equal to the difference between the beginning inventory value
under the gross invoice method and the net invoice method.

EXAMPLE. Taxpayer's accounts payable balance at the beginning of the
year of change was $980x under the net invoice method and $1,000x under
the gross invoice method. Taxpayer's inventory value was $2,955x under the
net invoice method $3,000x under the gross invoice method. The Applicable
Discount is $45 ($3,000x - $2,955x) and the Available Discount is $20
($1,000x - $980x). Thus, Taxpayer's net section 481(a) adjustment is a
positive $25 ($20 - $45).


.02 ESTIMATING INVENTORY "SHRINKAGE".

(1) DESCRIPTION OF CHANGE AND SCOPE. This change applies to a taxpayer
that wants to change to a method of accounting for estimating inventory
shrinkage in computing ending inventory, using:

(a) the "retail safe harbor method" described in section 4 of Rev.
Proc. 98-29 (1998-1 C.B. 857); or

(b) a method other than the retail safe harbor method, provided (i) the
taxpayer's present method of accounting does not estimate inventory
shrinkage, and (ii) the taxpayer's new method of accounting (that
estimates inventory shrinkage) clearly reflects income under section
446(b).


(2) SCOPE LIMITATIONS INAPPLICABLE. A taxpayer that wants to make this
change is not subject to the scope limitations in section 4.02 of this
revenue procedure.

(3) ADDITIONAL REQUIREMENTS. If the taxpayer wants to change to a
method of accounting for inventory shrinkage other than the retail safe
harbor method, the taxpayer must attach to the application a statement
setting forth a detailed description of all aspects of the new method of
estimating inventory shrinkage (including, for LIFO taxpayers, the method
of determining inventory shrinkage for, or allocating inventory shrinkage
to, each LIFO pool).

(4) AUDIT PROTECTION. A taxpayer, whose present method of accounting
estimates inventory shrinkage, does not receive audit protection under
section 7 of this revenue procedure in connection with a change to the
retail safe harbor method if, on the date the taxpayer files a copy of the
Form 3115 with the national office, the taxpayer's present method of
estimating inventory shrinkage is an issue under consideration within the
meaning of section 3.09 of this revenue procedure.

(5) FUTURE CHANGE. A taxpayer that changes to the retail safe harbor
method described in Rev. Proc. 98-29 will not be precluded, solely by
reason of such change, from changing to another safe harbor method for
estimating inventory shrinkage in computing ending inventory in the first
year that such other safe harbor method is available.


.03 SMALL TAXPAYER EXCEPTION FROM REQUIREMENT TO ACCOUNT FOR
INVENTORIES UNDER SECTION 471.

(1) DESCRIPTION OF CHANGE. This change applies to a taxpayer (other
than a taxpayer described in section 448(a)(3)) with "average annual gross
receipts" (as defined in section 5.01 of Rev. Proc. 2001-10, 2001-2 I.R.B.
272) of $1,000,000 or less that wants to change from a method of
accounting for inventoriable items (including, if applicable, from the
method of capitalizing costs under section 263A) to the method described
in Rev. Proc. 2001-10 for treating inventoriable items in the same manner
as materials and supplies that are not incidental under section 1.162-3.

(2) SCOPE LIMITATIONS INAPPLICABLE. The scope limitations in section
4.02 of this revenue procedure do not apply to this change.

(3) MANNER OF MAKING THE CHANGE. Taxpayers making this change should
consult Rev. Proc. 2001-10 for additional guidance on the computation of
the section 481(a) adjustment and the completion of the application.

(4) AUTOMATIC CHANGES TO THE CASH METHOD UNDER REV. PROC. 2001-10. A
taxpayer desiring to make both this change and the change to the overall
cash method under Rev. Proc. 2001-10 (see section 5.05 of the APPENDIX of
this revenue procedure) may file a single application for both changes.


.04 "FLOOR STOCKS" PAYMENTS MADE OR RECEIVED.

(1) DESCRIPTION OF CHANGE AND SCOPE. This change applies to a taxpayer
that wants to change its method of accounting for payments made or
received with respect to "floor stocks" to conform with the holding of
Rev. Rul. 2001-8 (2001-9 I.R.B. 726), or to elect the simplifying
assumption regarding goods on hand set forth in Rev. Rul. 2001-8.

(2) REQUIREMENTS. This change may only be made for the first taxable
year in which payments are made or received with respect to floor stocks
subsequent to February 26, 2001.

(3) SCOPE LIMITATIONS INAPPLICABLE. The scope limitations in section
4.02 of this revenue procedure do not apply to this change.

(4) MANNER OF MAKING THE CHANGE.

(a) The change is made using a cutoff method relative to payments made
or received with respect to floor stocks on or before February 26, 2001.
See section 2.06 of this revenue procedure.

