IRS Revenue Procedure
2002-18

Code Secs. 446, 481



<<FULL TEXT>>

26 CFR 601.105: Examination of returns and claims for refund, credit, or
abatement; determination of correct tax liability.
(Also Part I, sections 446, 481; 1.446-1, 1.481-1)


REV. PROC. 2002-18

SECTION 1. PURPOSE
.01 IN GENERAL
.02 VOLUNTARY COMPLIANCE
.03 PROCEDURES FOR EXAMINATION, APPEALS, AND COUNSEL FOR THE
GOVERNMENT FOR RESOLVING ACCOUNTING METHOD ISSUES

SECTION 2. BACKGROUND
.01 CHANGE IN METHOD OF ACCOUNTING DEFINED
.02 METHOD CHANGES IMPOSED BY THE SERVICE
.03 NO RIGHT TO RETROACTIVE METHOD CHANGE
.04 METHOD CHANGE WITH A SECTION 481(a) ADJUSTMENT
(1) Need for adjustment
(2) Adjustments attributable to pre-1954 years
(3) Adjustment period
.05 METHOD CHANGE USING A CUT-OFF METHOD
.06 PREVIOUS METHOD CHANGE WITHOUT CONSENT
.07 PENALTIES

SECTION 3. DEFINITIONS
.01 ACCOUNTING METHOD ISSUE
.02 YEAR OF CHANGE
.03 SECTION 481(a) ADJUSTMENT PERIOD
.04 TAXPAYER

SECTION 4. SCOPE

SECTION 5. EXAMINATION DISCRETION TO RESOLVE ACCOUNTING METHOD ISSUES
.01 IN GENERAL
.02 REQUIREMENT TO TREAT AN ACCOUNTING METHOD ISSUE AS A METHOD
CHANGE
.03 SELECTION OF NEW METHOD OF ACCOUNTING
.04 TERMS AND CONDITIONS OF CHANGE
(1) Year of change
(2) Section 481(a) adjustment
(3) Spread of section 481(a) adjustment

SECTION 6. APPEALS AND COUNSEL FOR THE GOVERNMENT DISCRETION TO RESOLVE
ACCOUNTING METHOD ISSUES
.01 AUTHORITY TO RESOLVE ACCOUNTING METHOD ISSUES
.02 TYPES OF RESOLUTIONS
(1) In general
(2) Accounting method changes
(a) Treating an accounting method issue as a method change
(b) Selection of new method of accounting
(c) Terms and conditions of change
(i) Year of change
(ii) Section 481(a) adjustment
(iii) Spread of the section 481(a) adjustment
(3) Alternative timing resolution
(4) Time-value of money resolution
(a) In general
(b) Computation of specified amount
(i) In general
(ii) Sample computation
(A) Hypothetical underpayment (overpayment)
(B) Applicable time-value rate
(C) Applicable period
(D) Processing of specified amount

SECTION 7. PROCEDURES FOR A SERVICE-IMPOSED ACCOUNTING METHOD CHANGE
.01 REQUIREMENT TO PROVIDE NOTICE TO TAXPAYER
(1) In general
(2) Form of notice
(3) Content of notice
(4) Method not established without notice
.02 FINALIZING A SERVICE-IMPOSED METHOD CHANGE
(1) In general
(2) Content of closing agreement
.03 IMPLEMENTING A SERVICE-IMPOSED METHOD CHANGE
(1) Years before the Service
(2) Succeeding years for which returns have been filed
(3) Future years
.04 EFFECT OF FINAL SERVICE-IMPOSED METHOD CHANGE
(1) New method established
(2) Subsequent examination
(3) Audit protection
(a) In general
(b) Limitations
.05 COORDINATION WITH EXAMINATION
.06 DEEMED CUT-OFF METHOD

SECTION 8. PROCEDURES FOR RESOLVING ACCOUNTING METHOD ISSUES ON A
NONACCOUNTING-METHOD-CHANGE BASIS
.01 CLOSING AGREEMENT REQUIRED
.02 CONTENT OF CLOSING AGREEMENT
.03 IMPLEMENTING RESOLUTION OF AN ACCOUNTING METHOD ISSUE ON A
NONACCOUNTING-METHOD-CHANGE BASIS.
(1) Resolution on an alternative-timing basis
(a) Years before the Service
(b) Succeeding years for which returns have been filed
(c) Future years
(2) Resolution on a time-value-of-money basis
.04 EFFECT OF RESOLVING AN ACCOUNTING METHOD ISSUE ON A
NONACCOUNTING-METHOD-CHANGE BASIS
(1) No change in method
(2) Subsequent change
(a) Resolution on an alternative-timing basis
(b) Resolution on a time-value-of-money basis
(3) Effect of subsequent change
(a) Resolution on an alternative-timing basis
(b) Resolution on a time-value-of-money basis

SECTION 9. DEFAULT PROCEDURES
.01 IN GENERAL
.02 EFFECT OF ADJUSTMENTS
(1) No omission or duplication
(2) No change in method
(3) Subsequent change
(4) Effect of subsequent change

SECTION 10. EXAMPLES
.01 EXAMINATION-IMPOSED CHANGE
(1) Facts
(2) Effect
.02 APPEALS RESOLUTION OF ACCOUNTING METHOD ISSUE AS A METHOD CHANGE
WITH COMPROMISE TERMS AND CONDITIONS
(1) Facts
(2) Effect
.03 APPEALS RESOLUTION OF ACCOUNTING METHOD ISSUE ON AN ALTERNATIVE-
TIMING BASIS
(1) Facts
(2) Effect
.04 APPEALS RESOLUTION OF ACCOUNTING METHOD ISSUE ON TIME-VALUE-OF-
MONEY BASIS
(1) Facts
(2) Computation of specified amount
(3) Effect
.05 DEFAULT PROCEDURES
(1) Facts
(2) Effect

SECTION 11. EFFECTIVE DATE
.01 IN GENERAL
.02 TRANSITION RULE


DRAFTING INFORMATION

SECTION 1. PURPOSE

.01 IN GENERAL. This revenue procedure provides the procedures under
section 446(b) of the Internal Revenue Code and section 1.446-1(b) of the
Income Tax Regulations for changes in method of accounting imposed by the
Internal Revenue Service (Service). This revenue procedure also provides
the procedures that the Service will use for accounting method issues
resolved by the Service on a nonaccounting-method-change basis.

.02 VOLUNTARY COMPLIANCE. This revenue procedure provides terms and
conditions for Service-imposed changes in method of accounting that are
intended to encourage taxpayers to voluntarily request a change from an
impermissible method of accounting prior to being contacted for
examination. Under this approach, a taxpayer that is contacted for
examination and required to change its method of accounting by the Service
("involuntary change") generally receives less favorable terms and
conditions when the change results in a positive section 481(a) adjustment
than the taxpayer would have received if it had filed an application to
change its method of accounting ("voluntary change") before the taxpayer
was contacted for examination. For example, an involuntary change
generally is made with an earlier year of change and a shorter section
481(a) adjustment period for a positive adjustment, and a voluntary change
generally is made with a current year of change and a longer section
481(a) adjustment period for a positive adjustment. See Rev. Proc. 97-27
(1997-1 C.B. 680) as modified by Rev. Proc. 2002-19 (2002-13 I.R.B. 696)
and Rev. Proc. 2002-9 (2002-3 I.R.B. 327) as modified by Ann. 2002-17
(2002-8 I.R.B. 561), and Rev. Proc. 2002-19 (2002-13 I.R.B. 696) which
provide the procedures for voluntary requests to change an accounting
method.

.03 PROCEDURES FOR EXAMINATION, APPEALS, AND COUNSEL FOR THE GOVERNMENT
FOR RESOLVING ACCOUNTING METHOD ISSUES. This revenue procedure sets forth
procedures for Examination, Appeals, and counsel for the government to
resolve accounting method issues. It does not alter Examination's
authority to examine the returns of a taxpayer. It provides parameters for
Examination to resolve accounting method issues, but does not limit or
expand Examination's authority to resolve any issues under any applicable
Delegation Order (e.g., Delegation Order No. 236, Application of Appeals
Settlement to Coordinated Examination Program Taxpayers, and Delegation
Order No. 247, Authority of Examination Case Managers to Accept Settlement
Offers and Execute Closing Agreements on Industry Specialization Program
and International Field Assistance Program Issues). This revenue procedure
also does not alter or limit the authority of Appeals or counsel for the
government to resolve or settle any issues.


SECTION 2. BACKGROUND

.01 CHANGE IN METHOD OF ACCOUNTING DEFINED.

(1) Section 1.446-1(e)(2)(ii)(a) 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, the taxpayer has adopted
a method of accounting for that item. 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 returns(s). See Rev. Rul. 90-38 (1990-1 C.B.
57). Rather, a taxpayer that wants to change its method of accounting must
follow either the automatic method change procedures of Rev. Proc. 2002-9
(or its successor), if applicable, or the advance consent procedures of
Rev. Proc. 97-27 (or its successor).

(3) Section 1.446-1(e)(2)(ii)(b) of the regulations provides examples
of circumstances that do not constitute changes in method of accounting,
including:

(a) 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);

(b) adjustment of any item of income or deduction that does not involve
the proper time for the inclusion of the item or the taking of a
deduction; and

(c) a change in treatment resulting from a change in underlying facts.


.02 METHOD CHANGES IMPOSED BY THE SERVICE.

(1) Section 446(b) and section 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 the manner that,
in the opinion of the Commissioner, does clearly reflect income.

(2) The Commissioner has broad discretion in determining whether a
taxpayer's method of accounting clearly reflects income, and the
Commissioner's determination must be upheld unless it is clearly unlawful.
See Thor Power Tool Co. v. Commissioner, 439 U.S. 522 (1979); RCA Corp. v.
United States, 664 F.2d 881 (2nd Cir. 1981), cert. denied, 457 U.S. 1133
(1982).

