rp-05-9.pdf

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Part III

Administrative, Procedural, and Miscellaneous

26 CFR 601.204: Changes in accounting periods and in methods of accounting.
(Also Part 1, §§ 162, 263, 446, 461, 481; 1.167(a)-3(b), 1.263(a)-4, 1.263(a)-5, 1.446-1,
1.461-4, 1.461-5, 1.481-1)

Rev. Proc. 2005-9
SECTION 1. PURPOSE
This revenue procedure provides the exclusive administrative procedures under
which a taxpayer described in section 4 of this revenue procedure may obtain automatic
consent for the taxpayer’s second taxable year ending on or after December 31, 2003,
to change to a method of accounting provided in §§ 1.263(a)-4, 1.263(a)-5, and
1.167(a)-3(b) of the Income Tax Regulations (the “final regulations”).
SECTION 2. BACKGROUND
.01 On January 5, 2004, the Internal Revenue Service and Treasury Department
published final regulations in the Federal Register (TD 9107; 69 FR 436). Section
1.263(a)-4 prescribes the extent to which taxpayers must capitalize amounts paid or
incurred to acquire or create (or to facilitate the acquisition or creation of) intangibles.
Section 1.263(a)-5 prescribes the extent to which taxpayers must capitalize amounts
paid or incurred to facilitate an acquisition of a trade or business, a change in the capital
structure of a business entity, and certain other transactions. Section 1.167(a)-3(b)
provides a safe harbor useful life for certain intangible assets. The final regulations

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under §§ 1.263(a)-4 and 1.263(a)-5 are effective for amounts paid or incurred on or
after December 31, 2003. The final regulations under § 1.167(a)-3(b) are effective for
intangible assets created on or after December 31, 2003.
.02 Sections 1.263(a)-4(p) and 1.263(a)-5(n) provide that a taxpayer seeking to
change to a method of accounting provided in the final regulations must secure the
consent of the Commissioner in accordance with the requirements of § 1.446-1(e). In
addition, §§ 1.263(a)-4(p) and 1.263(a)-5(n) provide that, for the taxpayer’s first taxable
year ending on or after December 31, 2003, the taxpayer is granted the consent of the
Commissioner to change to a method of accounting provided in the final regulations,
provided the taxpayer follows the administrative procedures issued under § 1.446-
1(e)(3)(ii) for obtaining the Commissioner’s automatic consent to a change in
accounting method (for further guidance, for example, see Rev. Proc. 2002-9, 2002-1
C.B. 327, as modified and clarified by Announcement 2002-17, 2002-1 C.B. 561,
modified and amplified by Rev. Proc. 2002-19, 2002-1 C.B. 696, and amplified, clarified,
and modified by Rev. Proc. 2002-54, 2002-2 C.B. 432). The final regulations further
provide that any applicable § 481(a) adjustment for a change to a method of accounting
provided in the final regulations for a taxpayer’s first taxable year ending on or after
December 31, 2003, is determined by taking into account only amounts paid or incurred
in taxable years ending on or after January 24, 2002. The preamble to the final
regulations states that the Service may issue additional guidance for utilizing the
automatic consent procedures to change to a method of accounting provided in the
regulations.
.03 Section 1.446-1(e)(3)(ii) authorizes the Commissioner to prescribe