(b) A taxpayer making this change should clearly indicate on its
application, or in an attachment thereto, if it is electing to use the
simplifying assumption of Rev. Rul. 2001-8 to identify the goods
physically held on the floor stocks date for costing purposes.


.05 QUALIFYING VOLUME-RELATED TRADE DISCOUNTS.

(1) DESCRIPTION OF CHANGE AND SCOPE. This change applies to a taxpayer
that wants to change its method of accounting to treat qualifying
volume-related trade discounts as a reduction in the cost of merchandise
purchased at the time the discount is recognized in accordance with
section 1.471-3(b). A "qualifying volume-related trade discount" means a
discount satisfying the following criteria:

(a) the taxpayer receives or earns the discount solely as the result of
the purchase of the merchandise to which the discount relates;

(b) the taxpayer is neither obligated nor expected to perform or
provide any services in exchange for the discount; and

(c) the discount is not a reimbursement of any expenditure incurred or
to be incurred by the taxpayer.


(2) SECTION 481 ADJUSTMENT. The net section 481 adjustment attributable
to the change is computed in a manner similar to the computation of a net
section 481 adjustment in the case of a change to the net invoice method
of accounting for cash discounts. See section 9.01(2) of the APPENDIX.


.06 IMPERMISSIBLE METHODS OF VALUATION. This change applies to a
taxpayer changing a method of accounting to restore a writedown or
discontinue maintaining a reserve specifically described within section
1.471-2(f).


SECTION 10. LAST-IN, FIRST-OUT (LIFO) INVENTORIES (SECTION 472)

.01 CHANGE FROM THE LIFO INVENTORY METHOD.

(1) DESCRIPTION OF CHANGE AND SCOPE.

(a) IN GENERAL. This change applies to any taxpayer that wants to:

(i) change from the LIFO inventory method for all its LIFO inventory or
for a pool or pools within its LIFO inventory; and

(ii) change to the permitted method as determined in section
10.01(1)(b) of this APPENDIX.


(b) METHOD TO BE USED.

(i) DETERMINING METHOD TO BE USED. The inventory method to be used by a
taxpayer is determined as follows:

(A) If the taxpayer has inventoriable goods not included in its LIFO
inventory computations (non-LIFO inventory) and, for all the taxpayer's
non-LIFO inventory, the taxpayer uses an inventory method that is a
permitted method, then the taxpayer must use that same inventory method
for all of its non-LIFO inventory, including the inventory that is the
subject of this accounting method change.

(B) If the LIFO inventory method is used by the taxpayer with respect
to all its inventoriable goods, then the taxpayer must use the same
inventory method it used prior to the adoption of the LIFO inventory
method, if that prior method is a permitted method.

(C) If the taxpayer has only LIFO inventory and the method used by the
taxpayer prior to the adoption of the LIFO inventory method is not a
permitted method, then the taxpayer must use a permitted method.


(D) If the taxpayer did not use an inventory method prior to the
adoption of the LIFO inventory method and has no inventoriable goods other
than its LIFO inventory, then the taxpayer must use a permitted method.


(ii) PERMITTED METHOD DEFINED. For purposes of section 10.01 of this
APPENDIX, a permitted method is a method under which:

(A) the identification method is either the first-in, first-out (FIFO)
inventory method or the specific identification inventory method; and

(B) the valuation method is cost; cost or market, whichever is lower;
market (but only if the taxpayer is a dealer in securities, as defined in
section 1.471-5); the "farm price method" or the "unit-livestock-price
method" (but only if the taxpayer is a farmer permitted to use such
methods); or the retail method, reduced to either approximate cost or
approximate cost or market, whichever is lower (but only if the taxpayer
is a retail merchant).


(iii) METHOD NOT TO BE USED. The average cost method (sometimes also
referred to as "the rolling average method") described in Rev. Rul. 71-234
(1971-1 C.B. 148), is not a permitted method.

(iv) DETERMINING PERMITTED METHOD. Whether an inventory method is a
permitted method is determined by the taxpayer's method of inventory
identification and valuation, and not by which types and amounts of costs
are capitalized under the taxpayer's method of computing inventory cost.
See section 263A and the regulations thereunder, which govern the types
and amounts of costs required to be included in inventory cost for
taxpayers subject to those provisions.


(2) LIMITATION ON LIFO ELECTION. The taxpayer may not re-elect the LIFO
inventory method for a period of at least five taxable years beginning
with the year of change unless, based on a showing of unusual and
compelling circumstances, consent is specifically granted by the
Commissioner to change the method of accounting at an earlier time. A
taxpayer that wants to re-elect the LIFO inventory method within a period
of five taxable years (beginning with the year of change) must file a Form
3115 in accordance with Rev. Proc. 97-27 (1997-1 C.B. 680). A taxpayer
that wants to re-elect the LIFO inventory method after a period of five
taxable years (beginning with the year of change) is not required to file
a Form 3115 in accordance with Rev. Proc. 97-27, but must file a Form 970,
Application to Use LIFO Inventory Method, in accordance with section
1.472-3.

