Internal Revenue Bulletin 2019-39 (PDF rendition): IRS Notices

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Bulletin No. 2019–39
September 23, 2019
HIGHLIGHTS
OF THIS ISSUE
These synopses are intended only as aids to the reader in
identifying the subject matter covered. They may not be
relied upon as authoritative interpretations.
ADMINISTRATIVE
NOTICE 2019-47, page 731.
This notice provides penalty relief for organizations exempt
from tax under section 501(a), other than those organiza-
tions described in section 501(c)(3), that did not report the
names and addresses of their contributors on the Schedule
B of their Forms 990 or 990-EZ filed for a taxable year end-
ing on or after December 31, 2018, and on or prior to July
30, 2019.
INCOME TAX
REG-104554-18, page 737.
This document contains proposed regulations regarding the
timing of income inclusion under section 451 of the Internal
Revenue Code of advance payments for goods, services,
and certain other items. The proposed regulations reflect
changes made by the Tax Cuts and Jobs Act. These pro-
posed regulations affect taxpayers that use an accrual meth-
od of accounting and receive advance payments.
REG-104870-18, page 754.
This document contains proposed regulations regarding the
timing of income inclusion under section 451 of the Internal
Revenue Code. The proposed regulations reflect changes
made by the Tax Cuts and Jobs Act. These proposed reg-
ulations affect taxpayers that use an accrual method of ac-
counting and have an applicable financial statement.
REV. PROC. 2019-37, page 731.
This revenue procedure modifies Rev. Proc. 2018-31, 2018-
22 I.R.B. 637, to provide procedures under section 446 and
the accompanying regulations to obtain automatic consent
of the Commissioner of Internal Revenue to change methods
of accounting to comply with sections 451 and the proposed
regulations under sections 1.451-3 and 1.451-8.
Finding Lists begin on page ii.

The IRS Mission
Provide America’s taxpayers top-quality service by helping
them understand and meet their tax responsibilities and en-
force the law with integrity and fairness to all.
Introduction
The Internal Revenue Bulletin is the authoritative instrument
of the Commissioner of Internal Revenue for announcing of-
ficial rulings and procedures of the Internal Revenue Service
and for publishing Treasury Decisions, Executive Orders, Tax
Conventions, legislation, court decisions, and other items of
general interest. It is published weekly.
It is the policy of the Service to publish in the Bulletin all sub-
stantive rulings necessary to promote a uniform application
of the tax laws, including all rulings that supersede, revoke,
modify, or amend any of those previously published in the
Bulletin. All published rulings apply retroactively unless other-
wise indicated. Procedures relating solely to matters of inter-
nal management are not published; however, statements of
internal practices and procedures that affect the rights and
duties of taxpayers are published.
Revenue rulings represent the conclusions of the Service
on the application of the law to the pivotal facts stated in
the revenue ruling. In those based on positions taken in rul-
ings to taxpayers or technical advice to Service field offices,
identifying details and information of a confidential nature are
deleted to prevent unwarranted invasions of privacy and to
comply with statutory requirements.
Rulings and procedures reported in the Bulletin do not have the
force and effect of Treasury Department Regulations, but they
may be used as precedents. Unpublished rulings will not be
relied on, used, or cited as precedents by Service personnel in
the disposition of other cases. In applying published rulings and
procedures, the effect of subsequent legislation, regulations,
court decisions, rulings, and procedures must be considered,
and Service personnel and others concerned are cautioned
against reaching the same conclusions in other cases unless
the facts and circumstances are substantially the same.
The Bulletin is divided into four parts as follows:
Part I.—1986 Code.
This part includes rulings and decisions based on provisions
of the Internal Revenue Code of 1986.
Part II.—Treaties and Tax Legislation.
This part is divided into two subparts as follows: Subpart A,
Tax Conventions and Other Related Items, and Subpart B,
Legislation and Related Committee Reports.
Part III.—Administrative, Procedural, and Miscellaneous.
To the extent practicable, pertinent cross references to these
subjects are contained in the other Parts and Subparts. Also
included in this part are Bank Secrecy Act Administrative
Rulings. Bank Secrecy Act Administrative Rulings are issued
by the Department of the Treasury’s Office of the Assistant
Secretary (Enforcement).
Part IV.—Items of General Interest.
This part includes notices of proposed rulemakings, disbar-
ment and suspension lists, and announcements.
The last Bulletin for each month includes a cumulative index
for the matters published during the preceding months. These
monthly indexes are cumulated on a semiannual basis, and are
published in the last Bulletin of each semiannual period.
The contents of this publication are not copyrighted and may be reprinted freely. A citation of the Internal Revenue Bulletin as the source would be appropriate.
September 23, 2019 Bulletin No. 2019–39

Part III – Administrative, Procedural, and Miscellaneous
PENALTY RELIEF RELATED
TO RELIANCE ON REVENUE
PROCEDURE 2018-38
Notice 2019-47
This Notice provides penalty relief re-
lated to taxpayer reliance on Revenue Pro-
cedure 2018-38, which was set aside by an
order issued on July 30, 2019, by the Unit-
ed States District Court for the District of
Montana in the case of Bullock v. IRS, 2019
WL 3423485 (D. Mont. Jul. 30, 2019).
Revenue Procedure 2018-38, 2018-31
IRB 280, provided information reporting
relief to organizations exempt from tax
under section 501(a), other than organiza-
tions described in section 501(c)(3), that
are required to file an annual Form 990,
Return of Organization Exempt From In-
come Tax, or Form 990-EZ, Short Form
Return of Organization Exempt From In-
come Tax. Pursuant to Revenue Procedure
2018-38, those organizations that are ex-
empt from tax under section 501(a), other
than organizations described in section
501(c)(3), were granted relief from the
general requirement to report the names
and addresses of their contributors on the
Schedule B of their Forms 990 or 990-EZ
filed for taxable years ending on or after
December 31, 2018. The information re-
porting relief did not apply to political or-
ganizations described in section 527. The
instructions to Schedule B of Forms 990
and 990-EZ were modified to conform to
Revenue Procedure 2018-38.
Section 6652(c)(1)(A)(i) imposes a pen-
alty for a failure to file a return required
under section 6033(a)(1) on the date and
in the manner prescribed. Section 6652(c)
(1)(A)(ii) imposes a penalty for a failure
to include any of the information required
to be shown on a return filed under section
6033(a)(1) or to show the correct informa-
tion. The section 6652(c) penalty is not im-
posed if it is shown that the failure was due
to reasonable cause. I.R.C. § 6652(c)(5). In
general, an organization exempt from tax
under section 501(a) must file its Form 990
or 990-EZ by the 15
th
day of the 5th month
after the organization’s accounting period
ends. Treas. Reg. § 1.6033-1(e).
The court’s July 30, 2019 order in Bull-
ock has raised questions from taxpayers
regarding the filing requirements for the
2018 tax year because the order was issued
after the due date for most 2018 Forms
990 or 990-EZ. Any exempt organization
filing before July 30, 2019, other than or-
ganizations described in section 501(c)
(3), that did not report the names and ad-
dresses of its contributors on the Schedule
B of its Forms 990 or 990-EZ, would have
filed consistent with Revenue Procedure
2018-38 and according to the instructions
to Schedule B of Forms 990 and 990-EZ.
In consideration of these facts, and the
reliance interests of taxpayers, and consis-
tent with how the IRS has previously exer-
cised the authority under section 6652(c)
(5) to provide relief from penalties for
failures due to reasonable cause, the IRS
will not impose a penalty under section
6652(c) for organizations exempt from tax
under section 501(a), other than those or-
ganizations described in section 501(c)(3),
that do not report the names and address-
es of their contributors on the Schedule B
of their Forms 990 or 990-EZ filed for a
taxable year ending on or after December
31, 2018, and on or prior to July 30, 2019.
Exempt organizations may still be liable
for a penalty under section 6652(c) for a
failure to report any information required
under section 6033(a) that is unrelated to
the donor information described in Reve-
nue Procedure 2018-38.
The Office of the Associate Chief
Counsel (Procedure & Administration)
is the principal author of this notice. For
further information regarding this Notice,
call 202-317-3400 (not a toll-free num-
ber).
26 CFR 601.204: Changes in accounting periods
and in methods of accounting.
(Also: Part I, Sections 446, 451; 1.451-1.)
Rev. Proc. 2019-37
SECTION 1. PURPOSE
This revenue procedure modifies Rev.
Proc. 2018-31, 2018-22 I.R.B. 637, to
provide procedures under § 446 of the In-
ternal Revenue Code (Code) and § 1.446-
1(e) of the Income Tax Regulations to
obtain automatic consent of the Commis-
sioner of Internal Revenue (Commission-
er) to change methods of accounting to
comply with § 451 and the proposed regu-
lations under §§ 1.451-3 and 1.451-8.
SECTION 2. BACKGROUND
.01 Section 13221 of the Tax Cuts and
Jobs Act, Public Law 115-97, 131 Stat.
2054, 2113 (Dec. 22, 2017) (TCJA) made
several changes to the timing of income
for accrual method taxpayers by redesig-
nating § 451(b) through (i) as § 451(d)
through (k), and adding new § 451(b) and
(c). New § 451(b) and (c) are generally
effective for taxable years beginning after
December 31, 2017. Section 451(b), as
amended by the TCJA, generally provides
that for an accrual method taxpayer the
all events test with respect to any item of
gross income (or portion thereof) shall not
be treated as met any later than when such
item (or portion thereof) is taken into ac-
count as revenue in an applicable financial
statement (AFS) of the taxpayer, or such
other financial statement as the Secretary
may specify. Section 451(c), as amended
by the TCJA, provides an elective defer-
ral method of accounting for an accrual
method taxpayer that receives an advance
payment during the taxable year.
.02 Concurrently with the release of
this revenue procedure, the Department
of Treasury and the Internal Revenue
Service are issuing proposed regulations
under § 1.451-3 (REG-104870-18) and §
1.451-8 (REG-104554-18). The proposed
regulations under § 1.451-3 provide rules
relating to the taxable year of inclusion in
gross income under § 451(b) for taxpayers
with an AFS. The proposed regulations
under § 1.451-8 provide rules relating to
the use of the deferral method for advance
payments within the meaning of § 451(c)
for taxpayers with or without an AFS.
These proposed regulations generally ap-
ply to taxable years beginning on or after
the date the final regulations are published
in the Federal Register. However, until
the date the Treasury decision adopting
Bulletin No. 2019–39 731 September 23, 2019

proposed § 1.451-3 is published in the
Federal Register, a taxpayer may rely on
proposed § 1.451-3 for taxable years be-
ginning after December 31, 2017 (or in
the case of the specified credit card fees
defined in proposed § 1.451-3(i)(2), for
taxable years beginning after December
31, 2018). However, a taxpayer relying on
proposed § 1.451-3 is neither required to,
nor permitted to, apply proposed § 1.451-
3 to specified fees (as defined in proposed
§ 1.451-3(i)(2)) other than specified credit
card fees. See proposed § 1.451-3(n). In
addition, until the date the Treasury deci-
sion adopting proposed § 1.451-8 is pub-
lished in the Federal Register, a taxpayer
may rely on proposed § 1.451-8 for tax-
able years beginning after December 31,
2017. See proposed § 1.451-8(f).
.03 Except as otherwise provided by
the Code or the regulations, § 446(e) and
§ 1.446-1(e)(2) require a taxpayer to se-
cure 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 Commis-
sioner to prescribe administrative proce-
dures that provide the terms and conditions
necessary for a taxpayer to obtain consent
to a change in method of accounting. Rev.
Proc. 2015-13, 2015-5 I.R.B. 419, as clar-
ified and modified by Rev. Proc. 2015-
33, 2015-24 I.R.B. 1067, as modified by
Rev. Proc. 2016-1, 2016-1 I.R.B. 1, and
as modified by Rev. Proc. 2017-59, 2017-
48 I.R.B. 543, provides the general pro-
cedures by which a taxpayer may obtain
automatic consent of the Commissioner
to a change in method of accounting de-
scribed in the List of Automatic Changes.
Rev. Proc. 2018-31 contains the current
List of Automatic Changes.
.04 Rev. Proc. 2018-60, 2018-51 I.R.B.
1045, added section 16.12 to Rev. Proc.
2018-31 for taxpayers that want to change
their method of accounting for the tim-
ing of the recognition of income for fed-
eral income tax purposes to comply with
§ 451(b) as amended by the TCJA. In
general, Rev. Proc. 2018-60 provides pro-
cedures for taxable years beginning after
December 31, 2017. Rev. Proc. 2018-60
permits certain taxpayers to make changes
in method of accounting to comply with
§ 451(b) using streamlined method change
procedures if the change results in a zero
§ 481(a) adjustment or if the taxpayer re-
questing the change is a small business
taxpayer, as defined in the guidance.
.05 Section 3 of this revenue procedure
modifies Rev. Proc. 2018-31 to provide
additional automatic changes in method
of accounting for a taxpayer to change
its method of accounting under § 451 to
apply the proposed regulations under
§ 1.451-3 and/or § 1.451-8. Section 3 of
this revenue procedure also modifies Rev.
Proc. 2018-31 to provide an addition-
al automatic change for a taxpayer that
changes the manner in which it recogniz-
es amounts in revenue in an AFS and that
wants to change its method of accounting
for federal income tax purposes.
SECTION 3. MODIFICATIONS TO
REV. PROC. 2018-31
.01 Modifications to section 16.12 of
Rev. Proc. 2018-31.
(1) The heading to section 16.12 of
Rev. Proc. 2018-31 is modified to read as
follows:
.12 Changes in the timing of income
recognition under § 451(b) or proposed §
1.451-3, and changes relating to advance
payments under proposed § 1.451-8.
(2) Section 16.12(1) of Rev. Proc.
2018-31 is modified to read as follows:
(1) Description of change. This
change applies to an accrual method
taxpayer with an applicable financial
statement (AFS) that wants to make cer-
tain changes in method of accounting
described in section 16.12(2)(a) of this
revenue procedure for taxable years be-
ginning after December 31, 2017, or, in
the case of a specified credit card fee (as
defined in proposed § 1.451-3(i)(2)), for
taxable years beginning after December
31, 2018. This change also applies to a
taxpayer without an AFS that wants to
make certain changes in method of ac-
counting described in section 16.12(2)(b)
of this revenue procedure for a taxable
year beginning after December 31, 2017.
For purposes of this section 16.12, the
term AFS is defined under § 451(b)(3), or
for a taxpayer making a change to apply
proposed § 1.451-3 or proposed § 1.451-
8, the term AFS is defined in proposed
§ 1.451-3(c)(1).
(3) Section 16.12(2) of Rev. Proc.
2018-31 is modified to read as follows:
(2) Applicability.
(a) Taxpayer with an AFS. This change
applies to a taxpayer with an AFS that:
(i) wants to change to a method of ac-
counting that treats an item of gross in-
come, or portion thereof, as meeting the
all events test no later than when such
item, or portion thereof, is taken into ac-
count as revenue in its AFS under § 451(b)
(1)(A);
(ii) is not adopting the New Standards
(as defined in section 16.11(1) of this reve-
nue procedure) for the year of change, and
wants to allocate the transaction price to
performance obligations under § 451(b)(4);
(iii) wants to change to a method of ac-
counting that complies with the proposed
regulations under § 1.451-3 (including a
change for a specified credit card fee un-
der proposed §§ 1.451-3(i) and 1.1275-
2(l)); or
(iv) wants to change to a method of ac-
counting that complies with the proposed
regulations under § 1.451-8(c).
(b) Taxpayer without an AFS. This
change applies to a taxpayer that does not
have an AFS and that wants to change to a
method of accounting that complies with
the proposed regulations under § 1.451-
8(d).
(4) Section 16.12(3) of Rev. Proc.
2018-31 is modified to read as follows:
(3) Inapplicability. This change does
not apply to:
(a) a taxpayer that wants to make a
change for federal income tax purposes to
a method that adopts the New Standards,
as provided in section 16.11 of this rev-
enue procedure (for example, a change
to comply with § 451(b)(4), proposed §
1.451-3(g), or proposed § 1.451-8(c)(6));
(b) a taxpayer that wants to make a
change in method of accounting to a meth-
od described in § 451(b)(2);
(c) a taxpayer without an AFS that
wants to change to defer income based on
earned income under proposed § 1.451-
8(d)(4)(ii) determined using the follow-
ing: (i) a statistical basis if adequate data
are available to the taxpayer; (ii) a straight
line ratable basis over the term of the
agreement; or (iii) the use of any other ba-
sis that in the opinion of the Commission-
er results in a clear reflection of income;
or
(d) a taxpayer that wants to make a
change in method of accounting for spec-
ified fees (as defined in proposed § 1.451-
September 23, 2019 732 Bulletin No. 2019–39