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administrative procedures setting forth the limitations, terms, and conditions deemed
necessary to permit a taxpayer to obtain consent to change a method of accounting.
.04 Rev. Proc. 2002-9 provides procedures by which a taxpayer may obtain
automatic consent to change to a method of accounting described in the Appendix of
Rev. Proc. 2002-9.
.05 Rev. Rul. 90-38, 1990-1 C.B. 57, provides that, if a taxpayer uses an
erroneous method of accounting for two or more consecutive taxable years, the
taxpayer has adopted a method of accounting. The ruling further provides that a
taxpayer may not, without the Commissioner’s consent, retroactively change from an
erroneous to a permissible method of accounting by filing an amended return.
.06 Rev. Proc. 2004-23, 2004-16 I.R.B. 785, provides the exclusive
administrative procedures under which a taxpayer may obtain automatic consent for the
taxpayer’s first taxable year ending on or after December 31, 2003, to change to a
method of accounting provided in the final regulations and, if desired, to change to a
method of utilizing the 3½ month rule authorized by § 1.461-4(d)(6)(ii) or the recurring
item exception authorized by § 1.461-5 in conjunction with a change to a method of
accounting provided in the final regulations. Under Rev. Proc. 2004-23, a term and
condition of the Commissioner’s consent with respect to a change to a method of
accounting provided in the final regulations is that any applicable § 481(a) adjustment
take into account only amounts paid or incurred in taxable years ending on or after
January 24, 2002. In addition, Rev. Proc. 2004-23 states that for taxable years
subsequent to the first taxable year ending on or after December 31, 2003, a similar

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term and condition will apply. (For further background, see Section 2 of Rev. Proc.
2004-23.)
.07 This revenue procedure applies only for a taxpayer’s second taxable year
ending on or after December 31, 2003. As in Rev. Proc. 2004-23, this revenue
procedure grants taxpayers the Commissioner’s consent to change to a method of
utilizing the 3½ month rule or the recurring item exception only for the item for which the
taxpayer is simultaneously changing to a method of accounting provided in the final
regulations. In addition, a term and condition of obtaining the Commissioner’s consent,
whether or not automatic, is that any applicable § 481(a) adjustment take into account
only amounts paid or incurred in taxable years ending on or after January 24, 2002.
The Service intends to issue future guidance for changes in methods of accounting
made for subsequent taxable years, including automatic consent procedures for some
or all methods of accounting provided in the final regulations. Such guidance will
include as a term and condition of obtaining the Commissioner’s consent, whether or
not automatic, that any applicable § 481(a) adjustment take into account only amounts
paid or incurred in taxable years ending on or after January 24, 2002.
.08 This revenue procedure constitutes the exclusive guidance for utilizing the
automatic consent procedures to change to a method of accounting provided in the final
regulations for a taxpayer’s second taxable year ending on or after December 31, 2003.
For any change in method of accounting to which this revenue procedure applies, a
taxpayer may not file an application for a change in method of accounting under Rev.
Proc. 97-27, 1997-21 I.R.B. 10 (as modified and amplified by Rev. Proc. 2002-19, 2002-
13 I.R.B. 696, as amplified and clarified by Rev. Proc. 2002-54, 2002-35 I.R.B. 432).

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See section 4.02(1) of Rev. Proc. 97-27.
SECTION 3. HOW THIS REVENUE PROCEDURE DIFFERS FROM REV. PROC.
2004-23
.01 Rev. Proc. 2004-23 applies to a taxpayer’s first taxable year ending on or
after December 31, 2003. This revenue procedure applies to a taxpayer’s second
taxable year ending on or after December 31, 2003.
.02 Rev. Proc. 2004-23 waives the scope limitations in section 4.02 of Rev. Proc.
2002-9. This revenue procedure does not waive those limitations.
.03 Rev. Proc. 2004-23 does not require taxpayers to complete many of the lines
in Part II of Form 3115. Because this revenue procedure does not waive the scope
limitations of Rev. Proc. 2002-9, this revenue procedure requires taxpayers to complete
more of the lines in Part II of Form 3115. See section 5.02(2)(d) of this revenue
procedure.
SECTION 4. SCOPE
.01 This revenue procedure applies to a taxpayer that seeks, for the taxpayer’s
second taxable year ending on or after December 31, 2003, to change to a method of
accounting provided in the final regulations.
.02 This revenue procedure also applies to a taxpayer that, for the taxpayer’s
second taxable year ending on or after December 31, 2003, in addition to seeking a
change to a method of accounting provided in the final regulations, also seeks to
change its method of accounting to utilize the 3½ month rule authorized by § 1.461-
4(d)(6)(ii) or to utilize the recurring item exception authorized by § 1.461-5.
SECTION 5. APPLICATION