(3) The Commissioner has broad discretion in selecting a method of
accounting that the Commissioner believes properly reflects the income of
a taxpayer once the Commissioner has determined that the taxpayer's method
of accounting does not clearly reflect income, and the Commissioner's
selection may be challenged only upon showing an abuse of discretion by
the Commissioner. See Wilkinson-Beane, Inc. v. Commissioner, 420 F.2d 352
(1st Cir. 1970); Standard Paving Co. v. Commissioner, 190 F.2d 330 (10th
Cir.), cert. denied, 342 U.S. 860 (1951).

(4) The Commissioner has the discretion to change a taxpayer's method
of accounting even though the Commissioner previously changed the taxpayer
to the method if the Commissioner determines that the method of accounting
does not clearly reflect the taxpayer's income. The Commissioner is not
precluded from correcting mistakes of law in determining a taxpayer's tax
liability, including the power to retroactively correct rulings or other
determinations on which the taxpayer may have relied. See Dixon v. United
States, 381 U.S. 68 (1965); Automobile Club of Michigan v. Commissioner,
353 U.S. 180 (1957); Massaglia v. Commissioner, 286 F.2d 258 (10th Cir.
1961).

(5) The Commissioner does not have discretion, however, to require a
taxpayer to change from a method of accounting that clearly reflects
income to a method that, in the Commissioner's view, more clearly reflects
income. See Capitol Federal Savings & Loan v. Commissioner, 96 T.C. 204
(1991); W. P. Garth v. Commissioner, 56 T.C. 610 (1971), acq., 1975-1 C.B.
1.

(6) The Commissioner may change the accounting method of a taxpayer
that is under examination, before an appeals office, or before a federal
court, except as otherwise provided in published guidance. See, for
example, section 9 of Rev. Proc. 97-27, which generally precludes the
Service from changing a taxpayer's method of accounting for an item for
prior taxable years if the taxpayer timely files a Form 3115, Application
to Change a Method of Accounting, pursuant to Rev. Proc. 97-27 requesting
to change its method of accounting for the item.


.03 NO RIGHT TO RETROACTIVE METHOD CHANGE. Although the Commissioner is
authorized to consent to a retroactive accounting method change, a
taxpayer does not have a right to a retroactive change, regardless of
whether the change is from a permissible or impermissible method. See
generally, Rev. Rul. 90-38.

.04 METHOD CHANGE WITH A 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 used, 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, although not permitted to use the cash receipts
and disbursements method of accounting by section 448, uses the overall
cash 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) ADJUSTMENTS ATTRIBUTABLE TO PRE-1954 YEARS. Section 481(a)(2) and
section 1.481-3 provide that if the adjustments required by section 481(a)
are attributable to a change in method of accounting not initiated by the
taxpayer, no portion of any adjustments which is attributable to pre-1954
taxable years is taken into account in computing taxable income.

(3) ADJUSTMENT PERIOD. Section 481(c) and sections 1.446-1(e)(3)(i) 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 in computing taxable income completely in
the year of change. However, section 481(b) may limit the amount of tax
attributable to a substantial section 481(a) adjustment that increases
taxable income.


.05 METHOD CHANGE USING A CUT-OFF METHOD. The Commissioner may
determine that certain changes in method 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 are accounted for under the new method of accounting. 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.

.06 PREVIOUS METHOD CHANGE WITHOUT CONSENT. The Commissioner may
require a taxpayer that has changed a method of accounting without the
Commissioner's consent to change back to its former method. The
Commissioner may do so even when the taxpayer changed from an
impermissible to a permissible method. The change back to the former
method may be made in the taxable year the taxpayer changed without
consent, or if that year is closed by the running of the period of
limitations, in the earliest open year. See Commissioner v. O. Liquidating
Corp., 292 F.2d 225 (3rd Cir.), cert. denied, 368 U.S. 898 (1961); Wright
Contracting Co. v. Commissioner, 316 F.2d 249 (5th Cir., 1963), cert.
denied 375 U.S. 879 (1963), reh'g denied 375 U.S. 981 (1964), acq. 1966-2
C.B. 7; Daktronics, Inc. v. Commissioner, T.C. Memo. 1991-60; Handy Andy
T.V. and Appliances, Inc. v. Commissioner, T.C. Memo. 1983-713. For
example, the Service may change a taxpayer back to its former
impermissible method of accounting if the taxpayer changed to a
permissible method of accounting without the Commissioner's consent and
miscalculated the section 481(a) adjustment, even where the statute of
limitations has expired for the year of change.

.07 PENALTIES. Any otherwise applicable penalty 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 Service imposes an accounting method
change. See section 446(f). Additionally, the taxpayer's return preparer
may also be subject to the preparer penalty under section 6694.


SECTION 3. DEFINITIONS

.01 ACCOUNTING METHOD ISSUE. The term "accounting method issue" means
an issue regarding whether the taxpayer's accounting treatment of an item
is proper, but only if changing the taxpayer's treatment of such item
could constitute a change in method of accounting. See the definition of
change in method of accounting in section 1.446-1(e)(2) and section 2.01
of this revenue procedure.

.02 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 used, even if no affected items are taken into
account for that year. The year of change is also the first taxable year
for complying with all the terms and conditions accompanying the change.

.03 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.

.04 TAXPAYER. 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)).


SECTION 4. SCOPE

Except as otherwise provided in published guidance, this revenue
procedure applies to any accounting method change imposed by the Service,
and to any accounting method issue resolved by the Service on a
nonaccounting-method-change basis.


SECTION 5. EXAMINATION DISCRETION TO RESOLVE ACCOUNTING METHOD ISSUES

.01 IN GENERAL. Using professional judgment in accordance with auditing
standards, an examining agent will make findings of fact and apply Service
position on issues of law to determine whether an issue is an accounting
method issue (as defined by section 3.01 of this revenue procedure) and
whether the taxpayer's method of accounting is permissible. See Policy
Statement P-4-117. Except as otherwise provided in published guidance (for
example, Delegation Order No. 236), the discretion of an examining agent
to resolve an accounting method issue is set forth in sections 5.02
through 5.06 of this revenue procedure. See section 10.01 of this revenue
procedure for an example of the application of section 5 of this revenue
procedure.

.02 REQUIREMENT TO TREAT AN ACCOUNTING METHOD ISSUE AS A METHOD CHANGE.
An examining agent who determines that a taxpayer's method of accounting
is impermissible, or that a taxpayer changed its method of accounting
without obtaining the consent of the Commissioner, may propose an
adjustment with respect to that method only by changing the taxpayer's
method of accounting.

.03 SELECTION OF NEW METHOD OF ACCOUNTING. Except as provided in
section 2.06 of this revenue procedure, an examining agent changing a
taxpayer's method of accounting will select a new method of accounting by
properly applying the law to the facts determined by the agent. The method
selected must be a proper method of accounting and will not be a method
contrived to reflect the hazards of litigation.

EXAMPLE. A taxpayer held long-term zero coupon bonds during the taxable
year under examination but did not include any original issue discount
(OID) in income for that year. The examining agent determines that the
taxpayer should have included OID in income for that year under section
1272. Accordingly, the examining agent will change the taxpayer's method
of accounting to include the OID in income in accordance with section 1272
and the regulations thereunder. The examining agent will not impose a
method of accounting that is designed to take into account litigation
hazards (for example, a method that only requires the accrual of an
arbitrary percentage of the OID that would otherwise accrue during the
year under section 1272 and the regulations thereunder).


.04 TERMS AND CONDITIONS OF CHANGE.

(1) YEAR OF CHANGE. An examining agent changing a taxpayer's method of
accounting will make the change in a year under examination. Ordinarily,
the change will be made in the earliest taxable year under examination,
or, if later, the first taxable year the method is considered to be
impermissible. However, in appropriate circumstances, an examining agent
may defer the year of change to a later taxable year. For example, an
examining agent may defer the year of change if the examining agent
determines that:

(a) the taxpayer's books and records do not contain sufficient
information to compute a section 481(a) adjustment for the taxable year in
which the change would otherwise be imposed and the adjustment cannot be
reasonably estimated;

(b) the taxpayer's existing method of accounting does not have a
material effect for the taxable year in which the change would otherwise
be imposed; or

(c) there are taxable years for which the statute of limitations has
expired following the taxable year in which the change would otherwise be
imposed.


An examining agent will not defer the year of change in order to
reflect the hazards of litigation. Moreover, an examining agent will not
defer the year of change to later than the most recent year under
examination on the date of the agreement finalizing the change.

(2) SECTION 481(a) ADJUSTMENT. An examining agent changing a taxpayer's
method of accounting ordinarily will impose a section 481(a) adjustment,
subject to a computation of tax under section 481(b) (if applicable).
However, an examining agent should use a cut-off method to make a change
(other than a change within the LIFO inventory method as defined in
section 3.09 of Revenue Procedure 97-27 (1997-1 C.B. 680), or a change in
method of accounting for intercompany transactions, see section 1.1502-13)
when a statute, regulation, or administrative pronouncement of the Service
effective for the year of change directs that the change be made using a
cut-off method. See, e.g., section 174. In addition, an examining agent
may use a cut-off method to make a change in appropriate circumstances.
For example, the examining agent may use a cut-off method to make a change
if the agent determines that the taxpayer's books and records do not
contain sufficient information to compute a section 481(a) adjustment and
the adjustment cannot be reasonably estimated. Finally, an examining agent
will not make a change on a cut-off method in order to reflect the hazards
of litigation.

(3) SPREAD OF SECTION 481(a) ADJUSTMENT. The section 481(a) adjustment,
whether positive or negative, will be taken into account entirely in the
year of change.

<<END RULING>>



SECTION 6. APPEALS AND COUNSEL FOR THE GOVERNMENT DISCRETION TO RESOLVE
ACCOUNTING METHOD ISSUES

.01 AUTHORITY TO RESOLVE ACCOUNTING METHOD ISSUES. An appeals officer
or counsel for the government may resolve an accounting method issue (as
defined by section 3.01 of this revenue procedure) when it is in the
interest of the government to do so. See P-8-47.

