IRS Revenue Procedure
2002-19

Code Secs. 446, 481



<<FULL TEXT>>

26 CFR 601.204: Changes in accounting periods and methods of accounting.
(Also Part I, sections 446, 481; 1.446-1, 1.481-1, 1.481-4.)


REV. PROC. 2002-19

SECTION 1. PURPOSE

This revenue procedure modifies Rev. Proc. 97-27 (1997-1 C.B. 680)
which provides procedures under which taxpayers may obtain the advance
consent of the Commissioner of Internal Revenue to change a method of
accounting. In addition, this revenue procedure modifies Rev. Proc. 2002-9
(2002-3 I.R.B. 327) which provides procedures for taxpayers within the
scope of that revenue procedure to obtain automatic consent to change a
method of accounting.

The changes to Rev. Proc. 97-27 and Rev. Proc. 2002-9 include:

(1) allowing a taxpayer to change its method of accounting
prospectively, without audit protection, if the method to be changed is an
issue pending for a taxable year under examination or an issue under
consideration by either an appeals office or a federal court;

(2) providing that, in the case of changes in method of accounting that
result in a negative (i.e., taxpayer-favorable) section 481(a) adjustment,
the entire amount of the adjustment will be taken into account in the year
of change; and

(3) certain other conforming and clarifying changes.


For a discussion of the policy reasons for certain of the modifications
provided by this revenue procedure, see Announcement 2002-37 (2002-13
I.R.B. 703)


SECTION 2. CHANGES

.01 CHANGES TO BACKGROUND SECTIONS. Section 2.01(3) in each of Rev.
Proc. 97-27 and Rev. Proc. 2002-9 is deleted.

.02 CHANGES TO SECTION 481(a) SPREAD PERIOD FOR NEGATIVE SECTION 481(a)
ADJUSTMENTS.

(1) Section 5.02(3)(a) of Rev. Proc. 97-27 is modified to read as
follows:

"(a) IN GENERAL. Except as otherwise provided in sections 5.02(3)(b)
and 7.03 of this revenue procedure, the section 481(a) adjustment period
is four taxable years for a net positive adjustment for an accounting
method change, and one taxable year for a net negative adjustment for an
accounting method change."


(2) Section 5.04(1) of Rev. Proc. 2002-9 is modified to read as
follows:

"(1) IN GENERAL. Except as otherwise provided in section 5.04(3) or the
APPENDIX of this revenue procedure, the section 481(a) adjustment period
is four taxable years for a net positive adjustment for an accounting
method change, and one taxable year for a net negative adjustment for an
accounting method change."


(3) The second sentence in both Example 1 and Example 2 in section 7.02
of Rev. Proc. 97-27 and section 5.04(2) of Rev. Proc. 2002-9 is modified
to read as follows:

"The net section 481(a) adjustment for this method change is a positive
adjustment of $30,000 and the adjustment period is four taxable years."


(4) Section 7.03(1) of Rev. Proc. 97-27 and section 5.04(3)(a) of Rev.
Proc. 2002-9 are each modified to read as follows:

"De minimis rule. A taxpayer may elect to use a one-year adjustment
period in lieu of the section 481(a) adjustment period otherwise provided
by this revenue procedure for positive adjustments if the net section
481(a) adjustment for the change is less than $25,000. The taxpayer must
complete the appropriate line on the Form 3115 to elect this de minimis
rule."


(5) Section 4.01(3) of the APPENDIX of Rev. Proc. 2002-9 (relating to
the section 481(a) adjustment for certain uniform capitalization methods
used by resellers and reseller-producers) is modified to read as follows:

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


(6) Section 4.01(5) of the APPENDIX of Rev. Proc. 2002-9, which
provides an example illustrating the change to and from a UNICAP method of
accounting for small resellers and formerly small resellers is modified to
read as follows:

"(5) EXAMPLE.