Bulletin No. 2019–39 733 September 23, 2019
3(i)(2)) other than specified credit card
fees.
(5) Section 16.12(4) of Rev. Proc.
2018-31 is modified as follows:
(a) Section 16.12(4)(b) of Rev. Proc.
2018-31 is modified to read as follows:
(b) Special rules relating to § 481(a)
adjustment or cut-off basis.
(i) Section 481(a) adjustment period
for changes relating to specified credit
card fees. In the case of income from a
specified credit card fee, the § 481(a) ad-
justment period for any qualified change
in method of accounting described in
this section 16.12(4)(b)(i) is six taxable
years (year of change and next five tax-
able years). For purposes of the preceding
sentence, a qualified change in method
of accounting is a change in method of
accounting for income from a specified
credit card fee to a method that is required
by § 451(b), as added by section 13221 of
the Tax Cuts and Jobs Act (TCJA), Pub-
lic Law 115-97, 131 Stat. 2054 (Dec. 22,
2017), for such income, but only for the
taxpayer’s first taxable year beginning af-
ter December 31, 2018. Section 16.12(4)
(b)(ii) of this revenue procedure may not
be used for a change relating to specified
credit card fees.
(ii) Cut-off basis or § 481(a) adjust-
ment.
(A) Cut-off basis or § 481(a) adjust-
ment for changes made under section
16.12(2)(a)(i) or (iii) of this revenue pro-
cedure. Except as otherwise provided
in this section 16.12(4)(b)(ii), a taxpay-
er making a change described in section
16.12(2)(a)(i) or (iii) of this revenue pro-
cedure may implement the change with
either a § 481(a) adjustment as provided
in sections 7.02 and 7.03 of Rev. Proc.
2015-13 or on a cut-off basis provided
the taxpayer is also making a concurrent
method change under section 16.11 of this
revenue procedure. See section 16.12(8)
(b) of this revenue procedure for informa-
tion on making this concurrent change. A
taxpayer described in section 16.12(4)(c)
(i)(B) of this revenue procedure that uses
the streamlined procedures provided in
section 16.12(4)(c) of this revenue proce-
dure may not make a change in method of
accounting on a cut-off basis. If the tax-
payer makes a concurrent change under
section 16.11 of this revenue procedure
and implements the change under this sec-
tion 16.12(4)(b)(ii) of this revenue pro-
cedure on a cut-off basis, (1) the change
applies to contracts entered into on or after
the beginning of the year of change, (2) all
changes made under section 16.12(2)(a)(i)
or (iii) of this revenue procedure must be
implemented using a cut-off basis, and (3)
a § 481(a) adjustment is neither permitted
nor required. Notwithstanding anything
to the contrary in this section 16.12(4)
(b)(ii)(A), if a taxpayer is a member of
a consolidated group (within the mean-
ing of § 1.1502–1(h)), then the member
must implement all changes under this
section 16.12 with respect to its intercom-
pany transactions (within the meaning of
§ 1.1502–13(b)(1)(i)) under this section
16.12(4)(b)(ii) on a cut-off basis.
(B) Cut-off basis or § 481(a) adjust-
ment for changes to use proposed § 1.451-
8(c). Except as otherwise provided in this
section 16.12(4)(b)(ii), a taxpayer making
a change described in section 16.12(2)(a)
(iv) of this revenue procedure may imple-
ment the change with either a § 481(a)
adjustment as provided in sections 7.02
and 7.03 of Rev. Proc. 2015-13 or on a
cut-off basis. A taxpayer described in
section 16.12(4)(c)(i)(B) of this revenue
procedure that uses the streamlined pro-
cedures provided in section 16.12(4)(c)
of this revenue procedure may not make a
change in method of accounting on a cut-
off basis. If the taxpayer implements the
change on a cut-off basis, (1) the change
applies to contracts entered into on or after
the beginning of the year of change, (2) all
changes made under this section 16.12 to
adopt proposed § 1.451-8(c) must be im-
plemented using a cut-off basis, and (3) a
§ 481(a) adjustment is neither permitted
nor required. Notwithstanding anything
to the contrary in this section 16.12(4)
(b)(ii)(B), if a taxpayer is a member of a
consolidated group (within the meaning
of § 1.1502–1(h)), then the member must
implement all changes to adopt proposed
§ 1.451-8(c) with respect to its intercom-
pany transactions (within the meaning of
§ 1.1502–13(b)(1)(i)) under this section
16.12(4)(b)(ii)(B) on a cut-off basis.
(b) Section 16.12(4)(c)(i) of Rev. Proc.
2018-31 is modified to read as follows:
(i) Applicability. The procedures de-
scribed in this section 16.12(4)(c) may be
used by a taxpayer to make a change in
method of accounting described in sec-
tion 16.12(2)(a)(i) or (ii) of this revenue
procedure in the taxpayer’s first taxable
year beginning after December 31, 2017.
The procedures described in this section
16.12(4)(c) may also be used by a tax-
payer to make a change in method of ac-
counting described in section 16.12(2)(a)
(iii), 16.12(2)(a)(iv), or 16.12(2)(b) of this
revenue procedure in the taxpayer’s first
or second taxable year beginning after De-
cember 31, 2017. A taxpayer is permitted
to use the streamlined method change pro-
cedures if the taxpayer meets one of the
following requirements:
(A) the taxpayer, other than a tax shel-
ter (as defined in § 448(d)(3)), meets the §
448(c) gross receipts test (a “small busi-
ness taxpayer”). The taxpayer meets the §
448(c) gross receipts test if the taxpayer
has average annual gross receipts for the
three prior taxable years of $25,000,000
or less (adjusted for inflation); or
(B) the taxpayer is making one or more
changes under section 16.12(2)(a) of this
revenue procedure, and the § 481(a) ad-
justment required by each of the changes
is zero. A taxpayer making more than one
change in method of accounting under
section 16.12(2)(a) of this revenue proce-
dure is not permitted to net the § 481(a)
adjustments to determine if the taxpayer
meets the requirements to use the stream-
lined method change procedures. See sec-
tion 16.12(8)(a) of this revenue procedure
for more information on making a permit-
ted concurrent change.
(6) Section 16.12(5) is modified as fol-
lows:
(a) Section 16.12(5)(b) of Rev. Proc.
2018-31 is modified to read as follows:
(b) Changes related to specified cred-
it card fees. For a change related to in-
come from a specified credit card fee,
the eligibility rule in section 5.01(1)(f) of
Rev. Proc. 2015-13 does not apply to this
change for a taxpayer’s first, second, or
third taxable year beginning after Decem-
ber 31, 2018.
(b) Section 16.12(5)(c) of Rev. Proc.
2018-31 is modified to read as follows:
(c) Changes made under the stream-
lined method change procedures. For a
change made using the streamlined proce-
dures of section 16.12(4)(c) of this reve-
nue procedure for a change in method of
accounting described in section 16.12(2)
(a)(i) or (ii) of this revenue procedure,

September 23, 2019 734 Bulletin No. 2019–39
the eligibility rule in section 5.01(f) of
Rev. Proc. 2015-13 does not apply to this
change for a taxpayer’s first taxable year
beginning after December 31, 2017. For
a change made using the streamlined pro-
cedures of section 16.12(4)(c) of this rev-
enue procedure for a change in method of
accounting described in section 16.12(2)
(a)(iii), 16.12(2)(a)(iv), or 16.12(2)(b) of
this revenue procedure, the eligibility rule
in section 5.01(f) of Rev. Proc. 2015-13
does not apply to this change for the tax-
payer’s first or second taxable year begin-
ning after December 31, 2017.
(7) Section 16.12(6) of Rev. Proc.
2018-31 is modified to read as follows:
(6) Audit protection.
(a) Streamlined procedures. A taxpayer
making a change in method of accounting
under this section 16.12 using the stream-
lined method change procedures provided
in section 16.12(4)(c) of this revenue pro-
cedure does not receive audit protection
under section 8.01 of Rev. Proc. 2015-13.
(b) Taxpayers under examination.
(i) In general – certain audit protection
exception temporarily inapplicable. Ex-
cept as otherwise provided in this section
16.12(6)(b), for a taxpayer’s first, second,
or third taxable year beginning after De-
cember 31, 2017, the audit protection rule
in section 8.02(1) of Rev. Proc. 2015-13
does not apply to a change in method of
accounting made under section 16.12(2)
(a)(iii) or (iv) of this revenue procedure.
However, section 8.02(1) of Rev. Proc.
2015-13 continues to apply for purposes
of determining the § 481(a) adjustment
period for a positive § 481(a) adjustment
provided in section 7.03(3)(b) of Rev.
Proc. 2015-13. This paragraph applies to a
taxpayer under examination that does not
use the streamlined procedures described
in section 16.12(4)(c) of this revenue pro-
cedure.
(ii) Changes related to specified credit
card fees. For a change related to income
from a specified credit card fee, for a tax-
payer’s first, second, or third taxable year
beginning after December 31, 2018, the
audit protection rule in section 8.02(1) of
Rev. Proc. 2015-13 does not apply to a
taxpayer that makes a change in method of
accounting described in section 16.12(2)
(a)(iii) of this revenue procedure. Howev-
er, for a taxpayer’s second or third taxable
year beginning after December 31, 2018,
section 8.02(1) of Rev. Proc. 2015-13 con-
tinues to apply for purposes of determin-
ing the § 481(a) adjustment period for a
positive § 481(a) adjustment provided in
section 7.03(3)(b) of Rev. Proc. 2015-13.
(8) Section 16.12(7) of Rev. Proc.
2018-31 is modified to read as follows:
(7) No ruling on method used. The con-
sent granted under section 9 of Rev. Proc.
2015-13 for a change made under sec-
tion 16.12 of this revenue procedure for a
change in method of accounting described
in section 16.12(2)(a)(i) or (ii) of this rev-
enue procedure is not a determination by
the Commissioner that the new method of
accounting is a permissible method of ac-
counting under § 451 and does not create
a presumption that the allocation meth-
od used under § 451(b)(4) is a permissi-
ble method of accounting. The Director
may ascertain whether the new method
of accounting is a permissible method of
accounting under § 451 and whether the
allocation method is permissible under
§ 451(b)(4).
(9) Section 16.12(8) of Rev. Proc.
2018-31 is modified to read as follows:
(8) Concurrent automatic changes.
(a) In general. A taxpayer that wants to
make one or more concurrent changes in
method of accounting under this section
16.12 may file a single Form 3115 that
includes all of the changes, must separate-
ly state the § 481(a) adjustment for each
change, if applicable, and may not net the
§ 481(a) adjustment for a change with the
§ 481(a) adjustment from another change.
However, a taxpayer that makes a concur-
rent change in method of accounting to
allocate transaction price to performance
obligations under section 16.12(2)(a)(ii),
(iii), or (iv) of this revenue procedure is
required to make the allocation change
before a change to a method under section
451(b)(1)(A), the AFS income inclusion
rule in proposed § 1.451-3, or the deferral
method described in proposed § 1.451-
8(c), as applicable. For example, a taxpay-
er that makes a change under both section
16.12(2)(a)(i) and (2)(a)(ii) of this reve-
nue procedure is required to implement
the change under section 16.12(2)(a)(ii)
of this revenue procedure before making
the change under section 16.12(2)(a)(i) of
this revenue procedure.
(b) Concurrent change in the timing
of recognition of income due to the New
Standards. Except as provided in section
16.12(4)(c)(i) of this revenue procedure,
a taxpayer that wants to make a change
under section 16.12(2)(a)(i), (iii), or (iv)
of this revenue procedure and a change
under section 16.11 of this revenue pro-
cedure for the same year of change may
file a single Form 3115 for both changes
and enter the designated automatic ac-
counting method change number for both
changes on the appropriate line of Form
3115. A taxpayer that makes both changes
is required to make the change under sec-
tion 16.11 of this revenue procedure be-
fore making the change under this section
16.12(2)(a)(i), (iii), or (iv), as applicable.
(10) Section 16.12(9) of Rev. Proc.
2018-31 is modified to read as follows:
(9) Designated automatic account-
ing method change number. The desig-
nated automatic method change number
for a change under section 16.12(2)(a)
(i) or (ii) of this revenue procedure is
“239.” The designated automatic method
change number for a change under section
16.12(2)(a)(iii), (iv), or 16.12(2)(b) of this
revenue procedure (that is, a change to
comply with the proposed regulations un-
der § 1.451-3 or § 1.451-8) is “242.”
.02 Modification to section 16.11 of
Rev. Proc. 2018-31. Section 16.11 of Rev.
Proc. 2018-31 is modified to renumber
existing paragraphs (6)-(10) as (7)-(11)
and adding new paragraph (6) to read as
follows:
(6) Under examination – certain audit
protection exceptions temporarily inap-
plicable. For a taxpayer’s first, second,
or third taxable year beginning after De-
cember 31, 2017, section 8.02(1) of Rev.
Proc. 2015-13 does not apply to a change
in method of accounting made under sec-
tion 16.11(2) of this revenue procedure
if the method of accounting to be used
complies with the proposed regulations
under § 1.451-3 and/or § 1.451-8. Howev-
er, section 8.02(1) of Rev. Proc. 2015-13
continues to apply for purposes of deter-
mining the § 481(a) adjustment period for
a positive § 481(a) adjustment provided in
section 7.03(3)(b) of Rev. Proc. 2015-13.
.03 Modifications to section 16.10 of
Rev. Proc. 2018-31.
(1) The heading of section 16.10 of
Rev. Proc. 2018-31 is modified as follows:
.10 Change in applicable financial
statements (AFS) for purposes of applying