.02 TYPES OF RESOLUTIONS.

(1) IN GENERAL. An appeals officer or counsel for the government may
resolve an accounting method issue by using any of the means described in
section 6 of this revenue procedure, or any other means deemed appropriate
under the circumstances, to reflect the hazards of litigation. See
sections 10.02 through 10.04 of this revenue procedure for examples of the
application of section 6 of this revenue procedure.

(2) ACCOUNTING METHOD CHANGES.

(a) TREATING AN ACCOUNTING METHOD ISSUE AS A METHOD CHANGE. An appeals
officer or counsel for the government resolving an accounting method issue
may treat the issue as a change in method of accounting.

(b) SELECTION OF NEW METHOD OF ACCOUNTING. Except as provided in
section 2.06 of this revenue procedure, an appeals officer or counsel for
the government changing a taxpayer's method of accounting will select a
new method of accounting by properly applying the law to the facts. The
appeals officer or counsel for the government will not put the taxpayer on
an improper method of accounting in order to reflect the hazards of
litigation.

(c) TERMS AND CONDITIONS OF CHANGE. An appeals officer or counsel for
the government changing a taxpayer's method of accounting may agree to
terms and conditions that differ from those ordinarily applicable to an
Examination-imposed accounting method change, including the following (or
any combination thereof):

(i) YEAR OF CHANGE. An appeals officer or counsel for the government
may compromise the year of change (for example, by agreeing to a later
year of change). However, an appeals officer or counsel for the government
changing a taxpayer's method of accounting ordinarily will not defer the
year of change to later than the most recent taxable year under
examination on the date of the agreement finalizing the change, and, in no
event, will defer the year of change to later than the taxable year that
includes the date of the agreement finalizing the change;

(ii) SECTION 481(a) ADJUSTMENT. An appeals officer or counsel for the
government may make the change using a section 481(a) adjustment or a
cut-off method. If a section 481(a) adjustment is used, the appeals
officer or counsel for the government may compromise the amount of the
section 481(a) adjustment (for example, by agreeing to a reduced section
481(a) adjustment). If the appeals officer or counsel for the government
agrees to compromise the amount of the section 481(a) adjustment, the
agreement must be in writing; and

(iii) SPREAD OF THE SECTION 481(a) ADJUSTMENT. An appeals officer or
counsel for the government may compromise the section 481(a) adjustment
period (for example, by agreeing to a longer section 481(a) adjustment
period).


(3) ALTERNATIVE-TIMING RESOLUTION. In lieu of changing a taxpayer's
method of accounting, an appeals officer or counsel for the government may
resolve an accounting method issue by agreeing to alternative timing for
all or some of the items arising during, or prior to and during, the
taxable years before Appeals or a federal court. The resolution of an
accounting method issue on an alternative-timing basis for certain items
will not affect the taxpayer's method of accounting for any items not
covered by the resolution.

EXAMPLE. The Service and the taxpayer agree that the taxpayer will
capitalize the inventoriable costs incurred during 1999 that were deducted
under the taxpayer's method of accounting. The taxpayer's inventoriable
costs covered by the agreement must be capitalized and accounted for under
the taxpayer's inventory method. The inventoriable costs that are not
covered by the agreement (that is, those costs incurred in taxable years
prior and subsequent to 1999) are not affected by the resolution and thus,
consistent with the taxpayer's method of accounting, must continue to be
deducted.


(4) TIME-VALUE OF MONEY RESOLUTION.

(a) IN GENERAL. In lieu of changing a taxpayer's method of accounting,
an appeals officer or counsel for the government may resolve an accounting
method issue by agreeing that the taxpayer will pay the government a
"specified amount" that approximates the time-value-of-money benefit the
taxpayer has derived from using its method of accounting for the taxable
years before appeals or a federal court (instead of the method of
accounting determined by the appeals officer or counsel for the government
to be the proper method of accounting), reduced by an appropriate factor
to reflect the hazards of litigation. If the sum of the
time-value-of-money benefit (detriment) computed with respect to each
taxable year is negative, the specified amount will be zero and no refund
will be made to the taxpayer. The specified amount is not interest under
section 163(a), and may not be deducted or capitalized under any provision
of the Code. In appropriate circumstances, however, the computation of the
specified amount may be tax affected to reflect the approximate effect of
a hypothetical tax deduction, as demonstrated in the sample computation.
See section 6.02(4)(b)(ii)(B) of this revenue procedure. The specified
amount will be treated as a miscellaneous payment as described in the
Internal Revenue Manual.

(b) COMPUTATION OF SPECIFIED AMOUNT.

(i) IN GENERAL. An appeals officer or counsel for the government may
use any reasonable manner to compute the specified amount, including the
sample computation described in section 6.02(4)(b)(ii) of this revenue
procedure, or a computation that takes into account the taxpayer's actual
tax rates and tax attributes.

(ii) SAMPLE COMPUTATION. Under the sample computation, the specified
amount equals the sum of the time-value-of-money benefit (detriment)
computed with respect to each taxable year before Appeals or a federal
court. The time-value-of-money benefit (detriment) with respect to each
taxable year before Appeals or a federal court equals the "hypothetical
underpayment (overpayment)" (as defined in section 6.02(4)(b)(ii)(A) of
this revenue procedure), multiplied by the "applicable time-value rate"
(as defined in section 6.02(4)(b)(ii)(B) of this revenue procedure),
compounded daily for the "applicable period" (as defined in section
6.02(4)(b)(ii)(C) of this revenue procedure).

(A) HYPOTHETICAL UNDERPAYMENT (OVERPAYMENT). The hypothetical
underpayment (overpayment) for each taxable year before Appeals or a
federal court is equal to the net increase or decrease in taxable income
(including the section 481(a) adjustment) that would have been reflected
on the return for the taxable year if the Service had changed the
taxpayer's method of accounting (in the earliest taxable year before
Appeals or a federal court, or, if later, the first taxable year the
method is considered impermissible), multiplied by the applicable tax rate
for the taxable year of the underpayment (overpayment). For this purpose,
only adjustments associated with the change are taken into account. The
applicable tax rate is the highest rate of income tax applicable to the
taxpayer (for example, the highest rate in effect under section 1 for
individuals or section 11 for corporations).

(B) APPLICABLE TIME-VALUE RATE. The applicable time-value rate
generally equals an average of the quarterly underpayment rates in effect
under section 6621(a) for the applicable period. However, for a taxpayer
that would be entitled to a deduction under section 163(a) for the
specified amount if the specified amount were treated as interest arising
from the underpayment of tax, the applicable time-value rate is computed
at a reduced rate equaling an average of the quarterly underpayment rates
in effect under section 6621(a) for the applicable period, multiplied by
the excess of 100% over the applicable tax rate for the taxable year of
the underpayment (overpayment).

(C) APPLICABLE PERIOD. The applicable period begins on the due date
(without regard to extensions) of the return for the taxable year of the
underpayment (overpayment) and ends on the date on which the specified
amount is paid.

(D) PROCESSING OF SPECIFIED AMOUNT. The Appeals Officer or government
counsel resolving the issue should forward checks in payment of specified
amounts to:

Internal Revenue Service
201 W. Riverside Blvd
Manual Deposit Unit
Stop 31, Unit 21
Covington, KY 41019
Attn: Manager, Manual Deposit Unit.


The Manager of the Manual Deposit Unit should be notified by telephone, at
(859) 292-5790, that the payment will be sent. The transmittal memorandum
should state that the payment is a "Rev. Proc. 2002-18 Specified Amount"
payment and should specify the name and TIN of the taxpayer, the type of
taxpayer (LMSB, SBSE, W&I), and the year(s) to which the payment pertains.


SECTION 7. PROCEDURES FOR A SERVICE-IMPOSED ACCOUNTING METHOD CHANGE.

.01 REQUIREMENT TO PROVIDE NOTICE TO TAXPAYER.

(1) IN GENERAL. An examining agent, appeals officer, or counsel for the
government changing a taxpayer's method of accounting will provide notice
that an accounting method issue is being treated as an accounting method
change. However, an appeals officer or counsel for the government
resolving an accounting method issue as an accounting method change is not
required to provide notice that the accounting method issue is being
treated as an accounting method change if such notice has been provided by
the examining agent. In addition, if the examining agent has provided
notice that an accounting method issue is being treated as an accounting
method change and an appeals officer or counsel for the government
subsequently resolves such accounting method issue on a
nonaccounting-method-change basis, the appeals officer or counsel for the
government should provide notice that the accounting method issue has not
been treated as an accounting method change.

(2) FORM OF NOTICE. The notice must be in writing. If the taxpayer and
the Service execute a closing agreement finalizing the change, the notice
will be provided in the closing agreement. If the taxpayer and the Service
do not execute a closing agreement, the notice ordinarily will be provided
in the examiner's report or the Form 870AD (Offer of Waiver of Restriction
on Assessment and Collection of Deficiency in Tax and of Acceptance of
Overpayment). However, the Service may also provide the notice in a
preliminary notice of deficiency, a statutory notice of deficiency, a
notice of claim disallowance, a notice of final administrative adjustment,
a pleading (for example, a petition, complaint, or answer) or amendment
thereto, or in any other similar writing provided to the taxpayer.

(3) CONTENT OF NOTICE. The notice must include:

(a) a statement that the accounting method issue is being treated as an
accounting method change or a clearly labeled section 481(a) adjustment;
and

(b) a description of the new method of accounting.


(4) METHOD NOT ESTABLISHED WITHOUT NOTICE. The resolution of an
accounting method issue will not establish a new method of accounting if
the Service does not provide the notice required by section 7.01 of this
revenue procedure. See section 9 of this revenue procedure for the
procedures applicable if the Service does not provide this notice.


.02 FINALIZING A SERVICE-IMPOSED METHOD CHANGE.