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.01 In general. A taxpayer within the scope of this revenue procedure is, in
accordance with section 6.01 of Rev. Proc. 2002-9, granted the consent of the
Commissioner to change to a method of accounting provided in the final regulations
(and, if desired, to also utilize the 3½ month rule authorized by § 1.461-4(d)(6)(ii) or the
recurring item exception authorized by § 1.461-5) provided that the taxpayer follows the
automatic change in method of accounting provisions in Rev. Proc. 2002-9, with the
following modifications:
(1) The taxpayer must prepare and file Form 3115, Application for Change
in Accounting Method, in accordance with section 5.02 of this revenue procedure;
(2) The copy of Form 3115 must be sent to the following special address
(note the special post office box number): Commissioner of Internal Revenue, Attention:
CC:ITA (Automatic Rulings Branch, Rev. Proc. 2005-9 Filing) P.O. Box 7616, Benjamin
Franklin Station, Washington, D.C. 20044 (or in the case of a private delivery service or
hand delivery to the courier’s desk: Commissioner of Internal Revenue, Attention:
CC:ITA (Automatic Rulings Branch, Rev. Proc. 2005-9 Filing), 1111 Constitution
Avenue, N.W., Washington, D.C. 20224);
(3) The taxpayer must compute any applicable § 481(a) adjustment and
take such adjustment into account in accordance with section 6 of this revenue
procedure; and
(4) A taxpayer described in section 5.03(2) of this revenue procedure must
file one or more amended federal income tax returns (amended returns) in accordance
with section 5.03(3), (4), or (5), as applicable, of this revenue procedure.
.02 Form 3115. In preparing the Form 3115 referred to in section 5.01 of this

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revenue procedure, a taxpayer must comply with the following procedures:
(1) The taxpayer may use one Form 3115 for all changes in method of
accounting made pursuant to the final regulations;
(2) The taxpayer is required to complete only the following information on
Form 3115:
(a) The identification section of Page 1 (above Part I);
(b) The signature section at the bottom of Page 1;
(c) Part I, Line 1(a). The designated automatic accounting method
change number for changes in method of accounting made pursuant to this revenue
procedure is No. “78”;
(d) Part II, all lines except lines 11, 13, 14, 15, and 17 (for purposes
of completing line 12, see section 6.02(2) of this revenue procedure if the taxpayer is
making more than one change in method of accounting);
(e) Part IV, in accordance with section 6 of this revenue procedure;
and
(f) Schedule E, if applicable;
(3) In addition to the other information required on line 12 of Form 3115,
the taxpayer must include the citation to the paragraph of the final regulations that
provides for the proposed method of accounting for each item (e.g., § 1.263(a)-4(d)(6)
or § 1.263(a)-4(f)), and, if applicable, whether the taxpayer is also proposing to change
to a method that uses the 3½ month rule authorized by § 1.461-4(d)(6)(ii) or the
recurring item exception authorized by § 1.461-5 with respect to the item;
(4) In addition to the other information required on Schedule E of Form

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3115 (if applicable), the taxpayer must include a statement as to whether the useful life
is the safe harbor useful life prescribed by § 1.167(a)-3(b)(1) or § 1.167(a)-3(b)(1)(iv)
and, if the useful life is the safe harbor useful life prescribed by § 1.167(a)-3(b)(1), a
statement explaining why the intangible asset does not have a useful life the length of
which can be estimated with reasonable accuracy; and
(5) A taxpayer that must file one or more amended returns as provided in
section 5.03 of this revenue procedure to be eligible to use the automatic consent
procedures of this revenue procedure must attach to the Form 3115 a written statement
signed under penalties of perjury confirming that the taxpayer has filed the amended
returns pursuant to section 5.03 of this revenue procedure.
.03 Unauthorized change in a preceding year.
(1) A taxpayer may change a method of accounting only with the consent
of the Commissioner. § 1.446-1(e)(2). A taxpayer that changes a method of accounting
without the consent of the Commissioner has made an unauthorized change in method
of accounting. If a taxpayer makes an unauthorized change in method of accounting,
the Service may adjust the taxpayer’s taxable income during the examination of the
taxpayer’s income tax return for the taxable year the unauthorized change was made
and for all affected subsequent years. In the notice of proposed rulemaking that
preceded the publication of the final regulations (REG-125638-01; 67 FR 77701), the
Service and Treasury Department advised taxpayers not to seek to change a method of
accounting in reliance on rules contained in the notice of proposed rulemaking until the
rules were published as final regulations. The Service and Treasury Department are
aware that some taxpayers have made an unauthorized change in method of