(3) EFFECT OF SUBCHAPTER S ELECTION BY CORPORATION.

(a) S ELECTION EFFECTIVE FOR YEAR OF LIFO DISCONTINUANCE. If a C
corporation elects to be treated as an S corporation for the taxable year
in which it discontinues use of the LIFO inventory method, section 1363(d)
requires 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 a corresponding adjustment to the basis of the taxpayer's inventory as
of the end of the taxable year preceding the year of change. Any increase
in income tax as a result of the inclusion of the LIFO recapture amount is
payable in four equal installments, beginning with the taxpayer's last
taxable year as a C corporation as provided in section 1363(d)(2). Any
corresponding basis adjustment is taken into account in computing the
section 481(a) adjustment (if any) that results upon the discontinuance of
the LIFO method by the corporation.

(b) S ELECTION EFFECTIVE FOR A YEAR AFTER LIFO DISCONTINUANCE. If a C
corporation elects to be treated as an S corporation for a taxable year
after the taxable year in which it discontinued use of the LIFO inventory
method, the remaining balance of any positive section 481(a) adjustment
must be included in its gross income in its last taxable year as a C
corporation. If this inclusion results in an increase in tax for its last
taxable year as a C corporation, this increase in tax is payable in four
equal installments, beginning with the taxpayer's last taxable year as a C
corporation as provided in section 1363(d)(2), unless the taxpayer is
required to take the remaining balance of the section 481(a) adjustment
into account in the last taxable year as a C corporation under another
acceleration provision in section 5.04(3)(c) of this revenue procedure.


(4) ADDITIONAL REQUIREMENTS. The taxpayer must complete the following
statements and attach them to the application:

(a) "The new method of identifying inventory goods is the [insert
method; that is, specific identification; FIFO; retail; etc.] method."

(b) "The new method of valuing inventory goods is [insert method; that
is, cost; cost or market, whichever is lower; etc.]."

(c) "The new method conforms to the requirements of section
10.01(1)(b)(i) [insert either (A), (B), (C), or (D)] of the APPENDIX of
Rev. Proc. 2002-9 because [explain in detail how the new method conforms
to the specific subdivision]."


.02 DETERMINING CURRENT-YEAR COST UNDER THE LIFO INVENTORY METHOD.

(1) DESCRIPTION OF CHANGE AND SCOPE. This change applies to a LIFO
taxpayer that wants to change to a method of determining current year
cost:

(a) by reference to the actual cost of the goods most recently
purchased or produced;

(b) by reference to the actual cost of the goods purchased or produced
during the taxable year in the order of acquisition; or

(c) by application of an average unit cost equal to the aggregate
actual cost of all the goods purchased or produced throughout the taxable
year divided by the total number of units so purchased or produced. See
section 1.472-8(e)(2)(ii).


(2) MANNER OF MAKING THE CHANGE. This change is made using a cut-off
method. See section 2.06 of this revenue procedure.


.03 ALTERNATIVE LIFO INVENTORY METHOD FOR RETAIL AUTOMOBILE DEALERS.

(1) DESCRIPTION OF CHANGE AND SCOPE.

(a) APPLICABILITY. This change applies to a taxpayer engaged in the
trade or business of retail sales of new automobiles or new light-duty
trucks ("automobile dealer") that wants to change to the "Alternative LIFO
Method" described in section 4 of Rev. Proc. 97-36 (1997-2 C.B. 450), for
its LIFO inventories of new automobiles and new light-duty trucks.
Light-duty trucks are trucks with a gross vehicle weight of 14,000 pounds
or less, which also are referred to as class 1, 2, or 3 trucks.

(b) INAPPLICABILITY. This change does not apply to an automobile dealer
that uses the inventory price index computation (IPIC) method for goods
other than new automobiles, new light-duty trucks, parts and accessories,
used automobiles, and used trucks.


(2) MANNER OF MAKING THE CHANGE.

(a) CUT-OFF METHOD. This change is made using a cut-off method. See
section 2.06 of this revenue procedure and section 5.03(6) of Rev. Proc.
97-36.

(b) IPIC METHOD CHANGES. An automobile dealer that uses the IPIC method
also must change from the IPIC method under section 10.03 of this APPENDIX
to another acceptable method for its goods other than new automobiles and
new light-duty trucks. For parts and accessories, the automobile dealer
must change to the dollar-value, index method, with all parts and
accessories within each separate trade or business in a separate LIFO
pool. For used vehicles, the automobile dealer must change to the
dollar-value, link-chain method, with all used automobiles within each
separate trade or business in one LIFO pool and all used trucks within
each separate trade or business in another separate LIFO pool.