(1) IN GENERAL. To implement a Service-imposed change in method of
accounting, the taxpayer and the Service should execute a closing
agreement under section 7121 in which the taxpayer agrees to the change
and the terms and conditions of the change. For purposes of this revenue
procedure, in the case of accounting method issues before a federal court,
the term "closing agreement" includes any other appropriate settlement
agreement. If the taxpayer and the Service execute such a closing
agreement, then the change is final as of the date of the agreement
(unless otherwise provided by a federal court). In the absence of such an
agreement, a Service-imposed accounting method change is final only upon
the expiration of the period of limitations for filing a claim for refund
under section 6511 for the year of change or the date of a final court
order requiring the change.

(2) CONTENT OF CLOSING AGREEMENT. A closing agreement finalizing a
Service-imposed accounting method change must comply with the requirements
of Rev. Proc. 68-16 (1968-1 C.B. 770), and should include the information
outlined in the Model Closing Agreement for Settlement on an Accounting
Method Basis attached as APPENDIX A of this revenue procedure. A
settlement agreement finalizing a Service-imposed accounting method change
with respect to an accounting method issue that is pending before a
federal court must conform to the rules and procedures of the court and
should include the information outlined in the Model Closing Agreement for
Settlement on an Accounting Method Change Basis attached as APPENDIX A of
this revenue procedure.


.03 IMPLEMENTING A SERVICE-IMPOSED METHOD CHANGE.

(1) YEARS BEFORE THE SERVICE. The Service should make the adjustments
necessary to effect a Service-imposed accounting method change to the
taxpayer's returns for the taxable years under examination, before
Appeals, or before a federal court. These adjustments include the
adjustments to taxable income necessary to reflect the new method
(including the section 481(a) adjustment required as a result of the
change), and any collateral adjustments to taxable income or tax liability
resulting from the change.

(2) SUCCEEDING YEARS FOR WHICH RETURNS HAVE BEEN FILED. If a
Service-imposed accounting method change is finalized by a closing
agreement, the Service may require that the taxpayer file amended returns
to reflect the change for any affected succeeding taxable years for which
a federal income tax return has been filed as of the date of the
agreement. The amended returns must include the adjustments to taxable
income and any collateral adjustments to taxable income or tax liability
resulting from the change necessary to reflect the new method. The Service
may require that the amended returns be filed prior to execution of the
closing agreement finalizing the change. If the Service does not require
the amended returns, the taxpayer should file such amended returns. If the
Service does not require the amended returns and the taxpayer does not
file the amended returns, the Service should make the adjustments
necessary to reflect the change for affected succeeding taxable years if
and when it examines the returns for those years. A taxpayer that files an
amended return using the new method prior to the date a Service-imposed
change becomes final must continue to use the new method on all subsequent
returns, unless the taxpayer obtains the consent of the Commissioner to
change from the new method or the Service changes the taxpayer from the
new method on subsequent examination. See Rev. Rul. 90-38. A taxpayer
eligible to file a "qualified amended return" under Rev. Proc. 94-69
(1994-2 C.B. 804) may satisfy any requirement to file an amended return by
filing a "qualified amended return" in accordance with that revenue
procedure.

(3) FUTURE YEARS. The taxpayer must use the new method of accounting on
all returns filed after the date that a Service-imposed accounting method
change becomes final (see section 7.02 of this revenue procedure), unless
the taxpayer obtains the consent of the Commissioner to change from the
new method or the Service changes the taxpayer from the new method on
subsequent examination. A taxpayer that files a return using the new
method prior to the date a Service-imposed change becomes final must
continue to use the new method on all subsequent returns, unless the
taxpayer obtains the consent of the Commissioner to change from the new
method or the Service changes the taxpayer from the new method on
subsequent examination. If the taxpayer does not use the new method on any
return filed prior to the date a Service-imposed change becomes final, and
does not file amended returns to reflect the change, the Service should
make the adjustments necessary to reflect the change for the affected
taxable years if and when it examines those returns.


.04 EFFECT OF FINAL SERVICE-IMPOSED METHOD CHANGE.

(1) NEW METHOD ESTABLISHED. A Service-imposed change that is final
establishes a new method of accounting within the meaning of section
446(e) and section 1.446-1(e). As a result, the taxpayer is required to
use the new method of accounting for the year of change and for all
subsequent taxable years, unless the taxpayer obtains the consent of the
Commissioner to change from the new method or the Service changes the
taxpayer from the new method on subsequent examination.

(2) SUBSEQUENT EXAMINATION. Except as provided in section 7.04(3) of
this revenue procedure, the Service is not precluded from changing the
taxpayer from the new method of accounting if the Service determines that
the new method does not clearly reflect the taxpayer's income.

(3) AUDIT PROTECTION.

(a) IN GENERAL. A taxpayer that executes a closing agreement finalizing
a Service-imposed accounting method change will not be required to change
or modify the new method for any taxable year for which a federal income
tax return has been filed as of the date of the closing agreement,
provided that:

(i) the taxpayer has complied with all the applicable provisions of the
closing agreement;

(ii) there has been no taxpayer fraud, malfeasance, or
misrepresentation of a material fact;

(iii) there has been no change in the material facts on which the
closing agreement was based; and

(iv) there has been no change in the applicable law on which the
closing agreement was based.


(b) LIMITATIONS. The Service may require the taxpayer to change or
modify the new method in the earliest open taxable year if the taxpayer
fails to comply with the applicable provisions of the agreement or upon a
showing of the taxpayer's fraud, malfeasance, or misrepresentation of a
material fact. The Service may require the taxpayer to change or modify
the new method in the earliest open taxable year in which the material
facts have changed. The Service also may require the taxpayer to change or
modify the new method in the earliest open taxable year in which the
applicable law has changed. For this purpose, a change in the applicable
law includes: (i) the enactment of legislation; (ii) a decision of the
United States Supreme Court; (iii) the issuance of temporary or final
regulations; or (iv) the issuance of a revenue ruling, revenue procedure,
notice, or other guidance published in the Internal Revenue Bulletin.


.05 COORDINATION WITH EXAMINATION. An appeals officer or counsel for
the government changing a taxpayer's method of accounting will coordinate
the resolution with Examination if the appeals officer or counsel for the
government proposes to defer the year of change to any taxable year not
before appeals or a federal court. Examination will advise the appeals
officer or counsel for the government of any changes in material fact in
any taxable year under examination.

.06 DEEMED CUT-OFF METHOD. If the Service does not impose a section
481(a) adjustment but otherwise provides the notice required by section
7.01 of this revenue procedure, the Service-imposed change will be treated
as being made using a cut-off method, unless the Service and the taxpayer
specifically have agreed in writing to compromise the amount of the
section 481(a) adjustment.


SECTION 8. PROCEDURES FOR RESOLVING ACCOUNTING METHOD ISSUES ON A
NONACCOUNTING-METHOD-CHANGE BASIS

.01 CLOSING AGREEMENT REQUIRED. To resolve an accounting method issue
raised by the Service on a nonaccounting-method-change basis, the Service
and the taxpayer will execute a closing agreement under section 7121. For
purposes of this revenue procedure, in the case of accounting method
issues before a federal court, the term "closing agreement" includes any
other appropriate settlement agreement. If the accounting method issue is
being resolved on an alternative-timing basis as described in section
6.02(3) of this revenue procedure, the taxpayer must agree to pay the
government any taxes and interest due as a result of the resolution. If
the accounting method issue is being resolved on a time-value-of-money
basis as described in section 6.02(4) of this revenue procedure, the
taxpayer must agree to pay the government the specified amount as a result
of the resolution.

.02 CONTENT OF CLOSING AGREEMENT. A closing agreement finalizing the
resolution of an accounting method issue on a nonaccounting-method-change
basis must comply with the requirements of Rev. Proc. 68-16, and should
include the information outlined in the Model Closing Agreement for
Settlement on a Nonaccounting-method-change Basis attached as APPENDIX B
of this revenue procedure. A closing agreement resolving an accounting
method issue that is pending before a federal court on a
nonaccounting-method-basis must conform to the rules and procedures of the
court and should include the information outlined in the Model Closing
Agreement for Settlement on a Nonaccounting-method-change Basis attached
as APPENDIX B of this revenue procedure.

.03 IMPLEMENTING RESOLUTION OF AN ACCOUNTING METHOD ISSUE ON A
NONACCOUNTING-METHOD-CHANGE BASIS.

(1) RESOLUTION ON AN ALTERNATIVE-TIMING BASIS.

(a) YEARS BEFORE THE SERVICE. The Service should make the adjustments
necessary to effect an alternative-timing resolution for the taxable years
before appeals or before a federal court. These adjustments include the
adjustments to taxable income necessary to reflect the resolution and any
collateral adjustments to taxable income or tax liability resulting from
the resolution.

(b) SUCCEEDING YEARS FOR WHICH RETURNS HAVE BEEN FILED. The Service may
require that the taxpayer file amended returns to reflect an
alternative-timing resolution for any affected succeeding taxable years
for which a federal income tax return has been filed as of the date of the
closing agreement. The amended returns must include the adjustments to
taxable income and any collateral adjustments to taxable income or tax
liability resulting from the resolution necessary to reflect the
resolution. The Service may require that the amended returns be filed
prior to execution of the closing agreement finalizing the resolution. If
the Service does not require the amended returns, the taxpayer should file
such amended returns. If the Service does not require amended returns and
the taxpayer does not file amended returns, the Service should make the
adjustments necessary to reflect the resolution for affected succeeding
taxable years if and when it examines the returns for those years. A
taxpayer eligible to file a "qualified amended return" under Rev. Proc.
94-69 may satisfy any requirement to file an amended return by filing a
"qualified amended return" in accordance with that revenue procedure.

(c) FUTURE YEARS. The taxpayer must reflect the alternative-timing
resolution on the returns for any affected succeeding taxable years for
which a return has not been filed as of the date of the closing agreement.
The taxpayer must continue to file its returns on its current method of
accounting for all items not covered by the closing agreement, unless the
taxpayer obtains the consent of the Commissioner to change from its
current method or the Service changes the taxpayer from its current method
on subsequent examination.


