IRS Revenue Procedure
2002-27

 Code Secs. 167, 168, 446, 481



<<FULL TEXT>>

26 CFR 601.204: Changes in accounting periods and in methods of
accounting.
(Also Part I, sections 167, 168, 446, 481; 1.446-1, 1.481-1.)


REV. PROC. 2002-27

SECTION 1. PURPOSE

This revenue procedure provides a safe harbor method of accounting for
the cost of original and replacement tires for certain vehicles (original
tire capitalization method) used in various business activities. This
revenue procedure also explains how a taxpayer can obtain automatic
consent from the Commissioner of Internal Revenue to change to the
original tire capitalization method, including rules relating to the
limitations, terms, and conditions the Commissioner deems necessary to
make the change. In addition, this revenue procedure provides an optional
procedure for a taxpayer to settle open taxable years using the original
tire capitalization method if the taxpayer's treatment of original and
replacement tire expenditures is an issue under consideration in
examination, before an area appeals office, or before the United States
Tax Court (Tax Court) or is an issue pending in examination.


SECTION 2. BACKGROUND

.01 Section 162 of the Internal Revenue Code allows a deduction for all
ordinary and necessary business expenses paid or incurred during the
taxable year in carrying on any trade or business. However, section 263(a)
prohibits a deduction for capital expenditures. Capital expenditures
include the cost of acquisition, construction, or erection of buildings,
machinery and equipment, furniture and fixtures, and similar property
having a useful life substantially beyond the taxable year. Section
1.263(a)-2(a) of the Income Tax Regulations. These capital expenditures
are subject to the allowance for depreciation.

.02 Section 167(a) provides a depreciation allowance for the
exhaustion, wear and tear of property used in a trade or business or held
for the production of income. The depreciation deduction provided by
section 167(a) for tangible property placed in service after 1986
generally is determined under section 168. This section prescribes two
methods of accounting for determining depreciation allowances: (1) the
general depreciation system (GDS) in section 168(a); and (2) the
alternative depreciation system (ADS) in section 168(g). Under either
depreciation system, the depreciation deduction is computed by using a
prescribed depreciation method, recovery period, and convention. For
purposes of either GDS or ADS, the applicable recovery period is
determined by reference to class life or by statute.

Rev. Proc. 87-56 (1987-2 C.B. 674) sets forth the class lives of
property that are necessary to compute the depreciation allowances under
section 168. The revenue procedure establishes two broad categories of
depreciable assets: (1) asset classes 00.11 through 00.4 that consist of
specific assets used in all business activities; and (2) asset classes
01.1 through 80.0 that consist of assets used in specific business
activities.

.03 Several court decisions and revenue rulings have considered the
expense-versus-capital expenditure issue regarding truck tires. In W. H.
Tompkins Co. v. Commissioner, 47 B.T.A. 292 (1942), the court stated that
the recovery of the cost of short-lived truck tires and tubes should not
be associated with the depreciation of much longer-lived trucks because
the tires and tubes are easily separable from the truck and are not a part
of the truck's mechanism. The court held, therefore, that the cost of
truck tires and tubes consumable within the taxable year are currently
deductible as an expense in the year of purchase. See also Zelco, Inc. v.
Commissioner, 331 F.2d 418, 421 (1st Cir. 1964) (a lessor of trailers and
tractors used by interstate motor carriers was not required to treat those
vehicles' tires as a part of the leased vehicles, and the cost of trailer
and tractor tires and tubes with an average useful life of 12 months could
be deducted currently); Interstate Truck Service, Inc. v. Commissioner,
T.C. Memo. 1958-219 (a taxpayer in the motor freight transportation
business can currently deduct the cost of tires and tubes on trucks,
tractors, and trailers because on average all of the tires and tubes were
consumable in less than one year). In Rev. Rul. 59-249 (1959-2 C.B. 55),
the Service announced that it would follow the holdings of Tompkins and
Interstate for tires purchased on new commercial trucking equipment and
used in motor freight transportation. Rev. Rul. 68-134 (1968-1 C.B. 63)
discusses Zelco and holds that the principles of Rev. Rul. 59-249 are
applicable to tires in the case of a taxpayer who is a purchaser-lessor of
new commercial trucking equipment.