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accounting for an item the treatment of which is provided for in the final regulations.
The Service and Treasury Department have determined that it is not appropriate for
taxpayers that have made an unauthorized change in method of accounting for an item
the treatment of which is provided for in the final regulations to obtain automatic consent
under this revenue procedure without correcting such unauthorized change. Therefore,
a taxpayer that made an unauthorized change in method of accounting for an item the
treatment of which is provided for in the final regulations is eligible to use the automatic
consent procedures provided in this revenue procedure only if the taxpayer amends
prior federal income tax returns to correct the unauthorized change in method of
accounting. However, as a matter of administrative grace, the Service and Treasury
Department have limited the application of this section 5.03 to certain taxpayers
described in section 5.03(2) of this revenue procedure.
(2) This section 5.03 applies to a taxpayer that –
(a) in a taxable year for which the due date of the federal income
tax return (including extensions, regardless of whether such extension is
automatic and whether or not actually requested) is after January 24, 2002 --
(i) made any unauthorized change in method of accounting
for an item the treatment of which is provided for in the final regulations; or
(ii) impermissibly changed the treatment of an item that is
provided for in the final regulations in the taxpayer’s first taxable year
ending on or after December 31, 2003, but has only used such treatment
on one federal income tax return; or
(b) made an unauthorized change in method of accounting to a

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method of accounting that is provided in the final regulations in a taxable year for
which the due date of the federal income tax return (including extensions,
regardless of whether such extension is automatic and whether or not actually
requested) is on or before January 24, 2002, and for which the statute of
limitations has not yet expired, if the taxpayer wishes to use the automatic
consent procedures to obtain the Commissioner’s consent to change to the same
method of accounting to which the taxpayer previously made the unauthorized
change.
(3) A taxpayer described in section 5.03(2)(a)(i) of this revenue procedure
is eligible to use the automatic consent procedures to obtain the Commissioner’s
consent to change to a method of accounting provided in the final regulations only if the
taxpayer changes back to the prior method of accounting (i.e., the method of accounting
used for an item prior to making the unauthorized change for the item) for each item
referred to in section 5.03(2)(a) of this revenue procedure by amending its federal
income tax returns for all of the preceding taxable years in which the unauthorized
method (or methods) was used.
(4) A taxpayer described in section 5.03(2)(a)(ii) of this revenue procedure
is eligible to use the automatic consent procedures to obtain the Commissioner’s
consent to change to a method of accounting provided in the final regulations only if the
taxpayer amends its federal income tax return for the preceding taxable year in which
the unauthorized treatment was used to change the treatment of each item referred to in
section 5.03(2)(a) of this revenue procedure to a treatment consistent with the
taxpayer’s historic method of accounting (i.e., the method of accounting used for an