(2) RESOLUTION ON A TIME-VALUE-OF-MONEY BASIS. The taxpayer must pay
the specified amount required by the time-value-of-money resolution. The
Service will not change or otherwise propose adjustments to taxable income
with respect to the taxpayer's method of accounting for the taxable years
covered by a closing agreement. The taxpayer must continue to file its
returns on its current method of accounting, unless the taxpayer obtains
the consent of the Commissioner to change from its current method or the
Service changes the taxpayer from its current method on subsequent
examination.


.04 EFFECT OF RESOLVING AN ACCOUNTING METHOD ISSUE ON A
NONACCOUNTING-METHOD-CHANGE BASIS.

(1) NO CHANGE IN METHOD. If the Service resolves an accounting method
issue on a nonaccounting-method-change basis, the resolution does not
constitute a change in method of accounting. If the accounting method
issue is resolved on an alternative-timing basis, the taxpayer is required
to use its current method of accounting for all items not covered by the
closing agreement, unless the taxpayer obtains the consent of the
Commissioner to change from its current method or the Service changes the
taxpayer from its current method on subsequent examination. If the
accounting method issue is resolved on a time-value-of-money basis, the
taxpayer is required to continue to use its current method of accounting
on all returns for taxable years subsequent to the years covered by the
closing agreement, unless the taxpayer obtains the consent of the
Commissioner to change from its current method or the Service changes the
taxpayer from its current method on subsequent examination.

(2) SUBSEQUENT CHANGE.

(a) RESOLUTION ON AN ALTERNATIVE-TIMING BASIS. If an accounting method
issue is resolved on an alternative-timing basis, the Service is not
precluded from changing the taxpayer's method of accounting in any open
taxable year for any item not covered by the closing agreement.

(b) RESOLUTION ON A TIME-VALUE-OF-MONEY BASIS. If an accounting method
issue is resolved on a time-value-of-money basis, the Service is not
precluded from changing the taxpayer's method of accounting in any open
taxable year not covered by the closing agreement.


(3) EFFECT OF SUBSEQUENT CHANGE.

(a) RESOLUTION ON AN ALTERNATIVE-TIMING BASIS. If an accounting method
issue is resolved on an alternative-timing basis and the taxpayer's method
of accounting subsequently is changed (voluntarily or involuntarily) in
any open taxable year, the section 481(a) adjustment (if any) will be
determined by reference to all items arising prior to the year of change,
except those items covered by the closing agreement (that is, those items
for which the closing agreement specifically provides the manner in which
the items are to be accounted for).

(b) RESOLUTION ON A TIME-VALUE-OF-MONEY BASIS. If an accounting method
issue is resolved on a time-value-of-money basis and the taxpayer's method
of accounting subsequently is changed (voluntarily or involuntarily) in
any open taxable year not covered by the closing agreement, the section
481(a) adjustment (if any) will be determined by reference to all items
arising prior to the year of change. If the Service subsequently changes
the taxpayer's method of accounting and imposes a section 481(a)
adjustment, the interest that is assessed on any underpayment, or the
interest that is due on any overpayment, for the year of change will be
treated as paid to the extent necessary to prevent duplicate payment of
the time-value-of-money benefit relating to the section 481(a) adjustment.



SECTION 9. DEFAULT PROCEDURES

.01 IN GENERAL. Section 9 of this revenue procedure applies to the
resolution of any accounting method issue if the Service changes the
taxpayer's method of accounting and fails to provide the notice required
by section 7.01 of this revenue procedure, or if the Service resolves the
accounting method issue on a nonaccounting-method-change basis and the
Service and the taxpayer do not execute a closing agreement as required by
section 8.01 of this revenue procedure. See section 10.05 of this revenue
procedure for an example of the application of section 9 of this revenue
procedure.

.02 EFFECT OF ADJUSTMENTS. For accounting method issues resolved under
section 9 of this revenue procedure:

(1) NO OMISSION OR DUPLICATION. The Service and the taxpayer are
required to treat all items in a manner that prevents the duplication or
omission of items of income or deduction;

(2) NO CHANGE IN METHOD. The resolution does not constitute a change in
method of accounting. The taxpayer is required to continue to use its
current method of accounting for all items not affected by the adjustments
made by the Service, unless the taxpayer obtains the consent of the
Commissioner to change from its current method or the Service changes the
taxpayer from its current method on subsequent examination;

(3) SUBSEQUENT CHANGE. The Service is not precluded from changing the
taxpayer's method of accounting in any open taxable year; and

(4) EFFECT OF SUBSEQUENT CHANGE. If the taxpayer's method of accounting
subsequently is changed (voluntarily or involuntarily) in any open taxable
year, the section 481(a) adjustment (if any) will be determined by
reference to all items arising prior to the year of change, including the
items affected by the adjustment made by the Service.


SECTION 10. EXAMPLES.

The following examples illustrate how the provisions of this revenue
procedure apply to the resolution of accounting method issues in various
circumstances. These examples include explanations of the resolution of an
accounting method issue previously resolved by Appeals on a
nonaccounting-method-change basis in the event that Examination resolves
such issue in a subsequent taxable year by changing the taxpayer's method
of accounting. Note, however, that where the resolution of an accounting
method issue is imposed by Appeals, an examining agent addressing such
issue in a subsequent taxable year may resolve it consistently with the
prior resolution by Appeals (see Delegation Order 236).

.01 EXAMINATION-IMPOSED CHANGE.

(1) FACTS. A taxpayer that is a corporation deducted costs that the
Service determines should have been capitalized to real property that was
placed in service in 2000. The taxpayer incurred and deducted $1,000,000
of the costs in 1996, $2,000,000 in each of 1997 and 1998, and $5,000,000
in each of 1999 and 2000. The taxpayer is examined for the 1997 and 1998
taxable years (1997 is the earliest open year). The examining agent
determines that the treatment of the costs is an accounting method issue,
and that the taxpayer's deduction of the costs is an impermissible method
of accounting. The examining agent therefore proposes an adjustment.

(2) EFFECT. Under section 5 of this revenue procedure, the examining
agent is required to properly apply the law to the facts and change the
taxpayer to the capitalization method of accounting for the costs. The
examining agent imposes the change in 1997, the earliest open taxable
year. The examining agent will provide the notice required by section 7.01
of this revenue procedure. The examining agent imposes a section 481(a)
adjustment of $1,000,000 (representing the $1,000,000 of the costs
deducted in 1996), the entire amount of which will be taken into account
in computing taxable income in 1997. The examining agent also disallows
the deductions of $2,000,000 in each of 1997 and 1998. The taxpayer's
basis in the property as of the beginning of 1998 is increased by
$5,000,000 (representing the $1,000,000 section 481(a) adjustment and the
disallowance of the $2,000,000 of deductions in each of 1997 and 1998).
The method change (once final) is effective for 1997. Thus, the taxpayer
is required to capitalize the costs in 1997 and all subsequent taxable
years, unless the taxpayer obtains the consent of the Commissioner to
change the method or the Service changes the taxpayer from the method on
subsequent examination.


.02 APPEALS RESOLUTION OF ACCOUNTING METHOD ISSUE AS A METHOD CHANGE
WITH COMPROMISE TERMS AND CONDITIONS.

(1) FACTS. The facts are the same as in section 10.01 of this revenue
procedure, except that the issue of whether the costs should be
capitalized is referred to Appeals. The appeals officer believes that
hazards of litigation exist with respect to the Service's position. The
appeals officer and the taxpayer agree to resolve the accounting method
issue by changing the taxpayer's method of accounting for the costs, but
with compromise terms and conditions to reflect the hazards of litigation.

(2) EFFECT. Under section 6.02(2) of this revenue procedure, when the
appeals officer changes the taxpayer's method of accounting, the appeals
officer is required to properly apply the law to the facts and change the
taxpayer to the capitalization method of accounting for the costs. The
appeals officer should provide the notice required by section 7.01 of this
revenue procedure.

The appeals officer may make the change using the cut-off method. If
the appeals officer makes the change in 1997 using the cut-off method, the
appeals officer will disallow the deductions of $2,000,000 in each of 1997
and 1998. The taxpayer's basis in the property as of the beginning of 1998
will be increased by $4,000,000 (representing the disallowance of the
$2,000,000 of deductions in each of 1997 and 1998). The method change
(once final) is effective for 1997. Thus, the taxpayer is required to
capitalize the costs in 1997 and all subsequent taxable years, unless the
taxpayer obtains the consent of the Commissioner to change the method or
the Service changes the taxpayer from the method on subsequent
examination.

Alternatively, the appeals officer may compromise the amount of the
section 481(a) adjustment. If the appeals officer makes the change in 1997
and agrees to reduce the section 481(a) adjustment by 25%, the appeals
officer will impose a section 481(a) adjustment of $750,000 (representing
75% of the amount of the costs deducted in 1996), the entire amount of
which will be taken into account in computing taxable income in 1997. The
appeals officer will disallow the deductions of $2,000,000 in each of 1997
and 1998. The taxpayer and the appeals officer agree in a closing
agreement that basis in the property as of the beginning of 1998 will be
increased by $4,750,000 (representing the reduced section 481(a)
adjustment of $750,000 and the disallowance of the $2,000,000 of
deductions in each of 1997 and 1998). The method change (once final) is
effective for 1997. Thus, the taxpayer is required to capitalize the costs
in 1997 and all subsequent taxable years, unless the taxpayer obtains the
consent of the Commissioner to change the method or the Service changes
the taxpayer from the method on subsequent examination.

As another alternative, the appeals officer may compromise the year of
change and/or the section 481(a) adjustment period. For example, the
appeals officer may agree to make the change in 1998 with a two-year
section 481(a) adjustment period. The appeals officer will impose a
section 481(a) adjustment of $3,000,000 (representing the $1,000,000 of
costs deducted in 1996 and the $2,000,000 of costs deducted in 1997),
one-half of which will be taken into account in computing taxable income
in each of 1998 and 1999. The appeals officer will disallow the deduction
of $2,000,000 in 1998. The taxpayer's basis in the property as of the
beginning of 1998 will be increased by $5,000,000 (representing the
$3,000,000 section 481(a) adjustment and the disallowance of the
$2,000,000 of deductions in 1998). The method change (once final) is
effective for 1998. Thus, the taxpayer is required to capitalize the costs
in 1998 and all subsequent taxable years, unless the taxpayer obtains the
consent of the Commissioner to change the method or the Service changes
the taxpayer from the method on subsequent examination.