Accordingly, truck, trailer, and tractor tires are not treated as part
of the vehicle for depreciation purposes. Rather, these tires are
considered to be separate assets and, as such, their cost is currently
deductible by a taxpayer provided they are consumable in less than one
year. However, the cost of truck, trailer, and tractor tires with an
average useful life to a taxpayer of more than one year cannot be
currently deducted as an operating expense. Their cost must be capitalized
and recovered through depreciation. Because truck, trailer, and tractor
tires are not considered part of the vehicle for depreciation purposes,
they are not associated with any of the specific transportation assets
included in the specific asset classes of Rev. Proc. 87-56 (that is, asset
classes 00.241, 00.242, 00.26, and 00.27). Therefore, in accordance with
section 168 and Rev. Proc. 87-56, all truck, trailer, and tractor tires
that must be capitalized, whether original or replacement, are depreciated
as assets used in specific business activities (that is, asset classes
01.1 through 80.0 of Rev. Proc. 87-56). For example, if a taxpayer's
business activity is described in asset class 42.0, Motor
Transport-Freight, original and replacement truck, trailer, and tractor
tires, like the other assets in this class, would have a 5-year recovery
period for GDS purposes and an 8-year recovery period for ADS purposes.

.04 Under section 446(b), the Commissioner has broad authority to
determine whether a method of accounting clearly reflects income. If a
taxpayer's method of accounting does not clearly reflect income, the
computation of taxable income must be made under a method that, in the
opinion of the Secretary, does clearly reflect income. See Thor Power Tool
Co. v. Commissioner, 439 U.S. 522 (1979) (1979-1 C.B. 167); Commissioner
v. Hansen, 360 U.S. 446 (1959) (1959-2 C.B. 460); section
1.446-1(c)(2)(ii).

.05 Section 446(e) and section 1.446-1(e) provide that, except as
otherwise provided, a taxpayer must secure the consent of the Commissioner
before changing a method of accounting for federal income tax purposes.
Section 1.446-1(e)(3)(ii) authorizes the Commissioner to prescribe
administrative procedures setting forth the limitations, terms, and
conditions deemed necessary to permit a taxpayer to obtain consent to
change a method of accounting.

.06 Since the issuance of the court decisions and revenue rulings
previously discussed, the quality of tires has improved significantly.
Most tires manufactured in recent years have useful lives in excess of a
year, although some taxpayers, because of the nature of their business
activities, still consume their tires within a year. To minimize disputes
regarding the useful lives of original tires and replacement tires for
certain vehicles, the Internal Revenue Service will permit a taxpayer that
complies with the requirements of this revenue procedure to account for
the cost of original tires and replacement tires for certain vehicles
using the original tire capitalization method described in section 5 of
this revenue procedure.


SECTION 3. DEFINITIONS

The following definitions apply solely for purposes of this revenue
procedure:

.01 QUALIFYING VEHICLE. A qualifying vehicle is a vehicle for which
depreciation is determined under section 168 and that is described in
asset class 00.241, 00.242, 00.26, or 00.27 of Rev. Proc. 87-56, or a
converter dolly (converter gear) for which depreciation is determined
under section 168.

.02 ORIGINAL TIRES. Original tires are the first set of tires installed
on a qualifying vehicle acquired by the taxpayer whether or not the
vehicle was equipped with tires when acquired.

.03 REPLACEMENT TIRES. Replacement tires are all other tires installed
on a qualifying vehicle following acquisition of the vehicle by taxpayer.