* * * * *

Because X satisfies the small reseller exception for 1997, X may change
voluntarily from the UNICAP method to a permissible non-UNICAP inventory
capitalization method under section 4.01 of this APPENDIX. To reflect the
removal of the additional section 263A costs from the cost of its 1997
beginning inventory, X must compute a corresponding section 481(a)
adjustment, which is a negative $100,000 ($1,200,000 - $1,300,000). The
entire amount of this negative section 481(a) adjustment is included in
the computation of X's taxable income for 1997. In addition, X must
include $20,000 of the unamortized 1995 section 481(a) adjustment in 1997
taxable income.

X's 1997 Ending Inventory:

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


X's Unamortized 1995 section 481(a) Adjustment:

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


X's Unamortized 1997 section 481(a) Adjustment:

1997 section 481(a) Adjustment <Negative> $<100,000>
Amount Included in 1997 Taxable Income 100,000
-----------
Unamortized 1997 section 481(a) Adjustment -- 12/31/97 $0
===========


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

X's 1998 Ending Inventory:

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


X's Unamortized 1995 section 481(a) Adjustment:

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


In 1999, X fails to satisfy the small reseller exception and,
therefore, must return to the UNICAP method as provided under section 4.01
of this APPENDIX. X changes to the simplified resale method without a
historic absorption ratio election under section 1.263A-3(d)(3). Assume
that X must capitalize $120,000 of additional section 263A costs to the
cost of its 1999 beginning inventory because of this change in inventory
method. Because X used a non-UNICAP for two taxable years prior to 1999,
the section 481 spread period for the positive section 481(a) adjustment
is two years. Therefore, X must include one-half of the section 481(a)
adjustment ($60,000) when computing taxable income for 1999 and 2000.
Assume that X must add $10,000 of additional section 263A costs to the
cost of its 1999 ending inventory because of the $100,000 increment for
1999.

X's 1999 Ending Inventory:

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


X's Unamortized 1999 section 481(a) adjustment:

1999 section 481(a) Adjustment $120,000
Amount Included in 1999 Taxable Income <60,000>
-----------
Unamortized 1999 section 481(a) Adjustment -- 12/31/99 $60,000
===========


Because X fails to satisfy the small reseller exception for 2000, X
must continue using the UNICAP method for its inventory costs.
Furthermore, X is required to include $60,000 of the unamortized 1999
positive section 481(a) adjustment in 2000 taxable income. Assume that X
is required to add $10,000 of additional section 263A costs to the cost of
its 2000 ending inventory because of the $100,000 increment for 2000.

X's 2000 Ending Inventory:

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


X's Unamortized 1999 section 481(a) Adjustment:

Unamortized 1999 section 481(a) Adjustment -- 12/31/99 $60,000
Amount Included in 2000 Taxable Income <60,000>
-----------
Unamortized 1999 section 481(a) Adjustment -- 12/31/00 $0
===========


.03 CHANGES TO SCOPE RESTRICTIONS FOR TAXPAYERS UNDER EXAMINATION, OR
BEFORE AN AREA APPEALS OFFICE OR A FEDERAL COURT.

(1) TAXPAYERS UNDER EXAMINATION.

(a) Section 4.02(2) of Rev. Proc. 97-27 (relating to the situations in
which Rev. Proc. 97-27 does not apply) is modified to read as follows:

"(2) UNDER EXAMINATION. If the taxpayer is under examination, except as
provided in sections 6.01(2) (90-day window), 6.01(3) (120-day window),
6.01(4) (director consent), and 6.01(5) (issue pending) of this revenue
procedure."


(b) Section 6.01 of Rev. Proc. 97-27 (relating to procedures for
taxpayers under examination) is modified as follows:

"(1) IN GENERAL. A taxpayer that is under examination may not file a
Form 3115 to request a change in accounting method under this revenue
procedure except as provided in sections 6.01(2) (90-day window), 6.01(3)
(120-day window), 6.01(4) (director consent), and 6.01(5) (issue pending).
A taxpayer that files a Form 3115 beyond the time periods provided in the
90-day and 120-day windows will not be granted an extension of time to
file under section 301.9100, except in unusual and compelling
circumstances."

* * * * *

"(5) ISSUE PENDING.