Bulletin No. 2019–39 735 September 23, 2019
certain revenue recognition methods of
accounting.
(2) Section 16.10(1)(a) of Rev. Proc.
2018-31 is modified to add new divisions
(ii)-(iv) to read as follows:
(ii) This change applies to a taxpayer
that: (A) receives advance payments, as
defined in proposed § 1.451-8(b)(1); (B)
uses the deferral method described in
proposed § 1.451-8(c); (C) changes the
manner in which it recognizes advance
payments in revenues in its AFS; and (D)
wants to change its method of accounting
to use its proposed method of recogniz-
ing advance payments in revenues in its
AFS for determining the extent to which
advance payments are included in income
under proposed § 1.451-8(c).
(iii) This change applies to a taxpayer
that: (A) includes amounts in income in
accordance with § 451(b); (B) changes the
manner in which the item, or portion there-
of, is taken into account in revenue in its
AFS; and (C) wants to change its method
of accounting to use the proposed method
of taking into account the item, or portion
thereof, in revenue in its AFS for purposes
of § 451(b), including, if applicable, alloca-
tion of the transaction price to performance
obligations under § 451(b)(4).
(iv) This change applies to a taxpayer
that: (A) includes amounts in income in
accordance with proposed § 1.451-3; (B)
changes the manner in which the item,
or portion thereof, is taken into account
as revenue in its AFS; and (C) wants to
change its method of accounting to use the
proposed method of taking into account
the item, or portion thereof, in revenue in
its AFS for purposes of proposed § 1.451-
3, including for purposes of allocating
transaction price to performance obliga-
tions under proposed § 1.451-3(g).
(3) Section 16.10(1)(b) of Rev. Proc.
2018-31 is modified to renumber existing
divisions (i) and (ii) as subparagraphs (i)
(A) and (i)(B), respectively, to add a head-
ing to (i), and to add division (ii) to read
as follows:
(i) Changes relating to Rev. Proc.
2004-34.
(A) a taxpayer that uses a present meth-
od of accounting for advance payments
that is not the deferral method described in
section 5.02(3)(a) of Rev. Proc. 2004-34.
For example, this change does not apply
to a taxpayer that uses the full inclusion
method under section 5.01 of Rev. Proc.
2004-34;
(B) a taxpayer that wants to change
its method for allocating payments under
section 5.02(4) of Rev. Proc. 2004-34.
(ii) Changes relating to § 451(b), pro-
posed § 1.451-3, or proposed § 1.451-8.
(A) a taxpayer whose present method
of accounting does not use its AFS for
purposes of § 451(b), proposed § 1.451-3,
or proposed § 1.451-8;
(B) a change in the manner in which
the taxpayer identifies contracts or deter-
mines the transaction price, including the
inclusion and exclusion of variable con-
sideration in the transaction price, under
the New Standards, as defined in section
16.11(1) of this revenue procedure;
(C) any change in method of account-
ing that qualifies under another automatic
change described in the List of Automatic
Changes provided in this revenue proce-
dure (or any successor); or
(D) with respect to a change described
in section 16.10(1)(a)(ii) of this reve-
nue procedure, a taxpayer whose present
method is not the deferral method under
proposed § 1.451-8(c). For example, this
change does not apply to a taxpayer that
uses the full inclusion method under §
451(c) or the non-AFS deferral method
under proposed § 1.451-8(d).
(4) Section 16.10(1) of Rev. Proc.
2018-31 is modified to add new subpara-
graph (c) to read as follows:
(c) Restatements. A taxpayer’s restate-
ment of its AFS for financial accounting
presentation does not affect the propriety
of the taxpayer’s method of accounting
for revenue recognized in the prior tax-
able year(s). For example, if the taxpay-
er uses the deferral method described in
section 5.02(3)(a) of Rev. Proc. 2004-34
for including advance payments in gross
income in accordance with its AFS (even
if the AFS for that taxable year is later re-
stated), the taxpayer satisfies the require-
ment of section 16.10(1)(a)(i)(B) of this
revenue procedure and may change its
method of accounting under this section if
it is otherwise eligible.
(5) Section 16.10(2) of Rev. Proc.
2018-31 is modified as follows:
(a) Section 16.10(2)(a) is modified to
read as follows:
(a) Cut-off basis for certain changes. A
change made under section 16.10(1)(a)(i)
or (ii) of this revenue procedure is made
on a cut-off basis and applies to items of
income received by the taxpayer on or af-
ter the beginning of the year of change.
Any advance payments received prior to
the year of change are accounted for un-
der the taxpayer’s former method of ac-
counting (that is, according to its former
AFS), and any advance payments received
in the year of change and in subsequent
taxable years are accounted for under the
taxpayer’s new method of accounting. A
taxpayer that makes a change in allocation
for purposes of § 451(c)(4)(D) must allo-
cate any payment allocations prior to the
year of change using the taxpayer’s for-
mer method of accounting. Accordingly,
a § 481(a) adjustment is neither permitted
nor required.
(b) Section 16.10(2)(b)(iv), (b)(v), and
(b)(vi) are modified to read as follows:
(iv) for each applicant, identify the
type of applicable financial statement
used by the taxpayer, as defined in appli-
cable guidance. See, as applicable, section
4.06 of Rev. Proc. 2004-34, § 451(b)(3),
proposed § 1.451-8(b)(2), or proposed §
1.451-3(c)(1);
(v) a detailed and complete descrip-
tion of each type of item affected by the
change in revenue recognition and the line
number (or schedule) where the affected
item is reflected on the federal tax return
for the year of change, and if applicable,
the section 481(a) adjustment for each
change;
(vi) a detailed description of the basis
used for revenue recognition (that is, the
method the taxpayer uses in its applicable
financial statement or how the taxpayer
determines amounts earned, as applica-
ble) both before and after the change in
the revenue recognition policy for the ap-
plicable financial statement.
(c) Section 16.10(2) of Rev. Proc.
2018-31 is modified to add new subpara-
graph (c) to read as follows:
(c) Concurrent automatic change. A
taxpayer may make more than one change
under this section 16.10 on the same
statement in lieu of a Form 3115 for the
same year of change. The taxpayer must
provide all of the information required for
each change.
(6) The heading of section 16.10(5) of
Rev. Proc. 2018-31 is modified to read as
follows:

September 23, 2019 736 Bulletin No. 2019–39
(5) Special rule – advance payments
under Rev. Proc. 2004-34.
.04 Modification to section 15.01 of
Rev. Proc. 2018-31. Section 15.01(5) of
Rev. Proc. 2018-31, as modified by Rev.
Proc. 2018-60, is modified to read as fol-
lows:
(5) No ruling on method used. The con-
sent granted under section 9 of Rev. Proc.
2015-13 for a change made under section
15.01 of this revenue procedure is not a de-
termination by the Commissioner that the
new method of accounting is a permissible
method of accounting under § 451 and does
not create a presumption that the allocation
method used under § 451(b)(4) is a permis-
sible method of accounting. The Director
may ascertain whether the new method
of accounting is a permissible method of
accounting under § 451 and whether the
allocation method is permissible under
§ 451(b)(4). This section 15.01(5) does
not apply to a taxpayer with an AFS that is
making a change to comply with the pro-
posed regulations under § 1.451-3.
SECTION 4. EFFECTIVE DATE
.01 In general. This revenue procedure
is effective for taxable years beginning af-
ter December 31, 2017, or in the case of
specified credit card fees, for taxable years
beginning after December 31, 2018.
.02 Return of Form 3115 filed under the
non-automatic change procedures. The
National Office will return any Form 3115
requesting a change in method of account-
ing that was filed with the National Office
on or before September 9, 2019, under the
non-automatic procedures of Rev. Proc.
2015-13 for a taxable year beginning af-
ter December 31, 2017, that is pending
with the National Office on September
9, 2019, and that is described in section
3 of this revenue procedure. The National
Office will send a letter to the taxpayer ac-
knowledging the return of the Form 3115
and will return the user fee submitted with
the Form 3115. For purposes of the rules
of Rev. Proc. 2015-13, the timely resub-
mitted Form 3115 will be considered filed
as of the date the taxpayer originally filed
the Form 3115 under the non-automatic
change procedures in Rev. Proc. 2015-13.
This paragraph does not extend the date
the taxpayer must file the original (re-
turned) Form 3115 under section 6.03(1)
(a)(i)(A) of Rev. Proc. 2015-13.
SECTION 5. EFFECT ON OTHER
DOCUMENTS
This revenue procedure modifies Rev.
Proc. 2018-31.
SECTION 6. PAPERWORK
REDUCTION ACT
The collection of information con-
tained in this revenue procedure has been
reviewed and approved by the Office
of Management and Budget in accor-
dance with the Paperwork Reduction Act
(44 U.S.C. 3507) under control number
1545–1551. An agency may not conduct
or sponsor, and a person is not required to
respond to, a collection of information un-
less the collection of information displays
a valid OMB control number. The collec-
tion of information in this revenue proce-
dure is in section 3.03. This information
is necessary and will be used to determine
whether the taxpayer properly changed to
a permitted method of accounting. The
collections of information are required for
the taxpayer to obtain consent to change
its method of accounting. The likely re-
spondents are the following: individuals,
farms, business or other for-profit insti-
tutions, nonprofit institutions, and small
businesses or organizations that use an
accrual method of accounting. The esti-
mated cumulative annual reporting and/
or recordkeeping burden for the method
changes described under OMB control
number 1545-1551 before this revenue
procedure is 27,336 respondents, and a to-
tal annual reporting and/or recordkeeping
burden of 30,580 hours. The estimated an-
nual burden per respondent/recordkeeper
under OMB control number 1545-1551
before this revenue procedure varies from
1/6 hour to 8½ hours, depending on indi-
vidual circumstances, with an estimated
average of 1¼ hours.
The estimated cumulative annual re-
porting and/or recordkeeping burden
for the method changes described under
OMB control number 1545-1551 after
this revenue procedure is accounted for
is 27,346 respondents, and a total annual
reporting and/or recordkeeping burden is
31,479 hours. The change described in
section 3.03 of this revenue procedure has
an estimated annual burden per respon-
dent/recordkeeper that varies from 3/4
hour to 2¼ hours, depending on individ-
ual circumstances, with an estimated av-
erage of 1½ hours. The estimated number
of respondents is 80. The estimated annual
frequency of responses is on occasion.
SECTION 7. DRAFTING
INFORMATION
The principal author of this revenue
procedure is Peter E. Ford of the Office of
the Associate Chief Counsel (Income Tax
& Accounting). For further information
regarding this revenue procedure, contact
Mr. Ford on (202) 317-7003 (not a toll
free number).