SECTION 4. SCOPE

.01 This revenue procedure applies to a taxpayer that has a depreciable
interest in its qualifying vehicles and that chooses to account for the
cost of original tires and replacement tires for all of its qualifying
vehicles under the original tire capitalization method described in
section 5 of this revenue procedure.

.02 A taxpayer that chooses not to account for the cost of original
tires and replacement tires for all of its qualifying vehicles under the
original tire capitalization method described in section 5 of this revenue
procedure must account for the cost of these tires in accordance with
section 2.03 of this revenue procedure.


SECTION 5. ORIGINAL TIRE CAPITALIZATION METHOD

.01 IN GENERAL. Under the original tire capitalization method, a
qualifying vehicle's tires are treated as part of the vehicle and not as
separate assets. In addition, under the original tire capitalization
method, the rotation of a tire from one vehicle to another (for example,
from a tractor to a trailer) is not treated as a change in use within the
meaning of section 168(i)(5). A taxpayer that uses the original tire
capitalization method described in this section must use this method for
the original and replacement tires of all of its qualifying vehicles.

.02 DESCRIPTION OF METHOD. Under the original tire capitalization
method, a taxpayer:

(1) must capitalize the cost of the original tires of a qualifying
vehicle and depreciate these tires under section 168 by using the same
depreciation method, recovery period, and convention applicable to the
vehicle on which the tires are first installed;

(2) must treat the original tires of the qualifying vehicle as being
disposed of at the same time the vehicle on which the tires were first
installed is disposed of by the taxpayer; and

(3) must deduct the cost of the replacement tires of the qualifying
vehicle as an expense in the taxable year the replacement tires are
installed on the vehicle by the taxpayer.


SECTION 6. CHANGE IN METHOD OF ACCOUNTING

.01 IN GENERAL. A change in a taxpayer's treatment of the cost of a
qualifying vehicle's original tires and replacement tires is a change in
method of accounting to which sections 446 and 481 apply.

.02 ISSUE NOT UNDER CONSIDERATION OR NOT PENDING. If a taxpayer within
the scope of this revenue procedure wants to change to the original tire
capitalization method for its first or second taxable year ending on or
after December 31, 2001, (year of change) and the treatment of its
qualifying vehicle's original tires or replacement tires is not an issue
under consideration in examination, before an area appeals office, or
before a federal court (within the meaning of section 3.09 of Rev. Proc.
2002-9, 2002-3 I.R.B. 327, as modified by Rev. Proc. 2002-19, 2002-13
I.R.B. 696, and as modified and clarified by Announcement 2002-17, 2002-8
I.R.B. 561), or is not an issue pending in examination (within the meaning
of section 6.03(6) of Rev. Proc. 2002-9), on April 3, 2002, the taxpayer
must follow the automatic change in method of accounting provisions in
Rev. Proc. 2002-9 (or its successor) with the following modifications:

(1) The scope limitations in section 4.02 of Rev. Proc. 2002-9 do not
apply. If the taxpayer is under examination, before an area appeals
office, or before a federal court regarding any income tax issue other
than the treatment of its qualifying vehicle's original tires or
replacement tires, the taxpayer must provide a copy of the Form 3115,
Application for Change in Accounting Method, to the examining officer,
appeals officer, or government counsel (whichever is applicable) at the
same time it files the copy of the Form 3115 with the national office. The
Form 3115 must contain the name(s) and telephone number(s) of the
examining officer, appeals officer, or government counsel, as appropriate.

(2) To assist the Service in processing changes in method of accounting
under this section of the revenue procedure, and to ensure proper
handling, section 6.02(4)(a) of Rev. Proc. 2002-9 is modified to require
that a Form 3115 filed under this revenue procedure include the statement:
"Automatic Change Filed Under Rev. Proc. 2002-27." This statement should
be legibly printed or typed on the appropriate line on any Form 3115 filed
under this revenue procedure.