.03 APPEALS RESOLUTION OF ACCOUNTING METHOD ISSUE ON AN
ALTERNATIVE-TIMING BASIS.

(1) FACTS. The facts are the same as in section 10.02 of this revenue
procedure, except that the appeals officer and the taxpayer agree to
resolve the issue on an alternative-timing basis as described in section
6.02(3) of this revenue procedure and they enter into a closing agreement
as required by section 8.01 of this revenue procedure. The accounting
method issue is resolved by providing in the closing agreement that the
taxpayer will deduct 50% of the costs incurred in 1997 and 1998 and
capitalize the other 50% of the costs incurred in those years.

(2) EFFECT. The appeals officer will disallow $1,000,000 of the
deductions in each of 1997 and 1998. The taxpayer's basis in the property
as of the beginning of 1998 is increased by $2,000,000 (representing the
disallowance of the $1,000,000 of deductions in each of 1997 and 1998).
The taxpayer's current method of accounting for the costs is not changed.
Thus, the taxpayer is required to continue to deduct the costs not covered
by the agreement (that is, the costs incurred in 1996 and the costs
incurred in 1999 and all subsequent taxable years), unless the taxpayer
obtains the consent of the Commissioner to change the method or the
Service changes the taxpayer from the method on subsequent examination. If
the Service changes the taxpayer's method in 1999, the Service will
compute a section 481(a) adjustment of $1,000,000 (including the amount of
the costs deducted in 1996, which are not covered by the agreement, and
excluding the amount of those costs deducted in 1997 and 1998 because the
costs are covered by the agreement). The Service will also disallow the
deduction of $5,000,000 in 1999. The taxpayer's basis in the property as
of the beginning of 1999 will be increased by an additional $6,000,000
(representing the $1,000,000 section 481(a) adjustment and the
disallowance of the $5,000,000 deduction in 1999). The method change (once
final) is effective for 1999. Thus, the taxpayer is required to capitalize
the costs in 1999 and all subsequent taxable years, unless the taxpayer
obtains the consent of the Commissioner to change the method or the
Service changes the taxpayer from the method on subsequent examination.

Alternatively, the accounting method issue may be resolved by providing
in the closing agreement that the taxpayer will capitalize $1,000,000 of
the costs incurred in each of 1997 and 1998 (and the agreement is silent
as to the manner in which the other $1,000,000 of costs incurred in each
of 1997 and 1998 are to be accounted for). The results for 1997 and 1998
will be the same as under the closing agreement in the original facts
described in section 10.03(1) of this revenue procedure. That is, the
appeals officer will disallow $1,000,000 of the deduction in each of 1997
and 1998. The taxpayer's basis in the property as of the beginning of 1998
is increased by $2,000,000 (representing the disallowance of the
$1,000,000 of deductions in each of 1997 and 1998). Because the taxpayer's
current method of accounting for the costs is not changed, the taxpayer is
required to continue to deduct the costs not covered by the closing
agreement (that is, the costs incurred in 1996, the remaining $1,000,000
of costs incurred in each of 1997 and 1998, and the costs incurred in 1999
and all subsequent taxable years). However, if the Service changes the
taxpayer's method in 1999, the Service will compute a section 481(a)
adjustment of $3,000,000 (including the $1,000,000 of the costs deducted
in 1996 and the remaining $2,000,000 of the costs deducted in 1997 and
1998, because those costs are not items covered by the closing agreement).
The Service also will disallow the deduction of $5,000,000 in 1999. The
taxpayer's basis in the property as of the beginning of 1999 will be
increased by an additional $8,000,000 (representing the $3,000,000 section
481(a) adjustment and the disallowance of the $5,000,000 deduction in
1999). The method change (once final) is effective for 1999. Thus, the
taxpayer is required to capitalize the costs in 1999 and all subsequent
taxable years, unless the taxpayer obtains the consent of the Commissioner
to change the method or the Service changes the taxpayer from the method
on subsequent examination.

Assuming, in the alternative, that the accounting method issue is
resolved by providing in the closing agreement that, for the costs
incurred in 1996 through 1998, the taxpayer will deduct 50% of the costs
and capitalize the other 50% of the costs, and will increase taxable
income by $500,000 in 1997 (representing the disallowance of $500,000 of
costs in 1996). The appeals officer will disallow $1,000,000 of the
deductions in each of 1997 and 1998. The taxpayer's basis in the property
as of the beginning of 1998 is increased by $2,500,000 (representing the
disallowance of the $500,000 of deductions in 1996 and the $1,000,000 of
deductions in each of 1997 and 1998). The taxpayer's current method of
accounting for the costs is not changed. Thus, the taxpayer is required to
continue to deduct the costs not covered by the closing agreement (that
is, the costs incurred in 1999 and all subsequent taxable years), unless
the taxpayer obtains the consent of the Commissioner to change the method
or the Service changes the taxpayer from the method on subsequent
examination. If the Service changes the taxpayer's method in 1999, the
Service will compute a section 481(a) adjustment of $0 (excluding the
amount of the costs deducted in 1996 through 1998, because the manner in
which those costs are to be accounted for is specifically covered by the
closing agreement). The Service also will disallow the deduction of
$5,000,000 in 1999. The taxpayer's basis in the property as of the
beginning of 1999 will be increased by an additional $5,000,000
(representing the disallowance of the $5,000,000 deduction in 1999). The
method change (once final) is effective for 1999. Thus, the taxpayer is
required to capitalize the costs in 1999 and all subsequent taxable years,
unless the taxpayer obtains the consent of the Commissioner to change the
method or the Service changes the taxpayer from the method on subsequent
examination.


.04 APPEALS RESOLUTION OF ACCOUNTING METHOD ISSUE ON
TIME-VALUE-OF-MONEY BASIS.

(1) FACTS. The facts are the same as section 10.02 of this revenue
procedure, except that the appeals officer and the taxpayer agree to
settle the issue on a time-value-of-money basis as described in section
6.02(4) of this revenue procedure. The taxpayer files its return on a
calendar year basis. The appeals officer and the taxpayer agree to compute
the specified amount using the sample computation described in section
6.02(4)(b)(ii) of the revenue procedure. The appeals officer believes that
an appropriate factor to reflect the hazards of litigation is 25%. The
taxpayer pays the specified amount on May 15, 2000. The highest marginal
tax rate applicable to the taxpayer for 1997 and 1998 is 35% and the
quarterly large corporation underpayment rates in effect for January 1,
1998, through June 30, 2000, are: 11%, 10%, 10%, 10%, 9%, 10%, 10%, 10%,
10%, and 11%. The specified amount under section 6.02(4) of this revenue
procedure would be deductible under section 163(a) by the taxpayer if it
were treated as interest expense arising from an underpayment of tax.

(2) COMPUTATION OF SPECIFIED AMOUNT. The hypothetical underpayment of
tax for 1997 is $1,050,000, computed as follows: the net increase in
taxable income of $3,000,000 (representing the section 481(a) adjustment
of $1,000,000 and the disallowance of the deduction of $2,000,000 computed
as if Examination had changed the taxpayer's method in 1997) multiplied by
the applicable tax rate of 35%. The hypothetical underpayment of tax for
1998 is $700,000, computed as follows: the net increase in taxable income
of $2,000,000 (representing the disallowance of the deduction of
$2,000,000 computed as if Examination had changed the taxpayer's method in
1997) multiplied by the applicable tax rate of 35%.

The applicable time-value rate for 1997 is 6.565%, which is computed as
follows: The applicable period for 1997 is March 15, 1998 (the due date of
the return) to May 15, 2000 (the date the specified amount is paid). The
underpayment rates in effect for the applicable period are 11%, 10%, 10%,
10%, 9%, 10%, 10%, 10%, 10%, and 11%. The average underpayment rate in
effect for the applicable period is 10.1%
[(11+10+10+10+9+10+10+10+10+11)/10]. The applicable after-tax time-value
rate is 6.565%, computed by multiplying the average underpayment rate by
one minus the applicable tax rate [10.1% * (1-.35)].

The applicable time-value rate for 1998 is 6.5%, which is computed as
follows: The applicable period for 1998 is March 15, 1999 (the due date of
the return) to May 15, 2000 (the date the specified amount is paid). The
underpayment rates in effect for the applicable period are 9%, 10%, 10%,
10%, 10%, and 11%. The average underpayment rate in effect for the
applicable period is 10.00% [(9+10+10+10+10+11)/6]. The applicable
after-tax time-value rate is 6.5%, computed by multiplying the average
underpayment rate by one minus the applicable tax rate [10.00% * (1-.35)].

The time-value-of-money benefit for each taxable year is computed by
using the following formula:

U * {[1+(r/365)]n-1}

where U = hypothetical underpayment for the taxable year

r = the applicable time-value rate

n = the number of days in the applicable period


The time-value-of-money benefit for 1997 is $160,519, computed as
follows: $1,050,000 * {[1+(.06565/365)]791-1. The time-value-of-money
benefit for 1998 is $55,165, computed as follows: $700,000 *
[1+(.065/365)]426-1{ }.

The specified amount is the sum of the time-value-of-money benefit for
1997 and 1998 reduced by 25% to reflect the hazards of litigation. The
specified amount is $161,763 computed as follows: ($160,519+$55,165) *
(1-.25).