Bulletin No. 2019–39 737 September 23, 2019
Part IV
Notice of Proposed
Rulemaking
Advance Payments for
Goods, Services, and Other
Items
REG-104554-18
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Notice of proposed rulemak-
ing.
SUMMARY: This document contains
proposed regulations regarding the timing
of income inclusion under section 451 of
the Internal Revenue Code (Code) of ad-
vance payments for goods, services, and
certain other items. The proposed regula-
tions reflect changes made by the Tax Cuts
and Jobs Act. These proposed regulations
affect taxpayers that use an accrual meth-
od of accounting and receive advance
payments.
DATES: Written or electronic comments
or a request for a public hearing must be
received by November 8, 2019.
ADDRESSES: Submit electronic sub-
missions via the Federal eRulemaking
Portal at www.regulations.gov (indicate
IRS and REG-104554-18) by following
the online instructions for submitting
comments. Once submitted to the Federal
eRulemaking Portal, comments cannot be
edited or withdrawn. The Department of
the Treasury (Treasury Department) and
the IRS will publish for public availability
any comment received to its public dock-
et, whether submitted electronically or in
hard copy. Send hard copy submissions
to Internal Revenue Service, CC:PA:LP-
D:PR (REG-104554-18), Room 5205,
P.O. Box 7604, Ben Franklin Station,
Washington, DC 20044. Submissions may
be hand delivered Monday through Friday
between the hours of 8 a.m. and 4 p.m. to
Courier’s Desk, Internal Revenue Service,
CC:PA:LPD:PR (REG-104554-18), 1111
Constitution Avenue, NW, Washington,
DC 20224.
FOR FURTHER INFORMATION
CONTACT: Concerning this proposed
regulation, Peter E. Ford, (202) 317-7003;
concerning submission of comments or
a request for a public hearing, Regina L.
Johnson, (202) 317-6901 (not toll-free
numbers).
SUPPLEMENTARY INFORMATION:
Background
This document contains proposed
amendments to 26 CFR part 1 under sec-
tion 451(c). On December 22, 2017, sec-
tion 451(c) was amended by section 13221
of the Tax Cuts and Jobs Act, Public Law
No. 115-97 (131 Stat. 2054) (the Act), to
provide that a taxpayer using an accrual
method of accounting (accrual method
taxpayer) with an applicable financial
statement (AFS) may use the deferral
method of accounting provided in section
451(c) for advance payments. These pro-
posed regulations also provide a deferral
method of accounting for taxpayers that
do not have an AFS. Unless otherwise
indicated, all references to section 451(c)
in this preamble are to section 451(c), as
amended by the Act.
In general, section 451 provides that
the amount of any item of gross income
is included in gross income for the taxable
year in which it is received by the taxpay-
er, unless, under the method of accounting
used in computing taxable income, the
amount is to be properly accounted for as
of a different period. Under §1.451-1, ac-
crual method taxpayers generally include
items of income in gross income in the
taxable year when all the events occur that
fix the right to receive the income and the
amount of the income can be determined
with reasonable accuracy (the all events
test). All the events that fix the right to re-
ceive income occur when (1) the required
performance takes place, (2) payment is
due, or (3) payment is made, whichever
happens first. See Revenue Ruling 2003-
10 (2003-1 CB 288); Revenue Ruling
84-31 (1984-1 CB 127); Revenue Ruling
80-308 (1980-2 CB 162). Section 451(c)
requires an accrual method taxpayer who
receives an advance payment to include
the amount thereof in income in the tax-
able year of receipt. Section 451(c) also
generally codifies the current deferral
method of accounting for certain advance
payments for goods, services, and other
specified items provided by the IRS un-
der Revenue Procedure 2004-34 (2004-
22 IRB 991) by allowing accrual method
taxpayers to elect to defer the inclusion of
income associated with certain advance
payments to the taxable year following the
taxable year of receipt if such income also
is deferred for AFS purposes.
On April 12, 2018, the Treasury De-
partment and the IRS issued Notice
2018-35 (2018-18 IRB 520) requesting,
in part, comments on future guidance un-
der section 451(c). The record of public
comments received in response to Notice
2018-35 may be requested by sending an
email to Notice.comments@irscounsel.
treas.gov. This document provides guid-
ance on the application of section 451(c),
taking into account comments that were
received regarding section 451(c). The ap-
plication of section 451(c) is addressed in
separate guidance published in the same
issue of the Federal Register as these
proposed regulations.
Explanation of Provisions
These proposed regulations describe
and clarify the statutory requirements of
section 451(c) by providing new §1.451-
8.
1. Deferral Methods under §1.451-8
A. AFS Deferral Method
Consistent with section 451(c)(1)(A),
these proposed regulations provide that
an accrual method taxpayer with an AFS
includes an advance payment in gross
income in the taxable year of receipt un-
less the taxpayer uses the deferral meth-
od in section 451(c)(1)(B) and proposed
§1.451-8(c) (AFS deferral method). A
taxpayer using the AFS deferral method
must have an AFS, as described in section

September 23, 2019 738 Bulletin No. 2019–39
451(b)(1)(A)(i) or (ii). These proposed
regulations define the term AFS by refer-
ence to the definition of that term in pro-
posed §1.451-3(c)(1) (REG-104870-18).
Under the AFS deferral method, a taxpay-
er with an AFS that receives an advance
payment must include: (i) The advance
payment in income in the taxable year of
receipt, to the extent that it is included in
revenue in its AFS, and (ii) the remaining
amount of the advance payment in income
in the next taxable year. The AFS defer-
ral method provided in these proposed
regulations closely follows the deferral
method of Revenue Procedure 2004-34,
as modified by Revenue Procedure 2011-
14 (2011-4 IRB 330), and as modified and
clarified by Revenue Procedure 2011-18
(2011-5 IRB 443), and Revenue Proce-
dure 2013-29 (2013-33 IRB 141) (Reve-
nue Procedure deferral method). Because
new section 451(c)(1)(B) was intended to
generally codify the Revenue Procedure
deferral method, the Treasury Department
and the IRS believe that rules similar to
the Revenue Procedure deferral meth-
od are necessary and appropriate for the
proper application of section 451(c). See
H.R. Rep. No. 115-466, at 429 (2017)
(Conf. Rep.).
B. Non-AFS Deferral Method
Section 451(c)(4)(A) generally defines
an advance payment as any payment the
full inclusion of which in gross income
of the taxpayer for the year of receipt is
a permissible method of accounting, any
portion of which is included in revenue
by the taxpayer in an AFS, and which is
for goods, services, or other items iden-
tified by the Secretary. One commenter
noted that the financial statement require-
ment within the definition of an advance
payment means that the rule in Revenue
Procedure 2004-34 that depended on de-
termining when the advance payment was
earned was not within the statutory text of
section 451(c). The Treasury Department
and the IRS have concluded that section
451(c) does not prohibit a deferral method
that is otherwise permissible under Rev-
enue Procedure 2004-34. See H.R. Rep.
No. 115-466, at 429 (2017) (Conf. Rep.).
See also, Joint Committee on Taxation,
General Explanation of Public Law 115-
97 (JCS-1-18) at 170-171 (Dec. 20, 2018).
Revenue Procedure 2004-34 permitted
non-AFS taxpayers to use the Revenue
Procedure deferral method based on when
the income is earned (earned standard).
See section 5.02(3)(b) of Revenue Pro-
cedure 2004-34. The Revenue Procedure
deferral method using the earned standard
is a permissible method of accounting for
non-AFS taxpayers and, therefore, these
proposed regulations also provide a sim-
ilar deferral method for non-AFS taxpay-
ers in proposed §1.451-8(d) (non-AFS
deferral method). Under the non-AFS de-
ferral method, an accrual method taxpayer
without an AFS that receives an advance
payment must include: (i) The advance
payment in income in the taxable year of
receipt, to the extent that it is earned, and
(ii) the remaining amount of the advance
payment in income in the next taxable
year.
2. Definition of Advance Payment
A. In general
Section 451(c)(4)(A) generally defines
advance payment as any payment (i) the
full inclusion of which in gross income of
the taxpayer for the taxable year of receipt
is a permissible method of accounting, (ii)
any portion of which is included in rev-
enue by the taxpayer in an AFS (or such
other financial statement as the Secretary
may specify) for a subsequent taxable
year, and (iii) which is for goods, services,
or such other items as may be identified by
the Secretary.
Proposed §1.451-8(b)(1)(i) clarifies
that the definition of advance payment un-
der the AFS and non-AFS deferral meth-
ods is consistent with the definition of
advance payment in Revenue Procedure
2004-34, which section 451(c) was meant
to codify. See H.R. Rep. No. 115-466, at
429 (2017) (Conf. Rep.). The Treasury
Department and the IRS believe this defi-
nition of advance payment: (1) is consis-
tent with section 451(c), (2) minimizes
additional tax compliance burden and
cost, (3) provides clarity to taxpayers, and
(4) uses rules which are familiar to both
taxpayers and the IRS.
Two commenters suggested that airline
miles be explicitly included in the list of
items for which an advance payment may
be received. The commenters suggest-
ed that airline miles are a unique type of
item, generally redeemed for air travel and
non-travel rewards. The Treasury Depart-
ment and the IRS decline to specifically
include airline miles in the definition of
advance payment because the use of the
deferral method under these proposed reg-
ulations, to the extent airline miles are re-
deemable for goods or services, is already
permissible. Therefore, these proposed
regulations include examples to illustrate
that, to the extent certain reward points are
treated as separate performance obliga-
tions, they may be eligible for the deferral
methods provided under these proposed
regulations.
Another commenter suggested that
progress payments with respect to the sale
of an interest in real property should be
included in the definition of an advance
payment. Revenue Procedure 2004-34
was intended to provide a simplified and
consistent deferral period for the sale of
goods, services, and other items. However,
the definition of advance payment in Rev-
enue Procedure 2004-34 does not include
prepayments for interests in real property.
These proposed regulations generally pro-
vide the same types of items in the defi-
nition of advance payment to those items
provided in Revenue Procedure 2004-34.
However, the Treasury Department and
IRS will consider any comments received
in determining whether it is appropriate
to include additional types of items in the
definition of advance payment.
B. Items Excluded from the Definition of
an Advance Payment
Section 451(c)(4)(B) provides that cer-
tain items, except as otherwise provided
by the Secretary, are to be excluded from
the definition of an advance payment. Pur-
suant to section 451(c)(4)(B), the term
advance payment does not include rent;
insurance premiums governed by sub-
chapter L; payments with respect to finan-
cial instruments; payments with respect
to certain warranty or guaranty contracts;
payments subject to section 871(a), 881,
1441, or 1442; payments in property to
which section 83 applies; and other pay-
ments identified by the Secretary.
Several commenters requested that cer-
tain payments for certain types of goods
be excluded from the definition of an

Bulletin No. 2019–39 739 September 23, 2019
advance payment under section 451(c)
(4)(B). A commenter requested that cer-
tain pre-delivery payments for the sale of
high-value customer-configured equip-
ment that will be delivered to customers at
reasonably certain times not be included
in the definition of advance payment. An-
other commenter requested that an exclu-
sion be provided for goods for which (i) a
taxpayer receives a payment in a taxable
year with respect to a contract for the sale
of goods not properly includible in such
taxpayer’s finished goods inventory, and
(ii) on the last day of such taxable year the
taxpayer does not have on hand (or avail-
able to it in such year through its normal
source of supply) goods of a substantially
similar kind and in a sufficient quantity to
satisfy the contract during such contract
year. This commenter suggested a nar-
rowing of this exclusion could be done
according to whether a good is commer-
cially significant or of high-value. A com-
mercially significant good has a useful life
equal to or in excess of 10 years and it is
developed, marketed, and sold to custom-
ers in the aerospace industry. Generally
these goods require a significant amount
of capital to produce and may require con-
siderable time from development to de-
livery. Generally, for financial statement
purposes, such manufacturers recognize
revenue related to these goods when the
product is completed and delivered to the
customer and title and risk of loss have
transferred to the customer.
Proposed §1.451-8(b)(1)(ii) provides
a list of items excluded from the defini-
tion of advance payment that is similar
to Revenue Procedure 2004-34. An addi-
tional exclusion is provided for payments
received in a taxable year earlier than the
taxable year immediately preceding the
taxable year of the contractual delivery
date for a specified good, as defined in
§1.451-8(b)(9). In response to the com-
ments received, the Treasury Department
and IRS have determined that an exclusion
is appropriate for certain goods for which
a taxpayer requires a customer to make an
upfront payment under the contract if (i)
the contracted delivery month and year of
the good occurs at least two taxable years
after an upfront payment, (ii) the taxpayer
does not have the good or a substantially
similar good on hand at the end of the year
the upfront payment is received, and (iii)
the taxpayer recognizes all of the revenue
from the sale of the good in its AFS in the
year of delivery.
The Treasury Department and the IRS
have employed the authority granted to
the Secretary in section 451(c)(4)(B)(vii)
to exclude certain payments, in a limited
manner, that would otherwise constitute
advance payments within the meaning of
section 451(c)(4)(A), in response to the
proposals described in comments already
received. In order to fully consider other
such potential exclusions, detailed com-
ments that specifically address the follow-
ing issues are requested:
1. Does the authority granted to the Sec-
retary by section 451(c)(4)(B)(vii) to
exclude certain payments from the
definition of an advance payment
under section 451(c) also permit an
exception for those payments from
the rules regarding the all events test
under section 451(b)?
2. What significance, if any, should the
time it takes to manufacture or cre-
ate an item of property, or such item
of property’s useful life, be given in
determining whether a pre-delivery
payment for such item of property
should be included in income as an
advance payment?
3. Does the authority granted to the Sec-
retary by section 451(c)(4)(B)(vii)
authorize rules that change the timing
of deductions or provide a safe harbor
allowing specified categories of tax-
payers to use methods of accounting
for recognizing income other than an
accrual method under section 451? Is
there any particular authority under
the Code that would allow changing
the timing of deductions in this con-
text under section 451 or another sec-
tion of Subchapter E?
4. Does the authority granted to the Sec-
retary by section 451(c)(4)(B)(vii) to
exclude certain payments from the
definition of an advance payment
also authorize the imposition of con-
ditions unrelated to an accrual meth-
od of accounting with respect to any
such exclusions? For example, could
the Secretary require that a taxpayer
use an alternative method of account-
ing as a condition for excluding a
type of payment from the definition
of advance payment?
5. Does the authority granted to the Sec-
retary by section 451(c)(4)(B)(vii) to
exclude certain payments from the
definition of advance payment also
authorize the imposition of a time
limit on such exclusion? For exam-
ple, could an exclusion under sec-
tion 451(c)(4)(B)(vii) be limited to a
specified number of years after which
all remaining amounts would have to
be recognized in income? If so, what
would be an appropriate time limit?
6. Does the authority granted to the Sec-
retary by section 451(c)(4)(B)(vii) al-
low deferral of income in an amount
equal to the estimated future perfor-
mance costs while requiring current
recognition of estimated profits not
in excess of the amounts of advance
payments? If so, does the authority
granted to the Secretary by section
451(c)(4)(B)(vii) permit rules to ac-
count for the time value of money for
any variances in estimated costs or
profits?
7. Would it be inappropriate to reduce
the amount a C corporation would
be permitted to defer for a given tax-
able year under a potential exclusion
under section 451(c)(4)(B)(vii) by
an amount equal to the excess of (i)
distributions the C corporation made
to its shareholders with respect to its
stock, over (ii) the C corporation’s
taxable income for that taxable year?.
3. Advance Payment Acceleration
Provisions
Section 451(c)(3) provides that the de-
ferral method does not apply to an advance
payment received by the taxpayer during
a taxable year if such taxpayer ceases to
exist during (or with the close of) the tax-
able year. In contrast, Revenue Procedure
2004-34 provides more detailed accelera-
tion rules.
The Treasury Department and the IRS
have determined that rules similar to the
acceleration rules provided in Revenue
Procedure 2004-34 are appropriate for the
proper application of the AFS and non-
AFS deferral methods. The continued
use of the deferral method for an advance
payment is not appropriate and should be
limited in certain situations, such as when
the taxpayer ceases to exist, or when their