(c) ADDITIONAL REQUIREMENTS. An automobile dealer also must comply with
the following:

(i) the conditions in section 5.03 of Rev. Proc. 97-36; and

(ii) for an automobile dealer changing from the IPIC method, the
automobile dealer also must attach to the application a schedule setting
forth the classes of goods for which the automobile dealer has elected to
use the LIFO method and the accounting method changes being made under
section 10.03 of this APPENDIX for each class of goods.


.04 USED VEHICLE ALTERNATIVE LIFO METHOD.

(1) DESCRIPTION OF CHANGE AND SCOPE.

(a) APPLICABILITY. This change applies to a taxpayer that sells used
automobiles and used light-duty trucks ("used vehicle dealers") that
wishes to change to the "Used Vehicle Alternative LIFO Method" as
described in Rev. Proc. 2001-23 (2001-10 I.R.B. 784).

(b) INAPPLICABILITY. This change does not apply to used vehicle dealers
that use the IPIC method and have in inventory goods other than new or
used automobiles, new or used light duty trucks, and parts and
accessories. See section 5.03(2) of Rev. Proc. 2001-23.


(2) ADDITIONAL REQUIREMENTS. A taxpayer making this change must comply
with the additional conditions set forth in section 5.04 of Rev. Proc.
2001-23.

(3) SCOPE LIMITATIONS INAPPLICABLE. The scope limitations in section
4.02 of this revenue procedure do not apply to this change, provided that
the change is made for the first or second taxable year ending on or after
December 31, 2000, unless the taxpayer's method of valuing its LIFO
inventories of used automobiles or used light-duty trucks is an issue
pending within the meaning of section 6.01(6) of Rev. Proc. 2000-38
(2000-40 I.R.B. 310).

(4) MANNER OF MAKING CHANGE.

(a) CUT-OFF METHOD. This change must be effected on a cut-off method,
which requires that the value of the taxpayer's used automobile and used
light-duty truck inventory at the beginning of the year of change must be
the same as the value of that inventory at the end of the preceding
taxable year, plus cost restorations, if any, required by section 5.04(5)
of Rev. Proc. 2001-23. However, if the taxpayer has previously improperly
accounted for a bulk bargain purchase, the taxpayer, as part of a change
to the Used Vehicle Alternative LIFO Method, must first change its method
of accounting to comply with Hamilton Industries, Inc. v. Commissioner, 97
T.C. 120 (1991), and compute a section 481(a) adjustment for that part of
the change (see Announcement 91-173, 1991-47 I.R.B. 29).

(b) NEW BASE YEAR. In effecting a change to the Used Vehicle
Alternative LIFO Method under this revenue procedure, any LIFO inventory
cost increments previously determined and the value of those increments
must be retained. Instead of using the earliest taxable year for which the
taxpayer adopted LIFO as the base year, the year of change must be used as
the new base year in determining the value of all existing LIFO cost
increments for the year of change and later taxable years. (The cumulative
index at the beginning of the year of change will be 1.00.) The base-year
cost of all LIFO cost increments at the beginning of the year of change
must be restated in terms of new base-year costs, using the year of change
as the new base year, and the indexes for previously determined inventory
increments must be recomputed accordingly. The new base-year cost of a
pool is equal to the total current-year cost of all the vehicles in the
pool.

(c) When filing their applications, taxpayers are reminded to complete
all applicable parts of the Form 3115, including Part I of Schedule B.


(5) CONCURRENT CHANGE AVAILABLE FOR CERTAIN IPIC TAXPAYERS. A used
vehicle dealer using the IPIC method that also has parts and accessories,
new automobiles, or new light-duty trucks in inventory may incorporate a
change, using a cut-off method, from IPIC to another acceptable LIFO
method for these other goods into this change. When changing from IPIC to
a dollar-value LIFO method for parts and accessories, new automobiles, or
new light-duty trucks, a separate inventory pool must be established for
each of these types of inventory.


.05 DETERMINING THE COST OF USED VEHICLES PURCHASED OR TAKEN AS A
TRADE-IN.

(1) DESCRIPTION OF CHANGE AND SCOPE.

(a) APPLICABILITY. This change applies to a LIFO taxpayer that wants
to:

(i) determine the cost of used vehicles acquired by trade-in using the
average wholesale price listed by an official used car guide on the date
of the trade-in. See Rev. Rul. 67-107 (1967-1 C.B. 115). The official used
car guide selected must be consistently used;

(ii) determine the cost of used vehicles purchased for cash using the
actual purchase price of the vehicle; or

(iii) reconstruct the beginning-of-the-year cost of used vehicles
purchased for cash using values computed by national auto auction
companies based on vehicles purchased for cash. The national auto auction
company selected must be consistently used.