(3) EFFECT. The Service will not propose any adjustments to taxable
income with respect to the taxpayer's method of accounting for the costs
for 1997 and 1998. The taxpayer's basis in the property as of the
beginning of 1998 is not changed. The taxpayer's current method of
accounting for the costs is not changed. Thus, the taxpayer is required to
continue to deduct the costs in 1999 and all subsequent taxable years,
unless the taxpayer obtains the consent of the Commissioner to change the
method or the Service changes the taxpayer from the method on subsequent
examination. If the Service changes the taxpayer's method in 1999, the
Service will compute a section 481(a) adjustment of $5,000,000
(representing the $1,000,000 of the costs deducted in 1996 and the
$2,000,000 of costs deducted in each of 1997 and 1998). The Service will
also disallow the deduction of $5,000,000 in 1999. The taxpayer's basis in
the property as of the beginning of 1999 will be increased by $10,000,000
(representing the $5,000,000 section 481(a) adjustment and the
disallowance of the $5,000,000 deduction in 1999). The method change (once
final) is effective for 1999. Thus, the taxpayer is required to capitalize
the costs in 1999 and all subsequent taxable years, unless the taxpayer
obtains the consent of the Commissioner to change the method or the
Service changes the taxpayer from the method on subsequent examination.

The interest on the taxpayer's deficiency (which reflects the inclusion
of the $5,000,000 section 481(a) adjustment in taxable income) for 1999 is
$100,000. A portion of the $100,000 of interest will be treated as paid to
the extent necessary to prevent duplicate payment of the
time-value-of-money benefit relating to the section 481(a) adjustment. The
interest on the deficiency for 1999 includes the time-value-of-money
benefit attributable to the section 481(a) adjustment for the period March
15, 2000, through the date of payment of the deficiency. The taxpayer
previously paid the Service the time-value-of-money benefit attributable
to $3,000,000 of the section 481(a) adjustment for the period March 15,
1998, through May 15, 2000, and $2,000,000 of disallowed deduction for the
period March 15, 1999, through May 15, 2000. The interest on the
deficiency for 1999 attributable to the overlap period of March 15, 2000,
through May 15, 2000, is $19,112, computed as follows:

A * t * {[1+(r/365)]n-1}

where A = the section 481(a) adjustment

t = highest marginal tax rate applicable to the taxpayer

r = the applicable time-value rate (computed for the overlap period)

n = the number of days in the overlap period

$5,000,000 * .35 * {[1+(.065/365)]61-1}


The $19,112 is reduced by 25% (the factor used by the appeals officer
to reflect the hazards of litigation) to arrive at the interest credit of
$14,334. The Service will treat the $14,334 as a payment toward the
$100,000 of interest on the taxpayer's deficiency for 1999.


.05 DEFAULT PROCEDURES.

(1) FACTS. The facts are the same as section 10.01 of this revenue
procedure, except that the examining agent does not provide the notice
required by section 7.01 of this revenue procedure. Specifically, the
examining agent disallows the deductions of $2,000,000 in each of 1997 and
1998, but does not compute the section 481(a) adjustment of $1,000,000 or
otherwise provide notice that the accounting method issue is being treated
as an accounting method change.

(2) EFFECT. The taxpayer's basis in the property as of the beginning of
1998 is increased by $4,000,000 (representing the disallowance of the
$2,000,000 of deductions in each of 1997 and 1998). The taxpayer's current
method of accounting for the costs is not changed. Thus, the taxpayer is
required to continue to deduct the costs in 1999 and all subsequent
taxable years, unless the taxpayer obtains the consent of the Commissioner
to change the method or the Service changes the taxpayer from the method
on subsequent examination. If the Service changes the taxpayer's method in
1999, the Service will compute a section 481(a) adjustment of $1,000,000
(representing the $1,000,000 of the costs deducted in 1996). The Service
will also disallow the deduction of $5,000,000 in 1999. The taxpayer's
basis in the property as of the beginning of 1999 will be increased by an
additional $6,000,000 (representing the $1,000,000 section 481(a)
adjustment and the disallowance of the $5,000,000 deduction in 1999). The
method change (once final) is effective for 1999. Thus, the taxpayer is
required to capitalize the costs in 1999 and all subsequent taxable years,
unless the taxpayer obtains the consent of the Commissioner to change the
method or the Service changes the taxpayer from the method on subsequent
examination.

Assume that the examining agent disallows the deductions of $2,000,000
in each of 1997 and 1998 and computes the section 481(a) adjustment of
$1,000,000, but does not label the section 481(a) adjustment or otherwise
provide notice that the accounting method issue is being treated as an
accounting method change. The taxpayer's basis in the property as of the
beginning of 1998 is increased by $5,000,000 (representing the $1,000,000
adjustment and the disallowance of the $2,000,000 of deductions in each of
1997 and 1998). The taxpayer's current method of accounting for the costs
is not changed. Thus, the taxpayer is required to continue to deduct the
costs in 1999 and all subsequent taxable years, unless the taxpayer
obtains the consent of the Commissioner to change the method or the
Service changes the taxpayer from the method on subsequent examination. If
the Service changes the taxpayer's method in 1999, the Service will
compute a section 481(a) adjustment of $0 (excluding the $1,000,000 of the
costs deducted in 1998 and the $2,000,000 of the costs deducted in each of
1997 and 1998 because the costs were accounted for in the prior
adjustments). The Service will also disallow the deduction of $5,000,000
in 1999. The taxpayer's basis in the property as of the beginning of 1999
will be increased by an additional $5,000,000 (representing the
disallowance of the $5,000,000 deduction in 1999). The method change (once
final) is effective for 1999. Thus, the taxpayer is required to capitalize
the costs in 1999 and all subsequent taxable years, unless the taxpayer
obtains the consent of the Commissioner to change the method or the
Service changes the taxpayer from the method on subsequent examination.


SECTION 11. EFFECTIVE DATE

.01 IN GENERAL. Except as provided in section 11.02 of this revenue
procedure, this revenue procedure is effective for:

(1) examiner's reports issued on or after July 1, 2002; and

(2) Forms 870AD and agreements executed on or after July 1, 2002
(regardless of when the underlying examiner's report was issued).


.02 TRANSITION RULE. The Service and the taxpayer may agree to apply
this revenue procedure to agreements executed on or after March 14, 2002.


DRAFTING INFORMATION

The principal author of this revenue procedure is Grant Anderson of the
Office of Associate Chief Counsel (Income Tax and Accounting). For further
information regarding this revenue procedure, contact Mr. Anderson at
(202) 622-4970 (not a toll-free call).


APPENDIX A

MODEL CLOSING AGREEMENT FOR SETTLEMENT ON ACCOUNTING METHOD CHANGE
BASIS

Department of the Treasury Internal Revenue Service

Closing Agreement on Final Determination Covering Specific Matters

Under section 7121 of the Internal Revenue Code, [Insert taxpayer's
name, address, telephone number, and identifying number] ("the taxpayer")
and the Commissioner of Internal Revenue ("the Commissioner") make the
following closing agreement:

WHEREAS:

1. The accounting method issue covered by this agreement is the
taxpayer's method of accounting for [identify subject: for example:
"credit sales"];

2. The taxable year(s) covered by this closing agreement are [insert
taxable year(s) covered by the agreement];

3. The taxpayer and the Commissioner relied on the following facts and
representations in making this closing agreement: [insert any relevant
facts];

4. Under the taxpayer's present method of accounting for [identify
subject: for example, "credit sales"], the taxpayer [describe in detail
the method of accounting being changed: for example, "includes income from
credit sales in gross income when payment is received"];

5. [If applicable, insert:] The taxpayer has filed an amended return(s)
for the taxable year(s) ended [insert applicable affected succeeding
taxable year(s) for which a federal income tax return has been filed as of
the date of the closing agreement] to reflect the change in method of
accounting for [insert subject: for example, "credit sales"] described in
this closing agreement;

6. [If applicable, insert:] A stipulated decision has been entered by
the [insert name of federal court] with respect to the taxable year(s)
ended [insert date(s)] that reflects taxable income for such year(s)
computed using the new method of accounting for [insert subject: for
example, "credit sales"].



NOW IT IS HEREBY DETERMINED AND AGREED for federal income tax purposes
that:

1. The Service is changing the taxpayer's method of accounting for
[insert subject: for example, "credit sales"] to the method of [describe
the method of accounting to which the taxpayer is being changed: for
example, "including income from credit sales in gross income when all the
events have occurred that fix the right to receive such income and the
amount thereof can be determined with reasonable accuracy (an accrual
method)"];

2. The change in method of accounting for [insert subject: for example,
"credit sales"] is to be effected for the taxable year ended [insert date]
(the year of change);

3. [Insert if applicable] An adjustment to income is required under
section 481(a) of the Internal Revenue Code in the amount of $ [insert
amount in numbers] ([insert amount in words] dollars), [if applicable,
insert computed by taking into account the limitations under section
481(b),] as of the beginning of the year of change ([insert date]), for
[describe the adjustment: for example, "credit sales"], which amount
previously has not been included in the taxpayer's gross income.
[Alternatively, insert] The change in method of accounting for [insert
subject: for example, "credit sales"] is to made on a cut-off basis;

4. [Insert if applicable] The section 481(a) adjustment will be taken
into account [insert section 481(a) adjustment spread period: for example,
"entirely in the year of change."]