September 23, 2019 740 Bulletin No. 2019–39
obligation regarding the advance payment
is satisfied or otherwise ends. According-
ly, proposed §1.451-8(c)(2) and (d)(6)
provide rules to ensure the acceleration
of an advance payment when a taxpayer
either dies or ceases to exist, or when a
taxpayer’s obligation regarding an ad-
vance payment is satisfied or otherwise
ends, except in certain circumstances.
Consistent with Revenue Procedure 2004-
34, the acceleration rules do not apply to
a taxpayer that engages in a transaction to
which section 381 applies or certain trans-
actions in which section 351 applies in the
taxable year in which an advance payment
is received.
Section 451(c) does not specifically
address whether the deferral method may
be used when an amount is earned in the
taxable year, but deferred for AFS pur-
poses. The deferral method under section
451(c) is an exception to the requirement
to include an amount in income when it is
received but is not an exception to the re-
quirement to include an amount in income
when it is earned under the all events test.
Accordingly, consistent with Revenue
Procedure 2004-34, these proposed reg-
ulations permit deferral of advance pay-
ments received to the extent, in the year
of receipt, the amount is not included in
revenue in the taxpayer’s AFS, and is not
otherwise earned in the taxable year of re-
ceipt. The amounts not included in gross
income in the year of receipt must be in-
cluded in gross income in the next taxable
year.
4. Advance Payments and Financial
Statement Adjustments
Section 451(c) does not address the
treatment of financial statement adjust-
ments that cause amounts to not be includ-
ed in income.
Proposed §1.451-8(c)(3) and (d)(7)
provide that a taxpayer that defers in-
clusion of all or a portion of an advance
payment must include the remainder of
the advance payment in gross income
in the subsequent year, notwithstanding
any write-down or adjustment for finan-
cial accounting purposes. This provision
is consistent with a plain reading of sec-
tion 451(c)(1)(B) and the rule in proposed
§1.451-3(j), which require that an item of
income treated as deferred revenue in a
taxpayer’s AFS in one year and charged,
in whole or part, to a capital account in a
subsequent year, is included in revenue in
the subsequent year.
A financial accounting adjustment may
occur after certain equity acquisitions. For
example, after certain equity acquisitions,
the acquiring entity may write-down or
adjust the target’s deferred revenue in
the subsequent year under purchase ac-
counting rules. Some taxpayers have as-
serted that a write-down or adjustment
for financial accounting purposes results
in a permanent exclusion of income for
federal income tax purposes. Proposed
§1.451-8(c)(3) and (d)(7) provide clarifi-
cation for instances in which a taxpayer
defers inclusion of an advance payment
and is subsequently acquired in certain
equity acquisitions. The Treasury Depart-
ment and the IRS believe that financial
statement write-downs or adjustments to
deferred revenue should not be taken into
account for federal income tax purposes
when determining the proper amount to
be included in income under the deferral
method. This clarification ensures that a
financial statement write-down or adjust-
ment to deferred revenue does not result
in a permanent exclusion of income for
federal income tax purposes.
5. Short Taxable Years and the 92-Day
Rule
Section 451(c) does not provide rules
relating to the treatment of short taxable
years. Proposed §1.451-8(c)(4) and (d)(8)
use the short taxable year rules of Reve-
nue Procedure 2004-34 for the AFS and
non-AFS deferral methods because a rule
for short taxable years is necessary to
properly implement the deferral method
provided in section 451(c)(1)(B).
6. Performance Obligations for AFS and
Non-AFS Taxpayers
Sections 451(b) and (c)(4)(D) require
that taxpayers with contracts that contain
multiple performance obligations must
allocate transaction price, and therefore
defer (or accelerate) income inclusion,
consistent with the transaction price allo-
cation used for AFS purposes. Proposed
§1.451-3(c)(3) (REG-104870-18) defines
the term performance obligation to mean
a promise in a contract with a customer to
transfer to the customer either a good or
service (or a bundle of goods or services)
that is distinct, or a series of distinct goods
or services that are substantially the same
and that have the same pattern of transfer
to the customer. Proposed §1.451-8(b)(4)
defines the term performance obligation
by cross-reference to proposed §1.451-
3(c)(3) for purposes of the allocation rule
provided in section 451(c)(4)(D).
Proposed §1.451-8(b)(7) defines the
term transaction price by cross-reference
to proposed §1.451-3(c)(6). Proposed
§1.451-3(c)(6) defines the term transaction
price to mean the gross amount of consid-
eration to which a taxpayer expects to be
entitled for AFS purposes in exchange for
transferring promised goods, services, or
other property, including amounts referred
to in proposed §1.451-3(i). However, the
term transaction price does not include
certain items, such as amounts collected
on behalf of third parties that are not oth-
erwise income to the taxpayer, increases
for consideration to which a taxpayer’s
entitlement is contingent on the occur-
rence or nonoccurrence of a future event,
and reductions for amounts subject to
section 461. Proposed §1.451-3(c)(6)(ii)
presumes that an amount included in the
transaction price for AFS purposes is not
contingent unless, upon examination of all
of the facts and circumstances existing at
the end of the taxable year, it can be es-
tablished to the satisfaction of the Com-
missioner that the amount is contingent
on the occurrence or nonoccurrence of a
future event. Proposed §1.451-3(c)(6)(ii)
also provides that certain amounts includ-
ed in transaction price for AFS purposes,
however, will not be treated as contingent
on the occurrence or nonoccurrence of a
future event.
Comments are requested on allocation
of the transaction price (i) to performance
obligations that are not contractually
based, (ii) for arrangements that include
both income subject to section 451 and
long-term contracts subject to section
460, and (iii) when the income realization
event for federal income tax purposes dif-
fers from the income realization event for
AFS purposes.
For non-AFS taxpayers, there is a con-
tinued need to provide an allocation meth-
od consistent with the objective criteria

Bulletin No. 2019–39 741 September 23, 2019
standard in Revenue Procedure 2004-34
because such taxpayers do not have an
AFS and cannot use the transaction price
allocation used for AFS purposes, as pro-
vided in section 451(b)(4). Therefore, pro-
posed §1.451-8(d)(5) permits a non-AFS
taxpayer to allocate the revenue of multi-
ple obligations in a single contract based
on how such obligations are separately
priced or on any method that may be pro-
vided in guidance published in the IRB.
7. Accelerated Cost Offset
Several commenters discussed the
need for a regulatory exception to the
existing statutory and regulatory timing
rules that apply to liabilities (for exam-
ple, deductions and offsets for rebates,
refunds, and cost of goods sold (COGS)
prior to when the liability for such items is
incurred under section 461) when advance
payments are required to be included in
income under section 451(c) prior to the
completion of the sale of goods or provi-
sion of services (accelerated cost offset).
The commenters argued that not provid-
ing an accelerated cost offset in the regu-
lations would cause a mismatch of income
and expenses and result in the taxation of
gross receipts.
An allowance to account for future
cost of goods sold, for future estimated
costs, or other cost offset is inconsistent
with sections 461(h) and, 471, 263A, and
the accompanying regulations. Moreover,
section 13221 does not change the tim-
ing rules provided in sections 461, 471,
263A and elsewhere that apply to liabili-
ties. Section 13221 changes the timing of
income for advance payments for goods
and generally codifies Revenue Procedure
2004-34. See H.R. Rep. No. 115-466, at
429 (2017) (Conf. Rep.). Revenue Proce-
dure 2004-34 does not include an acceler-
ated cost offset when amounts are includ-
ed in income prior to the sale of goods or
provision of services.
The Conference Report also indicates
that section 13221 of the Act is “intended
to override any deferral method provided
by Treasury Regulation §1.451-5 for ad-
vance payments received for goods.” H.R.
Rep. No. 115-466, at 429 n 880 (2017)
(Conf. Rep.). Section 1.451-5 includes a
deferral method that allows an accelerat-
ed cost offset when certain amounts are
included in income prior to the sale of
goods. See §1.451-5(c). Section 451(c)
does not provide a cost offset, and the
Conference Report does not provide any
indication that Congress intended to pre-
serve the cost offset rules permitted under
§1.451-5. See also, Joint Committee on
Taxation, General Explanation of Public
Law 115-97 (JCS-1-18) at 156-157 and
164-165 (December 20, 2018). Final reg-
ulations were published in the Federal
Register (84 FR 33691) on July 15, 2019,
that withdraw §1.451-5, consistent with
the Act.
The Treasury Department and the IRS
believe that Congress intentionally sim-
plified the rules for advance payments by
limiting the deferral of advance payments
for taxpayers with an AFS to a prescribed
statutory method that: (1) does not include
an accelerated cost offset, (2) is consistent
with Revenue Procedure 2004-34, and
(3) overrides §1.451-5. See H.R. Rep. No.
115-466, at 429 (2017) (Conf. Rep.). Ac-
cordingly, the Treasury Department and
the IRS decline to provide an accelerated
cost offset in these proposed regulations.
The Treasury Department and the IRS do
not agree with the contention that changes
to the timing of income under section 451
without an accelerated cost offset cause a
taxation of gross receipts. Section 451(c)
and these proposed regulations merely
change the timing of income recognition,
do not preclude any associated reduction
or deduction for properly incurred liabili-
ties, and are consistent with existing stat-
utory and regulatory timing requirements
that apply to liabilities.
Several commenters proposed a cost
offset mechanism for manufacturers of
certain property and taxpayers with inven-
toriable goods in order to ensure matching
of income and the associated expenses.
Commenters made the following sugges-
tions to alleviate the potential mismatch
of the acceleration of income recognition
with different timing rules for associated
costs: (i) permitting a taxpayer that uses a
percentage of completion method for AFS
purposes (book PCM), but not subject
to section 460, to elect to use their AFS
method for tax purposes; (ii) permitting
a taxpayer that uses book PCM, but not
subject to section 460, to elect to apply
section 460 for federal income tax pur-
poses; (iii) expanding the recurring item
exception in section 461(h)(3) to permit
a taxpayer to offset the portion of the ad-
vance payment included in income for the
taxable year by the cost of goods sold re-
lated to this payment if the goods are com-
pleted and shipped to the customer with-
in 8 ½ months of the end of the taxable
year that the advance payment is included
in income; or (iv) providing a cost offset
for taxpayers that can demonstrate at the
time of the purchase agreement that a net
operating loss will remain unused for the
5-year period after the taxable year the ad-
vance payment is received.
The Treasury Department and the IRS
continue to consider whether any such ex-
ceptions are an appropriate use of the Sec-
retary’s authority under section 461(h) or
460. To facilitate further consideration of
such potential exceptions, detailed com-
ments that specifically address the follow-
ing issues are requested:
1. Under what authority would it be ap-
propriate for the Secretary to permit a
taxpayer to use book PCM as its tax
method? When inventory is involved,
what limitations could be instituted to
ensure that book PCM could not be
used to recover costs related to inven-
toriable goods prior to the time when
such costs could be recovered under
sections 471 and 263A? Under what
specific authority would it be appro-
priate to permit a book PCM method
to be used to recover costs related to
inventoriable goods?
2. Would elective use of book PCM for
tax purposes provide an appropriate
cost offset? Would such a method be
characterized as one that reports con-
tract revenue according to a taxpay-
er’s book method, while accounting
for costs, including nondeductible
costs, as deductions under the Code?
If not, how would such a method ac-
count for costs for federal income tax
purposes?
3. Rather than make book PCM elective,
would it be appropriate for the defini-
tion of “unique item” for purposes of
section 460 to be expanded?
4. Section 460 requires use of the look-
back method to compensate for im-
proper acceleration or deferral of
income under PCM. It also requires
that all contract income be reported
no later than the year following con-