(b) INAPPLICABILITY. This change does not apply to taxpayers that have
adopted or changed to the Used Vehicle Alternative LIFO Method (see
section 10.06 of the APPENDIX of this revenue procedure).


(2) MANNER OF MAKING THE CHANGE. This change is made using a cut-off
method and applies to used vehicles acquired during the year of change and
all subsequent years. See section 2.06 of this revenue procedure.


.06 CHANGE TO INVENTORY PRICE INDEX COMPUTATION (IPIC) METHOD.

(1) DESCRIPTION OF CHANGE AND SCOPE.

(a) This change applies to a taxpayer that wants to change from a
non-IPIC LIFO inventory method to the IPIC method in accordance with all
relevant provisions of section 1.472-8(e)(3).

(b) A taxpayer may change its method of determining current-year cost
as part of a change made under section 10.06 of this APPENDIX by also
following the provisions of section 10.02 of this APPENDIX. These changes
may be made using a single application, provided the application is
labeled as being filed under both sections 10.02 and 10.06 of this
APPENDIX. See section 6.02(4) of this revenue procedure.

(c) A taxpayer may change its method of pooling to a method permitted
under section 1.472-8(b)(4) or section 1.472-8(c)(2) as part of a change
made under section 10.06 of this APPENDIX by also following the provisions
of section 10.07 of this APPENDIX. These changes may be made using a
single application, provided the application is labeled as being filed
under both sections 10.06 and 10.07 of this APPENDIX. See section 6.02(4)
of this revenue procedure.


(2) MANNER OF MAKING THE CHANGE. This change is made using a cut-off
method. See section 2.06 of this revenue procedure.

(3) BARGAIN PURCHASE. If the taxpayer has previously improperly
accounted for a bulk bargain purchase, the taxpayer must, as part of this
change, first change its method of accounting to comply with Hamilton
Industries, Inc. v. Commissioner, 97 T.C. 120 (1991), and compute a
section 481(a) adjustment for that part of the change. See Announcement
91-173 (1991-47 I.R.B. 29). Upon examination, if a taxpayer has properly
changed under section 10.04 of this APPENDIX except for complying with
section 10.04(3) of this APPENDIX, an examining agent may not deny the
taxpayer the change. However, the taxpayer does not receive audit
protection under section 7 of this revenue procedure with respect to the
improper method of accounting for the bargain purchase. Accordingly, the
examining agent may make any necessary adjustments in any open year to
effect compliance with Hamilton Industries, Inc.


.07 CHANGES WITHIN INVENTORY PRICE INDEX COMPUTATION (IPIC) METHOD.

(1) DESCRIPTION OF CHANGE AND SCOPE. This change applies to a taxpayer
that wants to make one or more of the following changes:

(a) change from the double-extension IPIC method to the link-chain IPIC
method, or vice versa. See sections 1.472-8(e)(3)(iii)(E) for principles
for computing the inventory price index under the double-extension IPIC
method and the link-chain IPIC method;

(b) change to or from the 10 percent method. See section
1.472-8(e)(3)(iii)(C) for principles for assigning items in a dollar-value
pool to BLS categories;

(c) change to a pooling method described in section 1.472-8(b)(4) or
section 1.472-8(c)(2), including a change to begin or discontinue applying
one or both of the 5 percent pooling rules;

(d) combine or separate pools as a result of the application of a 5
percent pooling rule described in section 1.472-8(b)(4) or section
1.472-8(c)(2);

(e) change its selection of BLS table from Table 3 (Consumer Price
Index for All Urban Consumers (CPI-U): U.S. city average, detailed
expenditure categories) of the monthly CPI Detailed Report to Table 6
(Producer price indexes and percent changes for commodity groupings and
individual items, not seasonally adjusted) of the monthly PPI Detailed
Report, or vice versa. See section 1.472-8(e)(3)(iii)(B) for principles
for selecting a BLS table under the IPIC method; or

(f) change the representative month when necessitated because of a
change in taxable year or a change in method of determining current-year
cost made pursuant to section 10.02 of this APPENDIX. See section
1.472-8(e)(3)(iii)(B) for principles for determining a representative
month under the IPIC method. A change in method of determining
current-year cost and a change of the representative month may be made
using a single application, provided the application is labeled as being
filed under both sections 10.02 and 10.07 of this APPENDIX. See section
6.02(4) of this revenue procedure.


(2) MANNER OF MAKING THE CHANGE. Changes made pursuant to section 10.07
of this APPENDIX are made using a cutoff method. See section 2.06 of this
revenue procedure. A taxpayer that changes pursuant to sections 10.07(a),
(b) and (e) of this APPENDIX must establish a new base year in the year of
change.