(a) A taxpayer that is under examination with respect to any income tax
issue may request to change a method of accounting if the method of
accounting to be changed is an issue pending for any taxable year under
examination. However, the audit protection provisions of section 9.01 of
this revenue procedure do not apply to a taxpayer changing its method of
accounting under this section 6.01(5). For this purpose, an issue is
pending for taxable years under examination if the Service has given the
taxpayer written notification indicating an adjustment is being made or
will be proposed with respect to the taxpayer's method of accounting. This
notification normally will occur after the Service has gathered
information sufficient to determine that an adjustment is appropriate and
justified, although the exact amount of the adjustment may not yet be
determined.

(b) A taxpayer that requests to change a method of accounting under
this section 6.01(5) must provide a copy of the Form 3115 to the examining
agent(s) at the same time it files the original Form 3115 with the
national office. The Form 3115 must contain the name(s) and telephone
number(s) of the examining agent(s). In order to assist in processing an
application under this section 6.01(5), the taxpayer should type or
legibly write "Issue pending" on the Form 3115."

(c) Section 4.02(1) of Rev. Proc. 2002-9 (relating to situations in
which Rev. Proc. 2002-9 does not apply) is modified to read as follows:

"(1) UNDER EXAMINATION. If, on the date the taxpayer would otherwise
file a copy of the application with the national office, the taxpayer is
under examination (as provided in section 3.08 of this revenue procedure),
except as provided in sections 6.03(2) (90-day window), 6.03(3) (120-day
window), 6.03(4) (director consent), 6.03(5) (changes lacking audit
protection), and 6.03(6) (issue pending) of this revenue procedure."


(d) Section 6.03 of Rev. Proc. 2002-9 (relating to procedures for
taxpayers under examination) is modified as follows:

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

* * * * *

"(6) ISSUE PENDING.

(a) A taxpayer that is under examination with respect to any income tax
issue may request to change a method of accounting if the method of
accounting to be changed is an issue pending for any taxable year under
examination. However, the audit protection provisions of section 7.01 of
this revenue procedure do not apply to a taxpayer changing its method of
accounting under this section 6.03(6). For this purpose, an issue is
pending for taxable years under examination if the Service has given the
taxpayer written notification indicating an adjustment is being made or
will be proposed with respect to the taxpayer's method of accounting. This
notification normally will occur after the Service has gathered
information sufficient to determine that an adjustment is appropriate and
justified, although the exact amount of the adjustment may not yet be
determined.

(b) A taxpayer that requests to change a method of accounting under
this section 6.03(6) must provide a copy of the Form 3115 to the examining
agent(s) at the same time it files the original Form 3115 with the
national office. The Form 3115 must contain the name(s) and telephone
number(s) of the examining agent(s). In order to assist in processing an
application under this section 6.03(6), the taxpayer should type or
legibly write "Issue pending" on the Form 3115."


(2) TAXPAYERS BEFORE AN APPEALS OFFICE.

(a) Section 4.02(3) of Rev. Proc. 97-27 (relating to the situations in
which Rev. Proc. 97-27 does not apply) is deleted.

(b) Section 6.02 of Rev. Proc. 97-27 (relating to procedures for
taxpayers before an appeals office) is modified as follows:

".02 TAXPAYER BEFORE AN APPEALS OFFICE. A taxpayer otherwise within the
scope of this revenue procedure that is before an appeals office with
respect to any income tax issue may request a change in accounting method.
However, the audit protection provisions of section 9.01 of this revenue
procedure do not apply if the accounting method to be changed is an issue
under consideration by the appeals office. A taxpayer that requests to
change a method of accounting under this section 6.02 must provide a copy
of the Form 3115 to the appeals officer at the time it files the original
Form 3115 with the national office. The Form 3115 must contain the name(s)
and telephone number(s) of the appeals officer(s). In order to assist in
processing an application under this section 6.02, the taxpayer should
type or legibly write "Issue under consideration" on the Form 3115."


(c) Section 4.02(2) of Rev. Proc. 2002-9 (relating to situations to
which Rev. Proc. 2002-9 does not apply) is deleted.