September 23, 2019 742 Bulletin No. 2019–39
tract completion. Would elective use
of a PCM under section 460 without
these provisions invite abuse? If so,
how could such abuse be prevented?
8. Section 451(c) is a Method of
Accounting
Section 451(c)(2) provides that a tax-
payer may elect deferral treatment of an
advance payment governed by section
451(c), and such election shall be made
at such time and manner and with respect
to such categories of advance payments as
specified by the Secretary. Section 451(c)
(2)(B) provides that the deferral method
is treated as a method of accounting and
the election is effective for taxable years
with respect to which it is first made and
for all subsequent taxable years, unless the
taxpayer secures the consent of the Sec-
retary to change to a different method of
accounting.
The use of the AFS or non-AFS defer-
ral method is the adoption of, or a change
in, a method of accounting under section
446. A taxpayer may change its method
of accounting to use the deferral methods
only with the consent of the Commission-
er as required under section 446(e) and the
corresponding regulations. The Treasury
Department and the IRS intend to issue
future guidance that will provide the pro-
cedures by which a taxpayer may change
its method of accounting to use one of the
deferral methods described in these pro-
posed regulations. However, until further
guidance for the treatment of advance
payments is applicable, a taxpayer may
continue to rely on Revenue Procedure
2004-34, as described in Notice 2018-35.
Proposed Applicability Date
Section 7805(b)(1)(A) and (B) of the
Code generally provides that no tempo-
rary, proposed, or final regulation relating
to the internal revenue laws may apply to
any taxable period ending before the ear-
liest of (A) the date on which such regu-
lation is filed with the Federal Register,
or (B) in the case of a final regulation, the
date on which a proposed or temporary
regulation to which the final regulation re-
lates was filed with the Federal Register.
These regulations are proposed to ap-
ply to taxable years beginning on or after
the date the final regulations are published
in the Federal Register. Until the date the
Treasury decision adopting these regula-
tions as final regulations is published in
the Federal Register, a taxpayer may rely
on these proposed regulations for taxable
years beginning after December 31, 2017,
provided that the taxpayer: (1) applies all
the applicable rules contained in these
proposed regulations, and (2) consistently
applies these proposed regulations to all
advance payments. See section 7805(b)
(7).
Statement of Availability of IRS
Documents
The IRS notice, revenue ruling, and
revenue procedures cited in this pream-
ble are published in the Internal Revenue
Bulletin (or Cumulative Bulletin) and are
available from the Superintendent of Doc-
uments, U.S. Government Publishing Of-
fice, Washington, DC 20402, or by visit-
ing the IRS website at http://www.irs.gov.
Special Analysis
l.Regulatory Planning and Review
Executive Orders 13771, 13563, and
12866 direct agencies to assess costs and
benefits of available regulatory alterna-
tives and, if regulation is necessary, to se-
lect regulatory approaches that maximize
net benefits, including potential economic,
environmental, public health and safety
effects, distributive impacts, and equi-
ty. Executive Order 13563 emphasizes
the importance of quantifying both costs
and benefits, reducing costs, harmonizing
rules, and promoting flexibility. The Ex-
ecutive Order 13771 designation for any
final rule resulting from these proposed
regulations will be informed by comments
received. The preliminary Executive Or-
der 13771 designation for this proposed
rule is regulatory.
The proposed regulations have been
designated by the Office of Information
and Regulatory Affairs (OIRA) as subject
to review under Executive Order 12866
pursuant to the Memorandum of Agree-
ment (MOA, April 11, 2018) between
the Treasury Department and the Office
of Management and Budget regarding
review of tax regulations. The Office of
Information and Regulatory Affairs has
designated these proposed regulations as
significant under section 1(b) of the MOA.
Accordingly, OMB has reviewed these
proposed regulations.
1.Background
Under section 451(a) of the Internal
Revenue Code, income is “recognized”
(that is, included in gross income for tax
purposes) in the year in which it is re-
ceived by the taxpayer, unless it is prop-
erly accounted for in a different period
under the taxpayer’s method of account-
ing. Because of this latter condition, the
tax treatment of certain forms of income
depends on the method of accounting a
taxpayer is using. For taxpayers using
the accrual method of accounting, in-
come is generally recognized in the year
in which all events have occurred that fix
the right to receive that income and when
the amount of income can be determined
with reasonable accuracy (the “all events
test”). Receipt of payment by the busi-
ness satisfies the all events test. Howev-
er, recognition of certain payments for
goods or services not yet provided may
be deferred to the year following receipt
of payment, to the extent that recogni-
tion is also deferred for on the taxpayer’s
Applicable Financial Statement (AFS).
Such payments are referred to as “ad-
vance payments.”
Prior to the December 22, 2017, en-
actment of, “An Act to provide for rec-
onciliation pursuant to titles II and V of
the concurrent resolution on the budget
for fiscal year 2018,” Public Law 115-
97, 131 Stat. 2054 (2017), commonly
referred to as the Tax Cuts and Jobs Act
(TCJA), taxpayers were generally per-
mitted to defer the tax on these advance
payments; in other words, advance pay-
ments could be recognized in a later tax-
able year. Section 451(c), added by the
TCJA, allows accrual-method taxpayers
to elect to recognize as income only a
portion of such an advance payment in
the taxable year in which it is received,
and then recognize the remainder in the
following taxable year. Section 451(c)
essentially codifies the deferral meth-
od of accounting for advance payments
that was permitted in Revenue Procedure
2004-34. (Joint Committee on Taxation,

Bulletin No. 2019–39 743 September 23, 2019
General Explanation of Public Law 115-
97, (Washington, U.S. Government Pub-
lishing Office, December 2018), at 167.)
New section 451(c), the subject of the
proposed regulations, deals with issues
around how these advance payments
are defined and the timing in which they
need to be recognized in the business’s
income tax.
2. Need for the Proposed Regulations
These proposed regulations provide
certainty and clarity to taxpayers affected
by statutory changes introduced in section
451(c). The Treasury Department and IRS
have received questions and comments re-
garding the meaning of various provisions
in section 451(c) and issues not explicit-
ly addressed in the statute. The Treasury
Department and the IRS have determined
that such comments warrant the issuance
of further guidance.
3. Overview of the proposed regulations
The proposed regulations provide guid-
ance regarding the new section 451(c).
The subsequent economic analysis covers
proposed regulations to: (1) Describe and
clarify the deferral rules for advance pay-
ments for taxpayers without an Applicable
Financial Statement (AFS); (2) provide
acceleration rules for taxpayers that cease
to exist; (3) clarify the treatment of finan-
cial statement adjustments for taxpayers
that have deferred advance payments;
(4) provide rules relating to the treatment
of short taxable years for taxpayers de-
ferring advance payments; and (5) define
and clarify the treatment of performance
obligations.
4. Economic analysis
A. Baseline
The Treasury Department and the IRS
have assessed the benefits and costs of the
proposed regulations relative to a no-ac-
tion baseline reflecting anticipated Fed-
eral income tax-related behavior in the
absence of these proposed regulations.
The following largely qualitative analysis
describes the anticipated economic effects
of the proposed regulation relative to this
baseline.
B. Summary of Economic Effects
The proposed regulations provide cer-
tainty and consistency in the application
of section 451(c) by providing definitions
and clarifications regarding the statute’s
terms and rules. An economically effi-
cient tax system generally aims to treat
income and expense derived from similar
economic decisions consistently across
taxpayers and across activities in order to
reduce incentives for businesses to make
choices based on tax rather than market
incentives. In the absence of the guidance
provided in these proposed regulations,
the chances that different taxpayers might
interpret the statute differently is exacer-
bated. For example, two similarly situat-
ed taxpayers might interpret the statutory
provisions pertaining to the definition of
advanced payments differently, with one
taxpayer pursuing a project that another
comparable taxpayer might decline be-
cause of a different interpretation of how
the income may be treated under section
451(c). If this second taxpayer’s activi-
ty is more profitable, an economic loss
arises. An economic loss might also arise
if all taxpayers have identical interpreta-
tions under the baseline of the tax treat-
ment of particular income streams but are
more conservative (or less conservative)
regarding the interpretation than Con-
gress intended for these income streams.
In this case, guidance provides value by
bringing economic decisions closer in
line with the intents and purposes of the
statute.
Because the proposed regulations clar-
ify the tax treatment of certain income
streams, there is the possibility that in-
vestments or other business decisions may
change as a result of these regulations. The
Treasury Department and the IRS have
not made projections of the change in in-
vestment patterns that might arise due to
the discretionary aspects of the proposed
regulations. The Treasury Department and
the IRS have also not made projections of
any change in compliance costs arising
from the proposed regulations, relative
to the baseline. The Treasury Department
project that changes in investment pat-
terns and compliance costs relative to the
baseline may generally be small because
the proposed regulations affect a relative-
ly small number of entities and because
they largely mirror the rules of Rev. Proc.
2004-34.
The economic consequences of
these proposed regulations depend in
part on their interaction with other sec-
tions of the Code, including section 460,
which governs when costs can be recov-
ered under the percentage of completion
method, and section 461(h), which gov-
erns when costs incurred by a taxpayer sat-
isfy the all events test, including a require-
ment for economic performance, and are
thereby allowed as deductions for Federal
income tax purposes. The economic anal-
ysis of the final regulations under section
451(c) may address the economic effects
of regulatory guidance, if any, under sec-
tions 460 and 461(h) or other sections of
the Code that interact with section 451(c),
that is issued between the proposed and
final regulations.
The Treasury Department and the IRS
project that approximately 15,000 busi-
ness entities may be affected by these reg-
ulations.
The Treasury Department and the IRS
solicit comments on this conclusion and
particularly solicit comments that provide
data, evidence, or models that would en-
hance the rigor by which the non-revenue
economic effects might be estimated for
the final regulations.
C. Economic Analysis of Specific
Provisions
The Treasury Department and the IRS
solicit comments on the economics of
each of the items discussed subsequently
and of any other items of the proposed
regulations not discussed in this section.
The Treasury Department and the IRS
particularly solicit comments that provide
data, other evidence, or models that could
enhance the rigor of the process by which
provisions might be developed for the fi-
nal regulations.
i. Deferral Methods under section 451(c)
The statute prescribes a particular de-
ferral method for accrual-method taxpay-
ers that have an AFS (AFS taxpayers)
but does not explicitly describe a deferral
method to be used by taxpayers that do
not have an AFS (non-AFS taxpayers). To
remedy this gap, the proposed regulations

describe and clarify that a method similar
to the deferral method available to non-
AFS taxpayers under Revenue Procedure
2004-34 will be available to non-AFS tax-
payers.
The Treasury Department and the IRS
considered and rejected a narrow interpre-
tation of section 451(c) that would have
precluded non-AFS taxpayers from using
a deferral method similar to that provided
in Revenue Procedure 2004-34. Section
451(c) does not explicitly prohibit the use
of such a method by non-AFS taxpayers,
and the Treasury Department and IRS
continue to have authority under the Code
to prescribe a deferral method for such
taxpayers. Precluding non-AFS taxpay-
ers from using a deferral method similar
to that of AFS taxpayers would treat AFS
and non-AFS taxpayers quite differently
regarding business decisions they might
make that are otherwise similar. Such
treatment would result in a less economi-
cally efficient tax system, which generally
treats similar economic decisions similar-
ly.
The Treasury Department and the IRS
solicit comments on this decision on the
treatment of deferral by non-AFS taxpay-
ers and particularly solicit comments that
provide data, other evidence, or models
that could enhance the rigor by which the
final regulations over non-AFS deferral
might be developed.
ii. Advance Payment Acceleration
Provisions
If a taxpayer ceases to exist by the close
of a taxable year in which an advance pay-
ment has been received and deferred, then
issues may arise as to when or whether
the remaining amount of the payment will
be recognized as taxable income because
there may not be a succeeding taxable year
in which such income can be recognized.
Under the statute, if the taxpayer dies
or ceases to exist by the close of the tax-
able year in which the advance payment
was received, any remaining untaxed
amounts of advance payments must be
included in income in the year they were
received. The proposed regulations extend
this payment “acceleration” rule to situa-
tions in which a performance obligation is
satisfied or otherwise ends in the taxable
year of receipt or in a succeeding short
taxable year, a treatment that is consistent
with a similar rule in Revenue Procedure
2004-34.
The Treasury Department and the IRS
considered not modifying or expanding
the acceleration rule contained in section
451(c), but rejected this alternative be-
cause of the remaining amount may never
be picked up into income risking a perma-
nent exclusion of the amount from taxable
income. The possibility of a permanent
exclusion of income provides incentives
for taxpayers to structure payments in
ways that avoid tax liability, thus reduc-
ing Federal tax revenue without provid-
ing an accompanying general economic
benefit. The proposed regulations treat the
expanded set of accelerated transactions
consistently with similar types of transac-
tions based on the timing and structure of
the payments involved.
The Treasury Department and the IRS
solicit comments on the proposed regula-
tion’s treatment of acceleration and par-
ticularly solicit comments that provide
data, other evidence, or models that would
enhance the rigor by which the treatment
of acceleration might be developed for the
final regulations.
iii. Advance Payments and Financial
Statement Adjustments
Under the statute, if a taxpayer counts
an advance payment as an item of deferred
revenue, under certain conditions (for ex-
ample, certain acquisitions of one corpo-
ration by another), the taxpayer may be
required by its system of accounting to ad-
just that item on the balance sheet in a sub-
sequent year. The item would then not be
included in current earnings or AFS reve-
nues. In this case, taxpayers might argue
that they can exclude the amount deferred
from taxable income because it is never
“earned” nor included in revenue under
their AFS. If this argument is upheld, tax-
payers could convert an income “defer-
ral” amount into an income “exemption”
amount. To address this issue and avoid
this possibility, the proposed regulations
specify that such financial statement ad-
justments are to be treated as “revenue.”
The Treasury Department and the IRS
considered not providing clarity on the
treatment of financial statement write-
downs, but rejected that approach, be
-
cause it would have risked an inappropri-
ate permanent exclusion of income. The
possibility of a permanent exclusion of
income provides incentives for taxpayers
to structure payments in ways that avoid
tax liability, thus reducing Federal tax rev-
enue without providing an accompanying
general economic benefit.
The Treasury Department and the IRS
solicit comments on these proposed regu-
lations and particularly solicits comments
that provide data, other evidence, and
models that would enhance the rigor by
which the final regulations dealing with
financial statement adjustments might be
developed.
iv. Short Taxable Years and the 92-Day
Rule
Section 451(c) does not provide a rule
relating to the treatment of short taxable
years. In the absence of such a rule, it will
be unclear to taxpayers how they should
implement the deferral method provided
in section 451(c) in the case of a short
taxable year. To address this issue, the
proposed regulations provide rules relat-
ing to the treatment of short taxable years
for advance payments that are generally
consistent with Revenue Procedure 2004-
34. The Treasury Department and the IRS
considered and rejected not providing
short taxable year rules because such a de-
cision would have created significant con-
fusion among taxpayers, increased admin-
istrative costs for the IRS, and increased
compliance costs for taxpayers.
The Treasury Department and the IRS
solicit comments on these proposed regu-
lations and particularly solicit comments
that would provide data, other evidence,
and models that would enhance the rigor
by the treatment of short taxable years
might be developed for the final regula-
tions.
v. Performance Obligations for Non-AFS
Taxpayers
A performance obligation is a contrac-
tual arrangement with a customer to pro-
vide a good, service or a series of goods
or services that are basically the same and
have a routine pattern of transfer. The stat-
ute requires that taxpayers with contracts
that include multiple performance obli-
September 23, 2019 744 Bulletin No. 2019–39