SECTION 10A. MARK-TO-MARKET ACCOUNTING METHOD FOR DEALERS IN SECURITIES
(SECTION 475)

.01 RESERVED.

.02 COMMODITIES DEALERS, SECURITIES TRADERS, AND COMMODITIES TRADERS
ELECTING TO USE THE MARK-TO-MARKET METHOD OF ACCOUNTING UNDER SECTION
475(e) OR (f).

(1) DESCRIPTION OF CHANGE. This change applies to certain taxpayers
that have elected to use the mark-to-market method of accounting under
section 475(e) or (f). Under section 475(e) and (f) and Rev. Proc. 99-17,
1999-1 C.B. 503, if a taxpayer makes an election under section 475(e) or
(f), then beginning with the first taxable year for which the election is
effective (election year), mark to market is the only permissible method
of accounting for securities or commodities subject to the election. Thus,
if the electing taxpayer's method of accounting for its taxable year
immediately preceding the election year is inconsistent with section 475,
the taxpayer is required to change its method of accounting to comply with
the election. A taxpayer that makes a section 475(e) or (f) election but
fails to change its method of accounting to comply with that election is
using an impermissible method. See section 4 of Rev. Proc. 99-17.

(2) SCOPE

(a) APPLICABILITY. This change applies to a taxpayer if all of the
following conditions are satisfied:

(i) The taxpayer is a commodities dealer, securities trader, or
commodities trader that has made a valid election under section 475(e) or
(f) (see section 5.02 or 5.03(1) of Rev. Proc. 99-17) and that is required
to change its method of accounting to comply with the election;

(ii) The method of accounting to which the taxpayer changes is in
accordance with its election under section 475(e) or (f); and

(iii) The year of change is the election year.


(b) SCOPE LIMITATIONS INAPPLICABLE. A taxpayer making this change is
not subject to the scope limitations in section 4.02 of this revenue
procedure.



SECTION 11. BANK RESERVES FOR BAD DEBTS (SECTION 585)

.01 CHANGING FROM THE SECTION 585 RESERVE METHOD TO THE SECTION 166
SPECIFIC CHARGE-OFF METHOD.

(1) DESCRIPTION OF CHANGE AND SCOPE.

(a) APPLICABILITY. This change applies to a bank (as defined in section
581, including a bank for which a qualified subchapter S subsidiary (QSSS)
election is filed) that wants to change its method of accounting for bad
debts from the section 585 reserve method to the section 166 specific
charge-off method.

(b) CERTAIN SCOPE LIMITATIONS INAPPLICABLE. A bank that changed from
the section 593 reserve method under section 593(g) to the section 585
reserve method will not be prohibited under section 4.02(6) of this
revenue procedure from changing its method of accounting for bad debts
under section 11.01 of this APPENDIX solely because of the section 593(g)
change. A bank for which a QSSS election is filed will not be prohibited
under section 4.02(7) of this revenue procedure from changing its method
of accounting for bad debts under section 11.01 of this APPENDIX solely
because of the deemed liquidation of the bank arising from a QSSS
election.

(c) INAPPLICABILITY. This change does not apply to a large bank as
defined in section 585(c)(2).


(2) SECTION 481(a) ADJUSTMENT. Generally, the amount of the section
481(a) adjustment for a change in method of accounting under section 11.01
of this APPENDIX is the amount of the bank's reserve for bad debts as of
the close of the taxable year immediately before the year of change.
However, the amount of the section 481(a) adjustment does not include the
amount of a bank's pre-1988 reserves (as described in section
593(g)(2)(A)(ii), without taking into account section 593(g)(2)(B)) if the
bank changed in a prior year from the section 593 reserve method to the
section 585 reserve method and section 593(g) applied to that change. The
deemed liquidation of a bank occurring solely because its parent makes a
QSSS election does not accelerate the section 481(a) adjustment. In
accordance with section 5.04(3)(c) of this revenue procedure, a bank that
ceases to be a bank under section 581 must accelerate its section 481(a)
adjustment.

(3) CHANGE FROM SECTION 585 REQUIRED WHEN ELECTING S CORPORATION
STATUS. A bank electing S corporation status (or a bank for which a QSSS
election is filed) cannot use the section 585 reserve method. The filing
by a bank of a Form 2553 (Election by a Small Business Corporation) or the
filing by a bank's parent of a QSSS election with respect to the bank will
constitute an agreement by the bank to change its method of accounting for
bad debts from the section 585 reserve method to the section 166 specific
charge-off method effective as of the taxable year for which the S
corporation election or QSSS election is effective (year of change) in
accordance with all of the applicable provisions of this revenue procedure
(including section 6 of this revenue procedure, which requires filing a
Form 3115 in duplicate). The section 481(a) adjustment is recognized
built-in gain under section 1374. See section 1.1374-4(d).