(3) The change to the original tire capitalization method will be made
using a "cut-off method." Under the cut-off method, only a qualifying
vehicle's original and replacement tires placed in service by a taxpayer
on or after the beginning of the year of change are accounted for under
the original tire capitalization method. A qualifying vehicle's original
and replacement tires placed in service by the taxpayer 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
the cut-off method is used to effect a change in accounting method, no
section 481(a) adjustment is necessary.


.03 ISSUE UNDER CONSIDERATION OR ISSUE PENDING. If a taxpayer within
the scope of this revenue procedure wants to change to the original tire
capitalization method for its year of change (as defined in section 6.02
of this revenue procedure) and the treatment of its qualifying vehicle's
original tires or replacement tires is an issue under consideration in
examination, before an area appeals office, or before a federal court
(within the meaning of section 3.09 of Rev. Proc. 2002-9), or is an issue
pending in examination (within the meaning of section 6.03(6) of Rev.
Proc. 2002-9), on April 3, 2002, the taxpayer must follow the automatic
change in method of accounting provisions in Rev. Proc. 2002-9 (or its
successor) with the following modifications:

(1) The scope limitations in section 4.02 of Rev. Proc. 2002-9 do not
apply. The taxpayer must provide a copy of the Form 3115 to the examining
officer, appeals officer, or government counsel (whichever is applicable)
at the same time it files the copy of the Form 3115 with the national
office. The Form 3115 must contain the name(s) and telephone number(s) of
the examining officer, appeals officer, or government counsel, as
appropriate.

(2) To assist the Service in processing changes in method of accounting
under this section of the revenue procedure, and to ensure proper
handling, section 6.02(4)(a) of Rev. Proc. 2002-9 is modified to require
that a Form 3115 filed under this revenue procedure include the statement:
"Automatic Change Filed Under Rev. Proc. 2002-27." This statement should
be legibly printed or typed on the appropriate line on any Form 3115 filed
under this revenue procedure.

(3) The change to the original tire capitalization method will be made
using a cut-off method. Under the cut-off method, only a qualifying
vehicle's original and replacement tires placed in service by a taxpayer
on or after the beginning of the year of change are accounted for under
the original tire capitalization method. A qualifying vehicle's original
and replacement tires placed in service by the taxpayer before the year of
change continue to be accounted for under the taxpayer's former method of
accounting. But see section 6.03(4) of this revenue procedure. Because no
items are duplicated or omitted from income when the cut-off method is
used to effect a change in accounting method, no section 481(a) adjustment
is necessary.

(4) Section 7 of Rev. Proc. 2002-9 does not apply. The taxpayer does
not receive audit protection in connection with a change to the original
tire capitalization method. Accordingly, the Service may require the
taxpayer to change its method of accounting for a qualifying vehicle's
original and replacement tires for any taxable year before the year of
change.


.04 SPECIAL RULE FOR CERTAIN TAXPAYERS WITH ISSUE UNDER CONSIDERATION
OR ISSUE PENDING. If a taxpayer is within the scope of this revenue
procedure and the treatment of its qualifying vehicle's original tires or
replacement tires is an issue under consideration (within the meaning of
section 3.09 of Rev. Proc. 2002-9) in examination, before an area appeals
office, or before the Tax Court, or is an issue pending in examination
(within the meaning of section 6.03(6) of Rev. Proc. 2002-9), on April 3,
2002, the taxpayer may change to the original tire capitalization method
for its first or second taxable year ending on or after December 31, 2001,
under section 6.03 of this revenue procedure or, alternatively, for an
earlier taxable year under section 7 of this revenue procedure. See also
section 6.05 of this revenue procedure for deemed consent situations.