gations to allocate the transaction price
to each performance obligation in the
same manner that revenue is allocated in
the taxpayer’s AFS. The statute does not,
however, specify the allocation rules to be
used by non-AFS taxpayers.
To address this issue, the proposed reg-
ulations provide allocation rules for non-
AFS taxpayers consistent with a similar
rule in Revenue Procedure 2004-34. That
rule specifies that the transaction price
be allocated in a manner that is based on
payments the taxpayer regularly receives
for an item or items it regularly sells or
provides separately. The Treasury Depart-
ment and the IRS considered not provid-
ing allocation rules for non-AFS taxpay-
ers but rejected such an approach because
it would have treated similarly situated
taxpayers quite differently, and would
have led to increased administrative costs
for the IRS and increased compliance
costs for taxpayers. While the allocation
rules for AFS taxpayers and non-AFS tax-
payers under the proposed regulations do
differ, the chosen solution provides a rule
upon which non-AFS taxpayers can rely,
while minimizing the differences between
AFS and non-AFS taxpayers in this regard
within the constraints imposed by the stat-
ute.
The Treasury Department and the IRS
solicit comments on these proposed regu-
lations and particularly solicit comments
that would provide data, other evidence,
and models that would enhance the rigor
by which final regulations affecting the
treatment of performance obligations tax-
able for non-AFS taxpayers might be de-
veloped for the final regulations.
II. Paperwork Reduction Act
These proposed regulations do not im-
pose any additional information collection
requirements in the form of reporting,
recordkeeping requirements or third-par-
ty disclosure requirements related to tax
compliance. However, because the de-
ferral methods described in proposed
§§1.451-8(c) and (d) are methods of ac-
counting, a portion of affected taxpayers
would be required to request the consent
of the Commissioner for a change in
their method of accounting under section
446(e) and the accompanying regulations.
The IRS expects that these taxpayers will
request this consent by filing Form 3115,
Application for Change in Accounting
Method (Parts I, II, IV and Schedule B).
Filing of Form 3115 and statements at-
tached thereto (for taxpayers who are re-
quired to do so or who elect to do so as a
result of the proposed regulations) is the
sole collection of information requirement
imposed by the statute and the proposed
regulations. See subsequent paragraphs
for a description of taxpayers who would
be required to change the method of ac-
counting under the statute and the pro-
posed regulations.
For purposes of the Paperwork Reduc-
tion Act, the reporting burden associated
with the collection of information with re-
spect to section 451(c) will be reflected in
the Paperwork Reduction Act submissions
for IRS Form 3115 (OMB control num-
bers 1545-0074 for individual filers, 1545-
0123 for business filers, and 1545-2070
for all other types of filers). The IRS may
provide streamlined method change pro-
cedures which could permit the filing of a
statement in lieu of filing a Form 3115, or,
in certain cases, no notification (see, for
example, the revenue procedure accompa-
nying these proposed regulations).
The Treasury Department and the IRS
anticipate that these proposed regulations
would require an accrual method taxpay-
er that receives an advance payment and
chooses to make an election to use the
deferral method described in proposed
§1.451-8(c) or (d) to file a Form 3115 to
change the method of accounting to com-
ply with these proposed regulations. See
proposed §1.451-8(e). The Treasury De-
partment and IRS estimate that 20,000-
40,000 taxpayers will be required to file
a Form 3115 in order to change to the
deferral method described in proposed
§1.451-8(c).
1
The Treasury Department
and the IRS anticipate a certain number
of accrual method taxpayers without an
AFS that receive advance payments may
choose to use the non-AFS deferral meth-
od described in proposed §1.451-8(d). The
Treasury Department and IRS plan to pro-
vide streamlined procedures for taxpayers
to change to the methods of accounting
described in proposed §1.451-8(c) and
(d). See the revenue procedure accompa-
nying these proposed regulations.
For a taxpayer with an AFS that uses
the deferral method in proposed §1.451-
8(c), a change in the taxpayer’s revenue
recognition policies for financial account-
ing purposes requires the taxpayer to seek
the consent of the Commissioner under
section 446(e) to use the method for fed-
eral income tax purposes. See proposed
§1.451-8(e). It is anticipated that the re-
porting burden associated with the col-
lection of information for a statement in
lieu of the Form 3115 would be reflected
in the Paperwork Reduction Act Submis-
sion associated with Revenue Procedure
2018-31, 2018-22 IRB 637 (or succes-
sor) (OMB control number 1545-1551).
See the revenue procedure accompanying
these proposed regulations.
In 2018, the IRS released and invited
comment on a draft of Form 3115 in or-
der to give members of the public the op-
portunity to benefit from certain specific
provisions made to the Code. The IRS re-
ceived no comments on the forms during
the comment period. Consequently, the
IRS made the forms available in January
2019 for use by the public. The IRS notes
that Form 3115 applies to changes of ac-
counting methods generally and is there-
fore broader than section 451(c).
The current status of the Paperwork
Reduction Act submissions related to the
information collections in the proposed
regulations is provided in the accompa-
nying table. The overall burden estimates
provided for the OMB control numbers
below are aggregate amounts that relate
to the entire package of forms associated
with the applicable OMB control number
and will in the future include, but not iso-
late, the estimated burden of the tax forms
that will be created or revised as a result of
the information collections in the proposed
regulations. These numbers are therefore
unrelated to the future calculations need-
ed to assess the burden imposed by the
proposed regulations. These burdens have
1
This estimate is based on data from the Compliance Data Warehouse of accrual-method taxpayers (includes C corporations, S corporations, partnerships, and sole proprietorships) with an
AFS that E-filed schedule M-3 during 2012-2016. Schedule M-3 is used to report a net income (loss) reconciliation but not all taxpayers who should file an M-3 do so. The rules for filing the
M-3 differ based on taxpayer status. For example, for C corporations, in general only those with assets of $10 million or more file an M-3 schedule with their Form 1120.
Bulletin No. 2019–39 745 September 23, 2019

September 23, 2019 746 Bulletin No. 2019–39
been reported for other regulations that
rely on the same OMB control numbers to
conduct information collections under the
Paperwork Reduction Act, and the Trea-
sury Department and the IRS urge readers
to recognize that these numbers are dupli-
cates and to guard against overcounting
the burden that the regulations that cite
these OMB control numbers impose. No
burden estimates specific to the forms
affected by the proposed regulations are
currently available. The Treasury Depart-
ment and the IRS have not estimated the
burden, including that of any new infor-
mation collections, related to the require-
ments under the proposed regulations.
For the OMB control numbers discussed
above, the Treasury Department and the
IRS estimate PRA burdens on a taxpay-
er-type basis rather than a provision-spe-
cific basis. Those estimates capture both
changes made by the Act and those that
arise out of discretionary authority exer-
cised in the proposed regulations (when
final) and other regulations that affect the
compliance burden for that form.
The Treasury Department and the IRS
request comments on all aspects of infor-
mation collection burdens related to the
proposed regulations, including estimates
for how much time it would take to com-
ply with the paperwork burdens described
above for each relevant form and ways for
the IRS to minimize the paperwork bur-
den. In addition, when available, drafts
of IRS forms are posted for comment at
https://apps.irs.gov/app/picklist/list/draft-
TaxForms.htm. IRS forms are available
at https://www.irs.gov/forms-instructions.
Forms will not be finalized until after they
have been approved by OMB under the
PRA.
FormType of Filer
OMB
Number(s)
Status
Form 3115
All other
Filers (mainly
trusts and
estates)
(Legacy
system)
1545-2070
Published in the Federal Register on 2/15/17 by IRS. Public Comment period
closed on 4/17/17.
Link: https://www.federalregister.gov/documents/2017/02/15/2017-02985/proposed-information-collection-
comment-request
Business
(NEW Model)
1545-0123
Published in the Federal Register on 10/8/18. Public Comment period closed on
12/10/18.
Link: https://www.federalregister.gov/documents/2018/10/09/2018-21846/proposed-collection-comment-request-
for-forms-1065-1065-b-1066-1120-1120-c-1120-f-1120-h-1120-nd
Individual
(NEW Model)
1545-0074
Limited Scope submission (1040 only) on 10/11/18 at OIRA for review. Full
ICR submission for all forms in 3-2019. 60-Day Federal Register notice not
published yet for full collection.
Link: https://www.reginfo.gov/public/do/PRAViewICR?ref_nbr=201808-1545-031
Revenue
Procedure
2018-31
IRS Research
estimates
1545-1551
Published in the Federal Register on 8-31-16. Public Comment period closed on
9/30/16.
Link: https://www.federalregister.gov/documents/2016/08/31/2016-20993/submission-for-omb-review-comment-
request
III. Regulatory Flexibility Act
It is hereby certified that these proposed
regulations will not have a significant eco-
nomic impact on a substantial number of
small entities within the meaning of sec-
tion 601(6) of the Regulatory Flexibility
Act (5 U.S.C. chapter 6).
The Treasury Department and the IRS
have estimated the number of business en-
tities that may be affected by the statute
and these proposed regulations. The stat-
ute and proposed regulations affect only
those business entities that use an accrual
method of accounting.
Regarding the accrual method of ac-
counting, the Treasury Department and the
IRS estimate that approximately 9 percent
of business entities with gross receipts of
$25 million or less used an accrual method
of accounting in taxable year 2016. Further-
more, section 13102 of TCJA modified sec-
tion 448 to expand the number of taxpayers
eligible to use the cash method. In general,
C corporations and partnerships with a C
corporation partner are now permitted to
use the cash receipts and disbursements
method of accounting if average annual
gross receipts are $25 million or less (up
from $5 million or less in 2016). The Trea
-
sury Department and the IRS project that
in future years, the number of entities with
gross receipts not greater than $25 million
that will be using the accrual method will
be less than 9 percent of all entities with
gross receipts not greater than $25 million.

Bulletin No. 2019–39 747 September 23, 2019
Number of Returns (Taxable Year 2016)
(Thousands)
EntityAll ReturnsMethod of Accounting
AccrualCash
C Corporations
Gross Receipts > $25 mil.30282
Gross Receipts <= $25 mil.1,567700867
Total1,597728869
S Corporations
Gross Receipts > $25 mil.41347
Gross Receipts <= $25 mil.4,5511,1403,411
Total4,5921,1743,418
Partnerships
Gross Receipts > $25 mil.20173
Gross Receipts <= $25 mil.3,7438602,883
Total3,7638772,886
Sole Proprietors and LLCs
Gross Receipts > $25 mil.110
Gross Receipts <= $25 mil.25,52435825,166
Total25,52535925,166
All Entities
Gross Receipts > $25 mil.928012
Gross Receipts <= $25 mil.35,3853,05832,327
Total35,4773,13832,339
Source: Statistics of Income data. Cash accounting includes cash, other, and unknown.
Regarding the applicable financial
statement, the Treasury Department and
the IRS estimate that 235,000 – 250,000
entities with gross receipts of $25 million
or less had an audited income statement
in taxable year 2016. This is an upper
bound estimate of entities that may be af-
fected by these proposed regulations be-
cause small entities are less likely to have
a financial statement that falls within the
definition of AFS in proposed §1.451-3(c)
(1) (which generally refers to certified au-
dited financial statements in accordance
with GAAP or IFRS). An AFS is general-
ly a financial statement that is certified as
being prepared in accordance with GAAP
or IFRS that is issued for credit purposes,
reporting to shareholders, or other non-tax
purpose. The smaller the entity, the less
likely that it will engage a CPA firm to
audit their financial statements. An AFS
does not include financial statements that
have only been compiled or reviewed by a
CPA firm, which are more affordable for
small entities, as these types of statements
are not certified as prepared in accordance
with GAAP or IFRS.
Affected taxpayers would be required
to file Form 3115. As an indicator of
whether a taxpayer is likely to have to
file a Form 3115, the Treasury Depart-
ment and the IRS estimated the number of
businesses that used the accrual method of
accounting, had a financial statement, and
indicated they had unearned or deferred
income. Approximately 15,000 businesses
with gross receipts of $25 million or less
fit this category. This is an upper bound
estimate of the number of taxpayers rely-
ing of Revenue Procedure 2004-34 that
will need to file a Form 3115 since some
reporting of unearned or deferred income
may just have deferral for financial report-
ing and not tax reporting reasons.
These proposed rules will not have a
significant economic impact on small en-
tities affected because the costs to comply
with these proposed regulations are not
significant. An entity is required to file a
Form 3115 (Parts I, II, IV and Schedule
B) to change its method of accounting in
order to use the deferral method described
in proposed §1.451-8(c) or (d). The Trea-
sury Department and IRS plan to provide