.02 RESERVED.


SECTION 11A. INCOME FROM SOURCES WITHIN THE UNITED STATES (SECTION 861)

.01 TRANSACTIONS INVOLVING COMPUTER PROGRAMS. This change applies to a
taxpayer that wishes to change its method of accounting for transactions
involving computer programs to conform to the provisions of section
1.861-18(i)(4). This change applies only to transactions occurring
pursuant to contracts entered into on or after December 31, 1998, or, in
the case of a taxpayer making an election under section
1.861-18(i)(2)(ii), to transactions occurring pursuant to contracts
entered into in taxable years ending on or after October 2, 1998.

.02 RESERVED.


SECTION 11B. FUNCTIONAL CURRENCY (SECTION 985)

.01 CHANGE IN FUNCTIONAL CURRENCY.

(1) DESCRIPTION OF CHANGE AND SCOPE. This change applies to a taxpayer
that wants to change its functional currency or the functional currency of
a qualified business unit (QBU) of the taxpayer.

(2) MANNER OF MAKING CHANGE. A taxpayer making this change must make
all necessary adjustments required by such change. See sections 1.985-5,
1.985-8(c).


.02 RESERVED.


SECTION 12. ORIGINAL ISSUE DISCOUNT (SECTIONS 1272, 1273)

.01 DE MINIMIS ORIGINAL ISSUE DISCOUNT (OID).

(1) DESCRIPTION OF CHANGE AND SCOPE.

(a) APPLICABILITY. This change applies to a taxpayer that wants to
change to the principal-reduction method of accounting described in
section 5 of Rev. Proc. 97-39 (1997-2 C.B. 485). The principal-reduction
method of accounting is an aggregate method of accounting for de minimis
OID (discount) on certain loans originated by the taxpayer.

(b) SCOPE LIMITATIONS INAPPLICABLE. A taxpayer that wants to make this
change is not subject to the scope limitations in section 4.02 of this
revenue procedure.

(c) DESCRIPTION. The principal-reduction method of accounting is a
permissible method for use by taxpayers to account for discount on one or
more categories of loans described in section 4.02 or 4.03 of Rev. Proc.
97-39. If the principal-reduction method is used to account for any loans
in a category of loans, the method must be used for the entire category of
loans. The principal-reduction method applies only to loans described in
section 3 of Rev. Proc. 97-39.


(2) MANNER OF MAKING THE CHANGE.

(a) This change is made using a cutoff method and applies only to loans
described in section 3 of Rev. Proc. 97-39 that were acquired on or after
the first day of the year of change. See section 2.06 of this revenue
procedure.

(b) The taxpayer must maintain books and records sufficient to satisfy
the director that old and new loans have been adequately segregated.


(3) ADDITIONAL REQUIREMENTS. On a statement attached to the
application, the taxpayer must:

(a) identify the categories of loans to which the new method will
apply; and

(b) describe any "additional categories" permitted under section 4.03
of Rev. Proc. 97-39.


(4) NO AUDIT PROTECTION. A taxpayer does not receive audit protection
under section 7 of this revenue procedure in connection with this change.


.02 RESERVED.


SECTION 12A. MARKET DISCOUNT BONDS (SECTION 1278)

.01 REVOCATION OF SECTION 1278(b) ELECTION.

(1) DESCRIPTION OF CHANGE AND SCOPE. This change applies to a taxpayer
that wants to change its method of accounting for market discount bonds by
revoking its section 1278(b) election. Under section 1278(b), a taxpayer
may elect a method of accounting under which market discount is currently
included in gross income for the taxable years to which the discount is
attributable. See Rev. Proc. 92-67 (1992-2 C.B. 429), for the procedures
to make a section 1278(b) election (including a deemed section 1278(b)
election). The procedures for revoking a section 1278(b) election were
formerly provided in section 7 of Rev. Proc. 92-67.

(2) REVOCATION OF ELECTION. The revocation of a section 1278(b)
election applies to all market discount bonds that are held by the
taxpayer on the first day of the first taxable year for which the
revocation is effective (year of change), and to all market discount bonds
that are subsequently acquired by the taxpayer. If a section 1278(b)
election is revoked, then, for purposes of section 1276(a), accrued market
discount with respect to any bond previously subject to the election means
accrued market discount as defined in section 1276(b) less any market
discount included in income while the bond was subject to the section
1278(b) election.

(3) MANNER OF MAKING THE CHANGE. This change is made using a cut-off
method and applies only to market discount accruing on or after the first
day of the year of change. Market discount accruing on a bond prior to the
year of change was currently included in income and market discount
accruing on the bond on and after the first day of the year of change is
included in income generally upon disposition of the bond. See section
1276(a). Because cut-off treatment is prescribed for this change, the
basis of any bond, adjusted for amounts previously included in income
during the period of the election, is not affected by the revocation.