.05 SPECIAL RULE FOR CERTAIN TAXPAYERS DEEMED TO HAVE OBTAINED CONSENT.
A taxpayer within the scope of this revenue procedure will be deemed to
have obtained the consent of the Commissioner to change to the original
tire capitalization method (as described in section 5 of this revenue
procedure) for all of its qualifying vehicles' original tires and
replacement tires placed in service before the year of change (as defined
in section 6.02 of this revenue procedure) if: (1) the taxpayer treated
these tires in the same manner as permitted under the original tire
capitalization method in all taxable years since the tires were placed in
service by the taxpayer; or (2) the taxpayer changed its treatment of
these tires in a taxable year ending on or before December 31, 2001, for
which an original federal income tax return has been filed as of April 3,
2002, to the original tire capitalization method, with or without a
section 481(a) adjustment, and treated the tires under that method in all
taxable years since the taxpayer changed to the original tire
capitalization method. Any taxpayer described in this section 6.05 will be
deemed to have obtained the consent of the Commissioner to change to the
original tire capitalization method as of the beginning of the first
taxable year in which the taxpayer used the original tire capitalization
method, and is not required to file a Form 3115 under this section 6.

However, if the taxpayer's treatment of its qualifying vehicle's
original tires or replacement tires is an issue under consideration in
examination, before an area appeals office, or before a federal court
(within the meaning of section 3.09 of Rev. Proc. 2002-9), or is an issue
pending in examination (within the meaning of section 6.03(6) of Rev.
Proc. 2002-9), on April 3, 2002, the taxpayer does not receive audit
protection in connection with the change to the original tire
capitalization method. Accordingly, the Service may require the taxpayer
to change its method of accounting for a qualifying vehicle's original and
replacement tires for any taxable year before the first taxable year in
which the taxpayer used the original tire capitalization method. The
procedures in section 7 of this revenue procedure apply for any taxable
year before the first taxable year in which the taxpayer used the original
tire capitalization method if the taxpayer's treatment of its qualifying
vehicle's original tires or replacement tires is an issue under
consideration in examination, before an area appeals office, or before the
Tax Court, or is an issue pending in examination, on April 3, 2002.

.06 CHANGES NOT MADE UNDER THIS REVENUE PROCEDURE. A taxpayer that
wants to change to the original tire capitalization method described in
section 5 of this revenue procedure that does not change its method of
accounting under section 6 or 7 of this revenue procedure must follow the
change in method of accounting provisions in Rev. Proc. 2002-9 (or any
successor). This change must be made with a section 481(a) adjustment.

<<END RULING>>



SECTION 7. OPTIONAL SETTLEMENT FOR TAXPAYERS UNDER EXAMINATION, BEFORE AN
AREA APPEALS OFFICE, OR BEFORE THE TAX COURT

.01 IN GENERAL. If a taxpayer is within the scope of this revenue
procedure, the treatment of the cost of its qualifying vehicles' original
tires or replacement tires is an issue under consideration (within the
meaning of section 3.09 of Rev. Proc. 2002-9) in examination, before an
area appeals office, or before the Tax Court, or is an issue pending in
examination (within the meaning of section 6.03(6) of Rev. Proc. 2002-9),
on April 3, 2002, and the taxpayer does not change to the original tire
capitalization method under section 6.03 of this revenue procedure, the
Service offers to settle the original and replacement tires issue by
changing the taxpayer's method of accounting for the cost of original and
replacement tires to the original tire capitalization method in the
earliest open taxable year after which there is no closed taxable year.

.02 TERMS OF SETTLEMENT.

(1) The Service will change the taxpayer's method of accounting for the
cost of original and replacement tires to the original tire capitalization
method described in section 5 of this revenue procedure.

(2) The change to the original tire capitalization method will be made
using a cut-off method in the earliest open taxable year after which there
is no closed taxable year.

(3) The taxpayer must reflect the settlement on its federal income tax
returns for any affected succeeding taxable years. For example, an amount
required to be capitalized during a taxable year covered by the settlement
should be depreciated in that taxable year and in affected succeeding
taxable years (whether or not covered by the settlement) in accordance
with the taxpayer's method of accounting for depreciation.