(d) Section 6.04 of Rev. Proc. 2002-9 (relating to procedures for
taxpayers before an appeals office) is modified to read as follows:

".04 TAXPAYER BEFORE AN APPEALS OFFICE. A taxpayer otherwise within the
scope of this revenue procedure that is before an appeals office with
respect to any income tax issue may request a change in accounting method.
However, the audit protection provisions of section 7.01 of this revenue
procedure do not apply if the accounting method to be changed is an issue
under consideration by the appeals office. A taxpayer that requests to
change a method of accounting under this section 6.04 must provide a copy
of the Form 3115 to the appeals officer at the time it files the original
Form 3115 with the national office. The Form 3115 must contain the name(s)
and telephone number(s) of the appeals officer(s). In order to assist in
processing an application under this section 6.04, the taxpayer should
type or legibly write "Issue under consideration" on the Form 3115."


(3) TAXPAYERS BEFORE A FEDERAL COURT.

(a) Section 4.02(4) of Rev. Proc. 97-27 (relating to the situations in
which Rev. Proc. 97-27 does not apply) is deleted.

(b) Section 6.03 of Rev. Proc. 97-27 (relating to procedures for
taxpayers before a federal court) is modified to read as follows:

".03 TAXPAYER BEFORE A FEDERAL COURT. A taxpayer otherwise within the
scope of this revenue procedure that is before a federal court with
respect to any income tax issue may request a change in accounting method.
However, the audit protection provisions of section 9.01 of this revenue
procedure do not apply if the accounting method to be changed is an issue
under consideration by the federal court. A taxpayer that requests to
change a method of accounting under this section 6.03 must provide a copy
of the Form 3115 to the counsel(s) for the government at the time it files
the original Form 3115 with the national office. The Form 3115 must
contain the name(s) and telephone number(s) of the counsel(s) for the
government. In order to assist in processing an application under this
section 6.03, the taxpayer should type or legibly write "Issue under
consideration" on the Form 3115."


(c) Section 4.02(3) of Rev. Proc. 2002-9 (relating to situations to
which Rev. Proc. 2002-9 does not apply) is deleted.

(d) Section 6.05 of Rev. Proc. 2002-9 (relating to procedures for
taxpayers before a federal court) is modified to read as follows:

.05 TAXPAYER BEFORE A FEDERAL COURT. A taxpayer otherwise within the
scope of this revenue procedure that is before a federal court with
respect to any income tax issue may request a change in accounting method.
However, the audit protection provisions of section 7.01 of this revenue
procedure do not apply if the accounting method to be changed is an issue
under consideration by the federal court. A taxpayer that requests to
change a method of accounting under this section 6.05 must provide a copy
of the Form 3115 to the counsel(s) for the government at the time it files
the original Form 3115 with the national office. The Form 3115 must
contain the name(s) and telephone number(s) of the counsel(s) for the
government. In order to assist in processing an application under this
section 6.05, the taxpayer should type or legibly write "Issue under
consideration" on the Form 3115."


.04 NOTIONAL PRINCIPAL CONTRACTS. Section 14.02 of Rev. Proc. 97-27
(relating to Designated A treatment for changes in method of accounting
for notional principal contracts) is deleted.


SECTION 3. EFFECT ON OTHER DOCUMENTS

Rev. Proc. 97-27 and Rev. Proc. 2002-9 are modified and amplified.


SECTION 4. EFFECTIVE DATE

.01 IN GENERAL. Except as otherwise provided in sections 4.02 and 4.03
of this revenue procedure, this revenue procedure is effective for taxable
years ending on or after December 31, 2001.

.02 CHANGES TO SCOPE RESTRICTIONS OF REV. PROC. 97-27. Notwithstanding
section 4.01 of this revenue procedure, the changes to the scope
restrictions of Rev. Proc. 97-27 provided in section 2.03(1)(a) and (b),
2.03(2)(a) and (b), and 2.03(3)(a) and (b) of this revenue procedure are
effective for taxable years ending on or after March 14, 2002.

.03 NOTIONAL PRINCIPAL CONTRACTS. Notwithstanding section 4.01 of this
revenue procedure, the deletion of section 14.02 of Rev. Proc. 97-27 is
effective for Forms 3115 pending with the national office on March 14,
2002.

.04 TRANSITION RULES.

(1) APPLICATIONS UNDER REV. PROC. 2002-9.