(4) ADDITIONAL REQUIREMENTS. On a statement attached to the
application, the taxpayer must provide:

(a) the reason(s) for revoking the section 1278(b) election (or deemed
section 1278(b) election);

(b) a description of the method by which, and the date on which, the
taxpayer made the section 1278(b) election (or deemed section 1278(b)
election) that is being revoked; and

(c) a statement that, after the revocation, the taxpayer will not make
a constant interest rate election for any bond that has been subject to
the section 1278(b) election (or deemed section 1278(b) election) being
revoked and for which a constant interest rate election was not effective
in the year of acquisition.


(5) AUDIT PROTECTION. A taxpayer receives audit protection under
section 7 of this revenue procedure in connection with this change.
However, the audit protection applicable to this change does not preclude
the Commissioner from examining the method used by the taxpayer to
determine the amount of accrued market discount under section 1276(b) for
a taxable year prior to the year of change.


.02 RESERVED.


SECTION 13. SHORT-TERM OBLIGATIONS (SECTION 1281)

.01 INTEREST INCOME ON SHORT-TERM OBLIGATIONS.

(1) DESCRIPTION OF CHANGE AND SCOPE.

(a) This change applies to a taxpayer that wants to change its method
of accounting to comply with section 1281 for interest income on
short-term obligations.

(b) Under section 1281, a holder of certain short-term obligations,
including a bank as defined in section 581, must include in gross income
any accrued interest income on such obligations, regardless of the
holder's overall method of accounting. Section 1281 applies to all types
of interest income, including acquisition discount, original issue
discount (OID), and stated interest. See S. Rep. No. 99-313, 99th Cong.,
2d Sess. 903 (1986), 1986-3 (Vol. 3) C.B. 903.

(c) Section 1283(a)(1) generally defines a short-term obligation as any
bond, debenture, note, certificate, or other evidence of indebtedness that
matures in one year or less from its issue date.

(d) Under sections 1281(a) and 1283(c), a holder of a short-term
obligation subject to section 1281 must include in gross income an amount
equal to the sum of the daily portions of the acquisition discount or OID,
whichever is applicable, on the obligation for each day during the taxable
year that the obligation is held by the holder. See section 1283(b), as
modified by section 1283(c), to determine the daily portions of
acquisition discount or OID. In addition, sections 1281(a) requires the
holder to include in gross income any stated interest that is payable on
the short-term obligation (other than stated interest taken into account
to determine the amount of the acquisition discount or OID) as it accrues.

(2) SECTION 481(a) ADJUSTMENT PERIOD. A taxpayer must take the entire
section 481(a) adjustment into account in computing taxable income for the
year of change.


.02 STATED INTEREST ON SHORT-TERM LOANS OF CASH METHOD BANKS.

(1) DESCRIPTION OF CHANGE AND SCOPE.

(a) APPLICABILITY. This change applies to a bank that uses the cash
receipts and disbursements method of accounting as its overall
accounting-method and that wants to change its method of accounting from
accruing stated interest on short-term loans made in the ordinary course
of business to using the cash method for that interest. For example, see
Security State Bank v. Commissioner, 214 F.3d 1254 (10th Cir. 2000), aff'g
111 T.C. 210 (1998), acq., 2001-5 I.R.B., and Security Bank Minnesota v.
Commissioner, 994 F.2d 432 (8th Cir. 1993), aff'g 98 T.C. 33 (1992), in
which the courts held that section 1281 does not apply to short-term loans
made by a cash method bank in the ordinary course of its business.

(b) SCOPE LIMITATIONS INAPPLICABLE. A taxpayer that wants to make this
change is not subject to the scope limitations in section 4.02 of this
revenue procedure.


(2) CHANGE FOR PRIOR TAXABLE YEARS. A taxpayer is permitted to make the
change in accounting method described in section 13.02(1)(a) of this
Appendix for any taxable year ending before December 31, 2000, provided
the year is not barred by the statute of limitations, there is no closed
taxable year after the year of change, and the taxpayer complies with the
following requirements:

(a) the taxpayer must attach a completed Form 3115 to an amended return
for the year of change, and must file, on or before December 31, 2001,
that amended return and amended returns for all subsequent affected
taxable years, if any; and

(b) the taxpayer must file a copy of the Form 3115 with the national
office no later than when the original Form 3115 is filed with the amended
return.


(3) SECTION 481(a) ADJUSTMENT PERIOD. A taxpayer making this change
must take the entire section 481(a) adjustment into account in computing
taxable income for the year of change.

<<END RULING>>



 

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