(4) The Service will not require the taxpayer to change its method of
accounting for the cost of its qualifying vehicles' original and
replacement tires to a method other than the original tire capitalization
method for any taxable year for which a federal income tax return has been
filed as of the date of the closing agreement or other appropriate
settlement agreement, provided that:

(a) the taxpayer has complied with all the applicable provisions of the
closing agreement or other appropriate settlement 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 the closing
agreement or other appropriate settlement agreement was based; and

(d) there has been no change in the applicable law on which the closing
agreement or other appropriate settlement agreement was based.


(5) The taxpayer must execute a closing agreement under section 7121 or
other appropriate settlement agreement as described in section 7.05 of
this revenue procedure.


.03 PROCEDURES FOR REQUESTING THE SETTLEMENT.

(1) INITIATING THE REQUEST.

(a) TAXABLE YEARS UNDER EXAMINATION OR IN APPEALS. A taxpayer that
wants to request a settlement under this section for taxable years under
examination or in Appeals must submit its request in writing to the first
line examination manager or appeals officer (whichever is applicable) on
or before September 3, 2002.

(b) TAXABLE YEARS BEFORE THE TAX COURT. A taxpayer that wants to
request a settlement under this section for taxable years before the Tax
Court must submit its request in writing to the Chief Counsel attorney
assigned to the case on or before the earlier of September 3, 2002, or the
date that is 30 days before the date the case is first set for trial,
which is the date scheduled for the calendar call.


(2) STATEMENT OF FACTS, LAW, AND ARGUMENTS. The request for settlement
must include the following information:

(a) the taxpayer's name, address, telephone number, and taxpayer
identification number;

(b) the taxable years covered by the proposed settlement;

(c) the taxpayer's earliest open taxable year after which there is no
closed taxable year;

(d) the taxpayer's current method of accounting for the cost of its
qualifying vehicles' original and replacement tires; and

(e) a statement of the material facts, including the capitalized amount
and the deductible amount computed under the original tire capitalization
method for each taxable year under examination, before an area appeals
office, or before the Tax Court, and an explanation of the computations
used to determine those amounts.


(3) PERJURY STATEMENT. The request for settlement must be accompanied
by the following declaration: "Under penalties of perjury, I declare that
I have examined this request, including accompanying documents, and, to
the best of my knowledge and belief, the request contains all the relevant
facts relating to the request, and such facts are true, correct, and
complete." This declaration must be signed by, or on behalf of, the
taxpayer by an individual with the authority to bind the taxpayer in these
matters. The declaration may not be signed by the taxpayer's
representative.


.04 PROCEDURES FOR PROCESSING THE REQUEST.

(1) RECEIPT OF REQUEST ACKNOWLEDGED. The first line examination
manager, appeals officer, or Chief Counsel attorney (whichever is
applicable) will acknowledge receipt of the taxpayer's request for
settlement in writing within 15 business days of receipt.

(2) FACTUAL DEVELOPMENT. The first line examination manager, appeals
officer, or Chief Counsel attorney (whichever is applicable) will contact
the taxpayer to discuss any questions the Service may have, or ask for
additional information believed to be necessary to execute the settlement
(for example, to verify the correctness of the taxpayer's information).

(3) ACCEPTANCE. The first line examination manager, appeals officer, or
Chief Counsel attorney (whichever is applicable) will accept the
taxpayer's request for settlement if the request complies with the
applicable terms of this revenue procedure. For taxable years before the
Tax Court, the settlement is subject to the approval of the Court.

(4) NOTIFICATION OF ACCEPTANCE. The first line examination manager,
appeals officer, or Chief Counsel attorney (whichever is applicable) will
notify the taxpayer in writing when the Service agrees to the settlement
requested by the taxpayer.


.05 PROCEDURES FOR IMPLEMENTING THE SETTLEMENT.

(1) CLOSING AGREEMENT OR OTHER APPROPRIATE SETTLEMENT AGREEMENT
REQUIRED. A taxpayer implementing a settlement is required to execute a
closing agreement under section 7121 or other appropriate settlement
agreement.