(a) If a taxpayer has filed its federal income tax return on or before
April 15, 2002, for a taxable year ending on or after December 31, 2001,
and wants to change a method of accounting for such taxable year under
Rev. Proc. 2002-9 for an issue pending at examination, or an issue under
consideration by an area office or by a federal court, without audit
protection, as permitted under this revenue procedure, then the taxpayer
must comply with the requirements of this section 4.04(1)(a). The taxpayer
must complete and file a Form 3115 in duplicate. The original must be
attached to the taxpayer's amended federal income tax return for the year
of change. The amended return must be filed no later than September 10,
2002. A copy of the Form 3115 must be filed with the national office (see
section 6.02(6) of Rev. Proc. 2002-9 for the address) no later than when
the taxpayer's amended return is filed.

(b) If a taxpayer has applied to change a method of accounting under
Rev. Proc. 2002-9 for a taxable year ending on or after December 31, 2001,
by filing an application with its federal income tax return on or before
April 15, 2002, such change in method of accounting results in a net
negative section 481(a) adjustment, and the taxpayer wants to apply the
one-year section 481(a) adjustment period of this revenue procedure to the
change, then the taxpayer must comply with the requirements of this
section 4.04(1)(b). The taxpayer must complete and file a revised Form
3115 in duplicate, reflecting the one-year section 481(a) adjustment
period. The original must be attached to the taxpayer's amended federal
income tax return for the year of change. The amended return must be filedno later than September 10, 2002. A copy of the revised Form 3115 must be
filed with the national office (see section 6.02(6) of Rev. Proc. 2002-9
for the address) no later than when the taxpayer's amended return is
filed. Both the original and the copy of the application filed with the
national office should be labeled "Substitute Application under Rev. Proc.
2002-19."

(c) If a taxpayer has filed a copy of an application to change a method
of accounting under Rev. Proc. 2002-9 for a taxable year ending on or
after December 31, 2001, with the national office on or before April 15,
2002, but has not filed its federal income tax return with the original
application attached by April 15, 2002, such change in method of
accounting results in a net negative section 481(a) adjustment, and the
taxpayer wants to apply the one-year section 481(a) adjustment period of
this revenue procedure to the change, then the taxpayer must comply with
the requirements of this section 4.04(1)(c). The taxpayer must complete
and file a revised Form 3115 in duplicate, reflecting the one-year section
481(a) adjustment period. The revised original Form 3115 must be attached
to the taxpayer's timely filed federal income tax return for the year of
change. The revised copy of the Form 3115 must be filed with the national
office (see section 6.02(6) of Rev. Proc. 2002-9 for the address) no later
than when the taxpayer's original federal income tax return is filed. The
copy of the application filed with the national office should be labeled
"Substitute Application under Rev. Proc. 2002-19."

(d) If a taxpayer has filed an original application and/or a copy of an
application to change a method of accounting under Rev. Proc. 2002-9 for a
taxable year ending on or after December 31, 2001, with the national
office on or before April 15, 2002, such change in method of accounting
results in a net negative section 481(a) adjustment, and the taxpayer does
not file revised applications under either section 4.04(1)(b) or (c) of
this revenue procedure (whichever applies), then the four-year section
481(a) adjustment period of Rev. Proc. 2002-9 (prior to its modification
by this revenue procedure) will apply to the change.


(2) APPLICATIONS UNDER REV. PROC. 97-27. In the case of an application
to change a method of accounting for a taxable year ending on or after
December 31, 2001, filed under Rev. Proc. 97-27, and pending with the
national office on March 14, 2002, the section 481(a) adjustment period
for a net negative section 481(a) adjustment for the change will be one
taxable year. In such a case, the national office will require the
taxpayer to make appropriate modifications to the application or ruling
request to comply with the applicable provisions of this revenue
procedure. However, if such a taxpayer does not want a one-year section
481(a) adjustment period to apply, the taxpayer must notify the national
office prior to the later of April 30, 2002, or the issuance of the letter
ruling granting or denying consent to the change. In such a case, the
section 481(a) adjustment period rules of Rev. Proc. 97-27, prior to its
modification by this revenue procedure, will apply.


DRAFTING INFORMATION

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

<<END RULING>>



 

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