5. [Insert if applicable] The adjustment(s) to tax attributable to the
adjustment(s) to taxable income resulting from the change in the method of
accounting for [insert subject: for example, "credit sales"] (including
the section 481(a) adjustment, current year adjustment(s), and any
collateral adjustments to taxable income or tax liability resulting from
the change) for each taxable year covered by the closing agreement are as
follows: [insert the adjustments to each taxable year covered by the
closing agreement in table form], and;

6. The change in method of accounting for [insert subject: for example,
"credit sales"] is a change in method of accounting within the meaning of
Rev. Proc. 2002-18. As such, the provisions of section 446 of the Code,
and the regulations thereunder, apply to the new method of accounting for
[insert subject: for example, "credit sales."];

7. The Service is not precluded from changing the taxpayer's method of
accounting for [insert subject: for example, "credit sales"] from the new
method of accounting if the Service determines that the new method does
not clearly reflect the taxpayer's income. However, under section 7.04(3)
of Rev. Proc. 2002-18, the Service will not require the taxpayer to change
its method of accounting for [insert subject: for example, "credit sales"]
from the new method for [insert taxable year(s) for which a federal income
tax return has been filed as of the date of this closing agreement],
provided that:

(a) the taxpayer has complied with all the applicable provisions of
this closing agreement;

(b) there has been no taxpayer fraud, malfeasance, or misrepresentation
of a material fact;

(c) there has been no change in the material facts on which this
closing agreement was based; and

(d) there has been no change in the applicable law on which this
closing agreement was based;


8. [Insert if applicable:] The following additional conditions also
apply: [insert, for example, conditions with respect to waiving
restrictions on assessment and collection, paying any tax, abating any
overassessment, or refunding or crediting any tax overpayment];

9. The taxpayer accepts this settlement and agrees to the applicable
terms of Rev. Proc. 2002-18. This agreement is final and conclusive
except:

(1) The matter it relates to may be reopened in the event of fraud,
malfeasance, or misrepresentation of a material fact;

(2) It is subject to the Internal Revenue Code sections that expressly
provide that effect be given to their provisions (including any stated
exception for section 7122) notwithstanding any law or rule of law; and

(3) If it relates to a tax period ending after the date of this
agreement, it is subject to any law enacted after the agreement date, that
applies to the tax period.


By signing, the parties certify that they have read and agreed to the
terms of this document.

Your signature ____ Date: ____

Spouse's signature if joint return: ____ Date: ____

Taxpayer's representative: ____ Date: ____

Taxpayer (other than an individual): ____ Date: ____

Title: ____


Commissioner of Internal Revenue:

By: ____ Date: ____

Title: ____


Instructions

This agreement must be signed and filed in triplicate. (All copies must
have original signatures.) The original and copies of the agreement must
be identical. The name of the taxpayer must be stated accurately. The
agreement may relate to one or more years.

If an attorney or agent signs the agreement for the taxpayer, the power
of attorney (or a copy) authorizing that person to sign must be attached
to the agreement.

If the taxpayer is a corporation, the agreement must be dated and
signed with the name of the corporation, the signature and title of an
authorized officer or officers, or the signature of an authorized attorney
or agent. It is not necessary that a copy of an enabling corporate
resolution be attached.

Use additional pages if necessary and identify them as part of this
agreement.

Please see Rev. Proc. 68-16 (1968-1 C.B. 770) for a detailed
description of practices and procedures applicable to most closing
agreements.


APPENDIX B MODEL CLOSING AGREEMENT FOR SETTLEMENT ON
NONACCOUNTING-METHOD-CHANGE BASIS

Department of the Treasury Internal Revenue Service

Closing Agreement on Final Determination Covering Specific Matters

Under section 7121 of the Internal Revenue Code, [Insert taxpayer's
name, address, telephone number, and identifying number] ("the taxpayer")
and the Commissioner of Internal Revenue ("the Commissioner") make the
following closing agreement:

WHEREAS:

1. The accounting method issue covered by this closing agreement is
[identify subject: for example: "costs of acquiring non-depreciable asset
X"];

2. [Insert if alternative-timing resolution] The item(s) covered by
this closing agreement are [identify items subject to the closing
agreement: for example, "the costs incurred in connection with the
acquisition of nondepreciable asset X in 1997 and 1998"]. [Alternatively,
insert if time-value-of-money resolution] The taxable year(s) covered by
this closing agreement are [insert taxable year(s) covered by the
agreement];

3. The taxpayer and the Commissioner relied on the following facts and
representations in making this closing agreement: [insert any relevant
facts];

4. Under the taxpayer's present method of accounting for [identify
subject: for example, "costs of acquiring nondepreciable asset X"], the
taxpayer [describe in detail the accounting method issue: for example,
"deducts the costs as an ordinary and necessary business expense"];

5. [If applicable, insert:] The taxpayer has filed an amended return(s)
for the taxable year(s) ended [insert applicable affected succeeding
taxable years for which a federal income tax return has been filed as of
the date of the closing agreement] to reflect the alternative-timing
resolution for [insert subject: for example, "costs of acquiring
nondepreciable asset X"] described in this closing agreement;

6. [If applicable, insert:] A stipulated decision has been entered by
the [insert name of federal court] with respect to the taxable years ended
[insert date(s)] that reflects the nonaccounting-method-change resolution
set forth in this agreement for [insert subject: for example, "costs of
acquiring nondepreciable asset X"].


NOW IT IS HEREBY DETERMINED AND AGREED for federal income tax purposes
that:

1. The Service is not changing the taxpayer's method of accounting for
[insert subject: for example, "costs of acquiring non-depreciable asset
X"].

2. The accounting method issue covered by this agreement ([identify
subject: for example: "costs of acquiring nondepreciable asset X"]) is
being resolved on [insert basis for resolution: for example, "an
alternative-timing basis" or "a time-value-of-money basis"].

[If alternative-timing resolution, insert the following paragraphs 3-9
as applicable]

3. The items covered by the closing agreement are to be accounted for
in the affected taxable years as follows: [insert a description of the
manner in which the items are to be accounted for, for example, "Fifty
percent of the costs incurred in each of 1997 and 1998 ($1,000,000) will
be deductible and the remaining fifty percent ($1,000,000) will be
capitalized"];

4. As a result of this treatment, [Insert a description of any
collateral effects of thie alternative-timing treatment: for example, "the
taxpayer's basis in asset X is increased by $2,000,000"];

5. Any items not specifically covered by this closing agreement are not
affected by this agreement;

6. The adjustment(s) to tax attributable to the adjustment to taxable
income resulting from the resolution of [insert subject: for example,
"costs of acquiring nondepreciable asset X"] by this agreement (including
the current year adjustment and any collateral adjustments for each
taxable year affected by this closing agreement) is [insert taxable
year(s)], $ [insert amount in numbers] ([insert amount in words] dollars);

7. The Service is not precluded from changing the taxpayer's method of
accounting for [insert subject: for example, "costs of acquiring
nondepreciable asset X"] upon subsequent examination for any open taxable
year for items not covered by this agreement;

8. If the taxpayer's method of accounting for [insert subject: for
example, "costs of acquiring nondepreciable asset X"] subsequently is
changed (voluntarily or involuntarily) in any open taxable year, the
adjustment under section 481(a) (if any) will be determined by reference
to all items arising prior to the year of change except for those items
specifically covered by this closing agreement; and

9. [Insert if applicable:] The following additional conditions also
apply: [insert, for example, conditions with respect to waiving
restrictions on assessment and collection, paying any tax, abating any
overassessment, or refunding or crediting any tax overpayment];


[Alternatively, if a time-value-of-money resolution, insert the
following paragraphs 3-10 as applicable]

3. The computation of the specified amount as provided in section
6.02(4)(b) of Rev. Proc. 2002-18 has been made as follows: [insert
computation].

4. The specified amount is not interest under section 163(a) of the
Code and may not be deducted or capitalized under any provision of the
Code.

5. [Insert if the computation of the specified amount takes into
account the taxpayer's actual tax attributes] The tax attributes that may
affect the computation of the taxpayer's tax liability in subsequent
taxable years [insert "are" or "are not"] adjusted to reflect their effect
on the specified amount;

6. The Service is not precluded from changing the taxpayer's method of
accounting for [insert subject: for example, "costs of acquiring
nondepreciable asset X"] upon subsequent examination for any open taxable
year not covered by the agreement;

8. If the taxpayer's method of accounting for [insert subject: for
example, "costs of acquiring nondepreciable asset X"] subsequently is
changed (voluntarily or involuntarily) in any open taxable year not
covered by this agreement, the adjustment under section 481(a) (if any)
will be determined by reference to all items arising prior to the year of
change;

9. If the Service changes the taxpayer's method of accounting in an
open taxable year not covered by this agreement and imposes a section
481(a) adjustment, the interest that is assessed on any underpayment, or
the interest that is due on any overpayment, for the year of change will
be treated as paid to the extent necessary to prevent duplicate payment of
the time-value-of-money benefit relating to the section 481(a) adjustment;

10. [Insert if applicable:] The following additional conditions also
apply: [insert, for example, conditions with respect to waiving
restrictions on assessment and collection, paying any tax, abating any
overassessment, or refunding or crediting any tax overpayment];


The taxpayer accepts this settlement and agrees to the applicable terms
of Rev. Proc. 2002-18.

This agreement is final and conclusive except:

(1) The matter it relates to may be reopened in the event of fraud,
malfeasance, or misrepresentation of a material fact;

(2) It is subject to the Internal Revenue Code sections that expressly
provide that effect be given to their provisions (including any stated
exception for section 7122) notwithstanding any law or rule of law; and

(3) If it relates to a tax period ending after the date of this
agreement, it is subject to any law enacted after the agreement date, that
applies to the tax period.


By signing, the parties certify that they have read and agreed to the
terms of this document.

Your signature ____ Date: ____

Spouse's signature if joint return: ____ Date: ____

Taxpayer's representative: ____ Date: ____

Taxpayer (other than an individual): ____ Date: ____

Title: ____


Commissioner of Internal Revenue:

By: ____ Date: ____

Title: ____


Instructions

This agreement must be signed and filed in triplicate. (All copies must
have original signatures.) The original and copies of the agreement must
be identical. The name of the taxpayer must be stated accurately. The
agreement may relate to one or more years.

If an attorney or agent signs the agreement for the taxpayer, the power
of attorney (or a copy) authorizing that person to sign must be attached
to the agreement.

If the taxpayer is a corporation, the agreement must be dated and
signed with the name of the corporation, the signature and title of an
authorized officer or officers, or the signature of an authorized attorney
or agent. It is not necessary that a copy of an enabling corporate
resolution be attached.

Use additional pages if necessary and identify them as part of this
agreement.

Please see Rev. Proc. 68-16 (1968-1 C.B. 770) for a detailed
description of practices and procedures applicable to most closing
agreements.

<<END RULING>>

 

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