11
item prior to changing the treatment of the item).
(5) A taxpayer described in section 5.03(2)(b) of this revenue procedure is
eligible to use the automatic consent procedures to obtain the Commissioner’s consent
to change to the same method of accounting provided in the final regulations to which
the taxpayer previously made the unauthorized change only if the taxpayer changes
back to its prior method of accounting for the item (i.e., the method of accounting used
for the item prior to making the unauthorized change for the item) by amending its
federal income tax returns for all of the preceding taxable years in which the
unauthorized method was used.
(6) A taxpayer filing one or more amended returns pursuant to section
5.03(3), (4), or (5) of this revenue procedure must file the amended returns on or before
the date the taxpayer files a Form 3115 under this revenue procedure (including the
copy of Form 3115 filed with the national office under section 5.01(2) of this revenue
procedure) for the taxpayer’s second taxable year ending on or after December 31,
2003. For this purpose, a taxpayer under examination will be considered to have filed
an amended return by providing the amended return to the examining agent.
(7) In accordance with § 1.446-1(e)(3)(ii) and Rev. Rul. 90-38, consent is
hereby granted for a taxpayer described in section 4.01 of this revenue procedure that
also is described in section 5.03(2)(a)(i) or (b) of this revenue procedure to file the
amended returns referred to in section 5.03(3) or (5) of this revenue procedure to
retroactively change its method of accounting. This consent is granted for the taxable
year for which the taxpayer made the unauthorized change and for any subsequent
taxable year affected by the unauthorized change.

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.04 Prior change. For purposes of this revenue procedure, a change in method of
accounting made pursuant to Rev. Proc. 2004-23 (including a change required to be
made on an amended return as provided by section 4.03 of Rev. Proc. 2004-23) for an
item is not treated as a prior change of the same method of accounting within the
meaning of section 4.02(6) of Rev. Proc. 2002-9 with respect to a different item covered
by this revenue procedure. Thus, for example, a taxpayer that obtained automatic
consent under Rev. Proc. 2004-23 to change to a method of applying the 12-month rule
to prepaid property insurance is not prohibited by section 4.02(6) of Rev. Proc. 2002-9
from obtaining consent under this revenue procedure to change to a method of applying
the 12-month rule to the taxpayer’s prepaid licenses and permits.
SECTION 6. COMPUTATION OF SECTION 481(a) ADJUSTMENT
.01 In general. A taxpayer changing a method of accounting under this revenue
procedure is required to take into account any applicable § 481(a) adjustment as
provided in §§ 1.263(a)-4(p)(3) and 1.263(a)-5(n)(3). The § 481(a) adjustment is
computed as of the first day of the taxpayer’s second taxable year ending on or after
December 31, 2003, and, as provided in the final regulations, takes into account only
amounts paid or incurred in taxable years ending on or after January 24, 2002. Thus,
the § 481(a) adjustment is computed by taking into account only amounts paid or
incurred in the period beginning with the first day of the taxable year that includes
January 24, 2002, and ending with the last day of the first taxable year ending on or
after December 31, 2003. The amount of the § 481(a) adjustment must include (i) as a
reduction of taxable income, any amounts paid or incurred in the period beginning with
the first day of the taxable year that includes January 24, 2002, and ending with the last

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day of the first taxable year ending on or after December 31, 2003, that were capitalized
under the taxpayer’s present method of accounting and are currently deductible under
the taxpayer’s proposed method of accounting, reduced by the amount of such
capitalized costs recovered through amortization or depreciation under the taxpayer’s
present method of accounting, (ii) as an increase to taxable income, any amounts paid
or incurred in the period beginning with the first day of the taxable year that includes
January 24, 2002, and ending with the last day of the first taxable year ending on or
after December 31, 2003, that were currently deducted under the taxpayer’s present
method of accounting and are capitalized under the taxpayer’s proposed method of
accounting, reduced by the amount of capitalized costs that would have been recovered
through amortization or depreciation if the taxpayer’s proposed method of accounting
had been applied in taxable years ending on or after January 24, 2002, and (iii) as an
increase or a reduction to taxable income, as appropriate, any other adjustments
required as a result of the change in method of accounting. If under its present method
of accounting a taxpayer capitalized costs incurred prior to the first taxable year that
includes January 24, 2002, the taxpayer must continue to treat amortization or
depreciation deductions attributable to those costs in accordance with the taxpayer’s
present method of accounting. Thus, for example, a taxpayer that files its federal
income tax return on a calendar year basis continues to amortize or depreciate in 2004
an intangible created in 2001, even though the taxpayer has changed to a method of
accounting provided in the final regulations under which the entire cost of the intangible
would be currently deductible if incurred in 2004.
.02 Reporting the section 481(a) adjustment on Form 3115.