(2) CONTENTS OF CLOSING AGREEMENT OR OTHER APPROPRIATE SETTLEMENT. A
closing agreement must comply with the requirements of Rev. Proc. 68-16
(1968-1 C.B. 770) and must be substantially in the form set forth in the
APPENDIX of this revenue procedure. Settlement agreements in cases pending
before the Tax Court must conform substantially to the provisions set
forth in the APPENDIX of this revenue procedure and must conform to the
rules and procedures of the Tax Court.

(3) REVIEW AND EXECUTION OF CLOSING AGREEMENT OR OTHER APPROPRIATE
SETTLEMENT.

(a) TAXPAYERS UNDER EXAMINATION. The first line examination manager
will prepare a closing agreement. The first line examination manager
should submit the closing agreement to the appropriate Territory Manager
(LMSB) or Territory Manager, Compliance (SB/SE) (whichever is applicable)
and his or her assigned counsel for review prior to submitting the closing
agreement to the taxpayer for execution. Failure by the examination
manager to submit the closing agreement to the Territory Manager or his or
her assigned counsel for review will not invalidate the closing agreement.
After the closing agreement has been executed by the taxpayer, it will be
executed on behalf of the Service by the appropriate Director, Field
Operations (LMSB) or Area Director, Field Compliance (SB/SE) (whichever is
applicable).

(b) TAXPAYERS BEFORE AN AREA APPEALS OFFICE. The appeals officer or
appeals team case leader will prepare a closing agreement. After the
closing agreement has been executed by the taxpayer, it will be executed
on behalf of the Service by an authorized official from Appeals.

(c) TAXPAYERS BEFORE THE TAX COURT. For docketed taxable years before
the Tax Court, the taxpayer and the Chief Counsel attorney must prepare an
appropriate settlement document, settlement stipulation, or stipulated
decision document, pursuant to the rules and procedures of the court. The
settlement document, settlement stipulation, or stipulated decision
document is subject to the approval of the court.


(4) AMENDED RETURNS.

(a) IN GENERAL. In cases pending before examination or appeals, the
Service will make the adjustments necessary to reflect the settlement to
the taxpayer's returns for the taxable years under examination or before
an area appeals office. In cases pending before the Tax Court, the
settlement agreement will include adjustments necessary to reflect the
settlement with respect to the year(s) before the court. The taxpayer is
required to file amended returns to reflect the settlement for any other
affected taxable years for which a federal income tax return has been
filed as of the date of the closing agreement or other appropriate
settlement agreement. The amended returns must include the adjustments to
taxable income necessary to reflect the new method and any collateral
adjustments to taxable income or tax liability resulting from the change.
A taxpayer eligible to file a qualified amended return under Rev. Proc.
94-69 (1994-2 C.B. 804) may satisfy the requirements of this section by
filing a qualified amended return in accordance with that revenue
procedure.

(b) TIME AND MANNER. The taxpayer must file any required amended
returns prior to the date it executes the closing agreement or other
appropriate settlement agreement. The taxpayer must provide a copy of the
amended returns to the first line examination manager, appeals officer, or
Chief Counsel attorney (whichever is applicable) before the closing
agreement or other appropriate settlement agreement is executed.

.06 EFFECT ON OTHER OFFICES OF THE SERVICE. If a taxpayer is before an
area appeals office or the Tax Court regarding the treatment of the cost
of its qualifying vehicles' original and replacement tires and does not
settle this issue under the provisions of this section 7, an appropriate
representative from an area appeals office or Chief Counsel office may
settle a particular taxpayer's case involving this issue on a more
favorable or less favorable basis than provided in this revenue procedure.
For example, an appeals officer may settle a case based on the hazards of
litigation.


