IRS Revenue Procedure
2002-36

 Code Secs. 61, 446, 451, 481, 1012



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26 CFR 601.204: Changes in accounting periods and methods of accounting.
(Also Part I, sections 61, 446, 451, 481, 1012; 1.61-1, 1.446-1, 1.451-1,
1.481-1, 1.1012-1.)


REV. PROC. 2002-36

SECTION 1. PURPOSE

This revenue procedure provides taxpayers that purchase vehicles
subject to leases and assume the associated leases from motor vehicle
dealers with a safe harbor method of accounting for capital cost reduction
payments ("CCR payments") made by vehicle lessees. This revenue procedure
also provides a procedure for taxpayers to obtain automatic consent of the
Commissioner to change to the safe harbor method of accounting.


SECTION 2. BACKGROUND

.01 Section 61(a) of the Internal Revenue Code provides that, except as
otherwise provided, gross income means all income from whatever source
derived.

.02 Section 451(a) and section 1.451-1(a) of the Income Tax Regulations
provide that the amount of any item of gross income should be included in
a taxpayer's gross income for the taxable year in which actually or
constructively received by the taxpayer, unless, under the taxpayer's
method of accounting, such amount is properly includible for a different
year.

.03 Section 1012 provides that the basis of property is the cost of the
property. In general, section 1.1012-1(a) provides that the cost is the
amount paid for the property in cash or other property.

.04 Under section 446(e) and section 1.446-1(e)(2)(i), a taxpayer
generally 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 terms and conditions necessary to obtain
consent to change a method of accounting.

.05 The Treasury Department and the Internal Revenue Service are aware
that the proper tax treatment of CCR payments by purchasers of leased
vehicles has become a source of significant controversy. For reasons of
administrative convenience and to avoid further controversy in this area,
Treasury and the Service have determined that it is appropriate to provide
purchasers with a safe harbor method of accounting for CCR payments, under
which a CCR payment is excluded from the purchaser's basis in the
purchased vehicle (and is excluded from the purchaser's gross income).
Treasury and the Service believe the scope of the safe harbor method
provided in this revenue procedure is appropriate given the current
vehicle lease market and lease financing market. However, Treasury and the
Service may modify the scope of this safe harbor method as necessary to
respond to changes in leasing market conditions.


SECTION 3. SCOPE

This revenue procedure applies to taxpayers who purchase motor vehicles
subject to leases in connection with which a lessee has made a CCR
payment, as defined in section 4.01 of this revenue procedure, to the
dealer/lessor of the vehicle at the inception of the lease.


SECTION 4. DEFINITIONS

.01 CCR PAYMENT. A CCR payment is any payment made at the inception of
a motor vehicle lease by the lessee to the dealer from which the vehicle
is leased that has the effect of reducing the total amount of rent the
lessee will pay after inception of the lease. A CCR payment may consist of
a cash down payment, the trade-in value of a lessee's used vehicle, a
rebate or incentive supplied by the manufacturer to the lessee, credits
earned under a credit card reward program, or the first or last monthly
rental payment. A CCR payment does not include refundable security
deposits; extended service plan fees; insurance premiums; title,
registration, or license fees; sales, lease, excise, use, or ad valorem
taxes paid in advance or collected by the dealer; or administrative fees;
made by a lessee in connection with a motor vehicle lease.

.02 TAXPAYER. A "taxpayer" for purposes of this revenue procedure is a
purchaser of a motor vehicle that is subject to a lease in connection with
which a lessee has made a CCR payment to the dealer from which the lessee
originally leased the vehicle.


SECTION 5. CCR METHOD

Under the CCR method, the amount of a CCR payment is not includible in
the taxpayer's gross income and may not be included in the taxpayer's
basis in the purchased vehicle.


SECTION 6. AUDIT PROTECTION FOR TAXPAYERS CURRENTLY USING THE CCR METHOD

A taxpayer within the scope of this revenue procedure that is using the
CCR method provided in section 5 of this revenue procedure on May 3, 2002,
may continue to use this safe harbor method for taxable years ending on or
after May 3,2002, without filing a Form 3115, Application to Change a
Method of Accounting. Such taxpayer's method of excluding CCR payments
from both its gross income and its basis in the purchased vehicle will not
be raised as an issue in a taxable year that ends before May 3, 2002.
Moreover, if such taxpayer's method of excluding CCR payments from both
its gross income and its basis in the purchased vehicle is already an
issue under consideration (within the meaning of section 3.09 of Rev.
Proc. 2002-9 (2002-3 I.R.B. 327)) in a taxable year that ends before May
3, 2002, the issue will not be further pursued.


SECTION 7. CHANGE IN METHOD OF ACCOUNTING

.01 LIMITATIONS, TERMS, AND CONDITIONS. A change to the CCR method
provided by this revenue procedure will be treated as a change in method
of accounting to which the provisions of sections 446 and 481 and the
regulations thereunder apply. Therefore, a taxpayer within the scope of
this revenue procedure that does not use the CCR method provided in
section 5 of this revenue procedure on May 3, 2002, but wants to use this
safe harbor method for taxable years ending on or after December 31, 2001,
must file a Form 3115.

.02 AUTOMATIC CHANGE TO CCR METHOD. A taxpayer within the scope of this
revenue procedure that wants to change to the CCR method provided by
section 5 of this revenue procedure must follow the automatic change in
method of accounting provisions of Rev. Proc. 2002-9 (or its successor),
as modified by Rev. Proc. 2002-19 (2002-13 I.R.B. 696) with the following
modifications:

(1) The scope limitations in section 4.02 of Rev. Proc. 2002-9 do not
apply to a taxpayer that wants to make the change for its first or second
taxable year ending on or after December 31, 2001;

(2) When filing the Form 3115, taxpayers must complete all applicable
parts of the form and, in lieu of the label required by section 6.02(4) of
Rev. Proc. 2002-9, are instructed to write "Filed under Rev. Proc.
2002-36" at the top of the form.


.03 SECTION 481(a) ADJUSTMENT. As provided in section 2 of Rev. Proc.
2002-19, the period for negative section 481(a) adjustments is one year,
and the period for positive section 481(a) adjustments is four years.

.04 AUDIT PROTECTION. If a taxpayer complies with the requirements of
this revenue procedure and changes its method of accounting for CCR
payments to the CCR method provided in section 5 of this revenue
procedure, the treatment of CCR payments will not be raised as an issue in
any taxable year before the year of change and, if the treatment of CCR
payments is already an issue under consideration (within the meaning of
section 3.09 of Rev. Proc. 2002-9) in a taxable year before the year of
change, that issue will not be further pursued.


SECTION 8. EFFECT ON OTHER DOCUMENTS

Rev. Proc. 2002-9 is modified and amplified to include this automatic
change in section 5A of the APPENDIX.


SECTION 9. EFFECTIVE DATE

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


DRAFTING INFORMATION

The principal author of this revenue procedure is Joy Ruff of the
Office of Associate Chief Counsel (Income Tax and Accounting). For further
information regarding this revenue procedure, contact Ms. Ruff at (202)
622-5020 (not a toll-free call).

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