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(1) Netting. For purposes of determining the adjustment period under
section 2.05(2) of Rev. Proc. 2002-9, the § 481(a) adjustment is determined separately
for each change in method of accounting being made under this revenue procedure.
Thus, a positive adjustment attributable to a change in one method may not be netted
against a negative adjustment attributable to a change in another method. However, in
determining the adjustment attributable to a change in method, a taxpayer must net
positive § 481(a) adjustments and negative § 481(a) adjustments resulting from that
change in method (e.g., if a taxpayer changes to a method of applying the 12-month
rule to prepaid amounts, the taxpayer must net the resulting negative § 481(a)
adjustment with the positive § 481(a) adjustment that results from including those
amounts in inventory pursuant to the taxpayer’s existing § 263A method of accounting
for inventory).
(2) Itemized listing on Form 3115. The taxpayer must include on Form
3115, Part IV, line 25, the total § 481(a) adjustment for all changes in methods of
accounting being made. If the taxpayer is making more than one change in method of
accounting under the final regulations, the taxpayer must include on an attachment to
Form 3115 –
(a) the information required by Part IV, line 25 for each change in method
of accounting (including the amount of the § 481(a) adjustment for each change
in method of accounting);
(b) the information required by Part II, line 12 of Form 3115 that is
associated with each change; and
(c) the citation to the paragraph of the final regulations that provides for

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each proposed method of accounting (e.g., § 1.263(a)-4(d)(6) or § 1.263(a)-4(f)).
.03 Example: Y, a calendar year taxpayer that uses an accrual method of
accounting, is a service provider not required to maintain inventories. Y wishes to
change to a method of accounting provided in the final regulations for taxable year
2004, which is Y’s second taxable year ending on or after December 31, 2003. Y
incurred and capitalized $100x in taxable year 2001, $200x in taxable year 2002, and
$250x in taxable year 2003. In addition, Y incurred $300x in taxable year 2004. The
$100x, $200x, and $250x capitalized and depreciated by Y in 2001, 2002, and 2003 all
relate to the same method of accounting and would be currently deductible under the
final regulations if the amounts had been incurred on or after December 31, 2003. Y
claimed a depreciation deduction of $10x in each of the taxable years 2001, 2002, and
2003 with respect to the $100x incurred and capitalized in 2001, a depreciation
deduction of $20x in each of the taxable years 2002 and 2003 with respect to the $200x
incurred and capitalized in 2002, and a depreciation deduction of $25x in taxable year
2003 with respect to the $250x incurred and capitalized in 2003. For taxable year 2004,
Y may apply for an automatic change in method of accounting with respect to the
method under which the amounts had been capitalized. Y’s section 481(a) adjustment
is a decrease in income of $385x ($160x relating to amounts capitalized in 2002 ($200x
- $40 ($20 for 2002 and $20 for 2003)) + $225x relating to amounts capitalized in 2003
($250x - $25x)). Y must continue to use its present method of accounting for the
amount capitalized in 2001. Y uses its new method of accounting for the amount
incurred in 2004.
SECTION 7. EFFECT ON OTHER DOCUMENTS

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Rev. Proc. 2002-9 is modified and amplified to include these automatic changes
in method of accounting in section 3 of the APPENDIX.
SECTION 8. EFFECTIVE DATE
This revenue procedure is effective for a taxpayer’s second taxable year ending
on or after December 31, 2003.
SECTION 9. DRAFTING INFORMATION
The principal author of this revenue procedure is Grace Matuszeski of the
Associate Chief Counsel (Income Tax and Accounting). For further information
regarding this revenue procedure call Ms. Matuszeski at (202) 622-7900 (not a toll free
call).