SECTION 8. EFFECTIVE DATE

01. IN GENERAL. This revenue procedure is effective for taxable years
ending on or after December 31, 2001.

02. FORM 3115 PENDING WITH THE SERVICE. If a taxpayer filed a Form 3115
with the national office to make the change in method of accounting
authorized by this revenue procedure, and this Form 3115 is pending with
the national office on April 3, 2002, the taxpayer may make the change
under this revenue procedure. However, the national office will process
the Form 3115 in accordance with the authority under which it was filed
unless the taxpayer notifies the national office by July 2, 2002, that it
intends to make the method change under this revenue procedure. If the
taxpayer timely notifies the national office that it wants to make the
method change under this revenue procedure, any user fee submitted with
the Form 3115 will be returned to the taxpayer.


SECTION 9. EFFECT ON OTHER DOCUMENTS

Rev. Proc. 2002-9 is modified and amplified to include this accounting
method change in section 2 of the APPENDIX.


DRAFTING INFORMATION

The principal author of this revenue procedure is Mark Pitzer of the
Office of Associate Chief Counsel (Passthroughs and Special Industries).
For further information regarding this revenue procedure, contact
Charlotte Chyr at (202) 622-3110 (not a toll-free call).


APPENDIX

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 the
taxpayer's method of accounting for the cost of its qualifying vehicles'
original and replacement tires. The definitions of qualifying vehicle,
original tires, and replacement tires set forth in section 3 of Rev. Proc.
2002-27, apply for purposes of this closing agreement.

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

3. Under the taxpayer's present method of accounting for the cost of
its qualifying vehicles' original and replacement tires, the taxpayer
[describe in detail the taxpayer's current method of accounting being
changed: for example, "deducts the cost of its qualifying vehicles'
original and replacement tires when purchased"].

4. The taxpayer and the Commissioner relied on the following facts and
representations in making this closing agreement: [insert relevant facts,
including the amounts capitalized or deducted under the original tire
capitalization method for each taxable year under examination, before an
area appeals office, or before the Tax Court, an explanation of the
computations used to determine those amounts, and a statement of whether
the amounts capitalized or deducted for each of those taxable years is
taken into account for federal income tax purposes].

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 the cost of the qualifying vehicles' original and
replacement tires 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 original tire capitalization method described in
section 5 of Rev. Proc. 2002-27 for the cost of the qualifying vehicles'
original and replacement tires.


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

1. That the Service is changing the taxpayer's method of accounting for
the cost of its qualifying vehicles' original and replacement tires to the
original tire capitalization method of accounting described in section 5
of Rev. Proc. 2002-27, for the taxable year ended [insert earliest open
taxable year after which there is no closed taxable year].

2. That the change in method of accounting is to be made on a cut-off
basis.

3. That the adjustment(s) to tax attributable to the adjustment(s) to
taxable income resulting from the change in the method of accounting for
the cost of the qualifying vehicles' original and replacement tires
(including the 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].

4. That the change in method of accounting for the cost of the
qualifying vehicles' original and replacement tires is a change in method
of accounting within the meaning of Rev. Proc. 2002-27. As such, the
provisions of section 446 and the regulations thereunder apply to the
original tire capitalization method of accounting described in section 5
of Rev. Proc. 2002-27 for the cost of the qualifying vehicles' original
and replacement tires.

5. That, under section 7.02(4) of Rev. Proc. 2002-27, the Service will
not require the taxpayer to change its method of accounting for the cost
of its qualifying vehicles' original and replacement tires to a method
other than the original tire capitalization 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.

6. That the Service is not precluded from challenging the computation
of the amounts capitalized or deducted for any taxable year covered by
this closing agreement on a basis unrelated to the original tire
capitalization method (for example, that all or a portion of the cost of a
qualifying vehicle's original or replacement tires is not incurred under
section 461).

7. [If applicable, insert:] That 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].

8. That the taxpayer accepts this settlement and agrees to the
applicable terms of Rev. Proc. 2002-27.

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.

Taxpayer (other than individual):

By: ____ 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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