September 23, 2019 748 Bulletin No. 2019–39
streamlined procedures for taxpayers to
change to the methods of accounting de-
scribed in proposed §1.451-8(c)1 and (d).
See the revenue procedure accompanying
these proposed regulations. As noted in
this revenue procedure, the estimated cu-
mulative annual reporting and/or record-
keeping burden for the statutory method
changes described under OMB control
number 1545-1551, before publication of
the revenue procedure, is 27,336 respon-
dents, and a total annual reporting and/
or recordkeeping burden of 30,580 hours.
The estimated annual burden per respon-
dent/recordkeeper under OMB control
number 1545-1551 before publication of
this revenue procedure varies from 1/6
hour to 8½ hours, depending on individual
circumstances, with an estimated average
of 1¼ hours. The estimated cumulative
annual reporting and/or recordkeeping
burden for the method changes described
under OMB control number 1545-1551
after that revenue procedure is account-
ed for is 27,346 respondents, and a total
annual reporting and/or recordkeeping
burden is 31,479 hours, leaving the aver-
age reporting and recordkeeping burden
essentially unchanged. These burdens are
essentially unaffected by these proposed
regulations.
Notwithstanding this certification that
the proposed rule would not have a sig-
nificant economic impact on a substantial
number of small entities, the Treasury
Department and the IRS invite comments
from the public about the impact of this
proposed rule on small entities.
Pursuant to section 7805(f), these reg-
ulations will be submitted to the Chief
Counsel for Advocacy of the Small Busi-
ness Administration for comment on their
impact on small business.
IV. Unfunded Mandates Reform Act
Section 202 of the Unfunded Mandates
Reform Act of 1995 requires that agencies
assess anticipated costs and benefits and
take certain other actions before issuing a
final rule that includes any Federal man-
date that may result in expenditures in any
one year by a state, local, or tribal govern-
ment, in the aggregate, or by the private
sector, of $100 million in 1995 dollars,
updated annually for inflation. In 2018,
that threshold is approximately $150 mil-
lion. This rule does not include any Fed-
eral mandate that may result in expendi-
tures by state, local, or tribal governments,
or by the private sector in excess of that
threshold.
V. Executive Order 13132: Federalism
Executive Order 13132 (entitled
“Federalism”) prohibits an agency from
publishing any rule that has federalism
implications if the rule either imposes
substantial, direct compliance costs on
state and local governments, and is not
required by statute, or preempts state law,
unless the agency meets the consultation
and funding requirements of section 6 of
the Executive Order. This rule does not
have federalism implications and does
not impose substantial direct compliance
costs on state and local governments or
preempt state law within the meaning of
the Executive Order.
Comments and Requests for a Public
Hearing
Before these proposed regulations
are adopted as final regulations, consid-
eration will be given to any comments
that are submitted timely to the IRS as
prescribed in this preamble under the
“ADDRESSES” heading. The Treasury
Department and the IRS request com-
ments on all aspects of the proposed reg-
ulations. All comments will be available
at http://www.regulations.gov or upon
request. A public hearing will be sched-
uled if requested in writing by any person
that timely submits written comments. If
a public hearing is scheduled, notice of
the date, time, and place for the public
hearing will be published in the Federal
Register.
Effect on Other Documents
When finalized, these proposed regu-
lations will obsolete Revenue Procedure
2004-34, Revenue Procedure 2011-18,
Revenue Procedure 2013-29 and Notice
2018-35.
Drafting Information
The principal author of these proposed
regulations is Peter E. Ford, IRS Office of
the Associate Chief Counsel (Income Tax
and Accounting). However, other person-
nel from the Treasury Department and the
IRS participated in their development.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and record-
keeping requirements.
Proposed Amendments to the
Regulations
Accordingly, 26 CFR part 1 is pro-
posed to be amended as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation for
part 1 continues to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
Sections 26 U.S.C. 451(c)(2)(A), (3),
(4)(A)(iii), (4)(B)(vii);
Par. 2. Section 1.451-8 is added to read
as follows:
§ 1.451-8 Advance payments for goods,
services, and certain other items.
(a) In general. Except as provided in
paragraph (c) or (d) of this section, an
accrual method taxpayer shall include
an advance payment in gross income no
later than in the taxable year in which the
taxpayer receives the advance payment as
provided under § 1.451-1(a).
(b) Definitions. Except as otherwise
provided in this section, the following
definitions apply for purposes of this sec-
tion:
(1) Advance payment—(i) In general.
An advance payment is a payment re-
ceived by a taxpayer if:
(A) The full inclusion of the payment
in the gross income of the taxpayer for
the taxable year of receipt is a permissible
method of accounting, without regard to
this section;
(B) Any portion of the payment is in-
cluded in revenue by the taxpayer in an
applicable financial statement for a subse-
quent taxable year;
(C) The payment is for:
(1) Services;
(2) The sale of goods;
(3) The use, including by license or
lease, of intellectual property, including
copyrights, patents, trademarks, service
marks, trade names, and similar intangible

Bulletin No. 2019–39 749 September 23, 2019
property rights, such as franchise rights
and arena naming rights;
(4) The occupancy or use of property
if the occupancy or use is ancillary to the
provision of services, for example, ad-
vance payments for the use of rooms or
other quarters in a hotel, booth space at
a trade show, campsite space at a mobile
home park, and recreational or banquet fa-
cilities, or other uses of property, so long
as the use is ancillary to the provision of
services to the property user;
(5) The sale, lease, or license of com-
puter software;
(6) Guaranty or warranty contracts
ancillary to an item or items described in
paragraph (b)(1)(i)(C)(1), (2), (3), (4), or
(5) of this section;
(7) Subscriptions in tangible or intan-
gible format. Subscriptions for which an
election under section 455 is in effect is
not included in this paragraph (b)(1)(i)(C)
(7);
(8) Memberships in an organization.
Memberships for which an election under
section 456 is in effect are not included in
this paragraph (b)(1)(i)(C)(8);
(9) An eligible gift card sale;
(10) Any other payment specified by
the Secretary in other guidance published
in the Internal Revenue Bulletin (see
§601.601(d)(2)); or
(11) Any combination of items de-
scribed in paragraphs (b)(1)(i)(C)(1)
through (10) of this section.
(ii) Exclusions from the definition of
advance payment. An advance payment
does not include:
(A) Rent, except for amounts paid with
respect to an item or items described in
paragraph (b)(1)(i)(C)(3), (4) or (5) of this
section;
(B) Insurance premiums, to the extent
the inclusion of those premiums is gov-
erned by subchapter L;
(C) Payments with respect to financial
instruments (for example, debt instru-
ments, deposits, letters of credit, notional
principal contracts, options, forward con-
tracts, futures contracts, foreign currency
contracts, credit card agreements (includ-
ing rewards or loyalty points under such
agreements), financial derivatives, or sim-
ilar items), including purported prepay-
ments of interest;
(D) Payments with respect to service
warranty contracts for which the taxpay-
er uses the accounting method provided
in Revenue Procedure 97-38 (1997-2 CB
479);
(E) Payments with respect to warran-
ty and guaranty contracts under which a
third party is the primary obligor;
(F) Payments subject to section 871(a),
881, 1441, or 1442;
(G) Payments in property to which sec-
tion 83 applies; and
(H) Payments received in a taxable
year earlier than the taxable year imme-
diately preceding the taxable year of the
contractual delivery date for a specified
good.
(2) Applicable financial statement. Ap-
plicable financial statement has the same
meaning as provided in proposed §1.451-
3(c)(1).
(3) Eligible gift card sale. Eligible gift
card sale means the sale of a gift card or
gift certificate if:
(i) The taxpayer is primarily liable to
the customer, or holder of the gift card, for
the value of the card until redemption or
expiration; and
(ii) The gift card is redeemable by the
taxpayer or by any other entity that is le-
gally obligated to the taxpayer to accept
the gift card from a customer as payment
for items listed in paragraphs (b)(1)(i)(C)
(1) through (11) of this section.
(4) Performance obligation. Perfor-
mance obligation has the same meaning
as provided in proposed §1.451-3(c)(3).
(5) Received. An item of gross income
is received by the taxpayer if it is actually
or constructively received, or if it is due
and payable to the taxpayer.
(6) Revenue. Revenue has the same
meaning as provided in proposed §1.451-
3(c)(4) and is determined under the rules
provided in proposed §1.451-3.
(7) Transaction price. Transaction
price has the same meaning as provided in
proposed §1.451-3(c)(6).
(8) Contractual delivery date. Contrac-
tual delivery date means the month and
year of delivery listed in the written con-
tract to the transaction.
(9) Specified good. A specified good
means a good for which:
(i) During the taxable year a payment
is received, the taxpayer does not have
on hand (or available to it in such year
through its normal source of supply)
goods of a substantially similar kind and
in a sufficient quantity to satisfy the con-
tract to transfer the good to the customer;
and
(ii) All the revenue from the sale of the
good is recognized in the taxpayer’s AFS
in the year of delivery.
(c) Deferral method for taxpayers with
an applicable financial statement (AFS)—
(1) In general. An accrual method
taxpayer with an AFS that receives an
advance payment may elect the deferral
method described in this paragraph (c) if
the taxpayer is able to determine the ex-
tent to which advance payments are in-
cluded in revenue in its AFS in the taxable
year received, including a short taxable
year (if applicable). A taxpayer that uses
the deferral method must:
(i) Include the advance payment, or any
portion thereof, in gross income in the tax-
able year of receipt to the extent included
in revenue in its AFS; and
(ii) Include the remaining portion of
such advance payment in gross income in
the taxable year following the taxable year
in which such payment is received.
(2) Acceleration of advance pay-
ments—(i) In general. A taxpayer that
uses the deferral method described in
this paragraph (c) must include in gross
income for the taxable year of receipt or,
if applicable, for a short taxable year de-
scribed in paragraph (c)(4) of this section,
all advance payments not previously in-
cluded in gross income:
(A) If, in that taxable year, the taxpayer
either dies or ceases to exist in a transac-
tion other than a transaction to which sec-
tion 381(a) applies; or
(B) If, and to the extent that, in that tax-
able year, the taxpayer’s obligation with
respect to the advance payments is satis-
fied or otherwise ends other than in:
(1) A transaction to which section
381(a) applies; or
(2) A section 351(a) transfer that is part
of a section 351 transaction in which:
(i) Substantially all assets of the trade
or business (including advance payments)
are transferred;
(ii) The transferee adopts or uses the
deferral method in the year of transfer; and
(iii) The transferee and the transferor
are members of the same consolidated
group, as defined in §1.1502-1(h).
(ii) Example. Ceasing to exist. A is a calendar
year taxpayer and is in the business of selling and

September 23, 2019 750 Bulletin No. 2019–39
licensing computer software (off the shelf, fully
customized, and semi-customized) and providing
customer support. On July 1, 2018, A enters into a
2-year software maintenance contract and receives
an advance payment. Under the contract, A will pro-
vide software updates if it develops an update within
the contract period, as well as online and telephone
customer support. A ceases to exist on December 1,
2018, in a transaction that does not involve a section
351(a) transfer described in paragraph (c)(2)(i)(B)(2)
of this section and is not a transaction to which sec-
tion 381(a) applies. For federal income tax purposes,
A must include the entire advance payment in gross
income in its 2018 taxable year.
(3) Financial statement adjustments—
(i) In general. Notwithstanding section
451(c)(4)(A)(ii), if a taxpayer treats an ad-
vance payment as an item of deferred rev-
enue in its AFS and writes-down or adjusts
that item, or portion thereof, to an equity
account (for example, retained earnings)
or otherwise writes-down or adjusts that
item of deferred revenue in a subsequent
taxable year, revenue for that subsequent
taxable year includes that item, or portion
thereof, that is written down or adjusted.
(ii) Examples—(A) Example 1. On May 1, 2018,
A, a corporation that files its federal income tax re-
turn on a calendar year basis, received $100 as an
advance payment for a 2-year contract to provide
services. For financial accounting purposes, A re-
corded $100 as a deferred revenue liability in its
AFS, expecting to report 1/4 of the advance payment
in revenue in its AFS for 2018, 1/2 for 2019, and 1/4
for 2020. On August 31, 2018, C, an unrelated cor-
poration that files its federal income tax return on a
calendar year basis, acquired all of the stock of A,
and A joined C’s consolidated group. A’s short tax-
able year ended on August 31, 2018, and, as of that
date, A had included only 1/4 ($25) of the advance
payment in revenue in its AFS. On September 1,
2018, after the stock acquisition, and in accordance
with purchase accounting rules, C wrote down A’s
deferred revenue liability to its fair value of $10 as
of the date of the acquisition. The $10 will be in-
cluded in revenue on A’s AFS in accordance with the
method of accounting A uses for financial accounting
purposes. For federal income tax purposes, A uses
the deferral method. For federal income tax purpos-
es, A must take 1/4 ($25) of the advance payment
into income for its short taxable year ending August
31, 2018, and the remainder of the advance payment
($75) ($65 write down + $10 future financial state-
ment revenue) must be included in income for A’s
next succeeding taxable year.
(B) Example 2. On May 1, 2018, B, a corporation
that files its federal income tax return on a calendar
year basis, received $100 advance payment for a
contract to be performed in 2018, 2019, and 2020.
On August 31, 2018, D, a corporation that is not con-
solidated for federal income tax purposes, acquired
all of the stock of B. Before the stock acquisition,
on its AFS for 2018, B included $40 of the advance
payment in revenue, and $60 as a deferred revenue
liability. On September 1, 2018, after the stock ac-
quisition and in accordance with purchase account-
ing rules, D wrote down its $60 deferred revenue
liability to $10 (its fair value) as of the date of the
acquisition. After the acquisition, B does not include
in revenue any of the $10 deferred revenue liabili-
ty in its 2018 AFS. B does include $5 in revenue in
2019, and $5 in revenue in 2020. For federal income
tax purposes, B uses the deferral method. For federal
income tax purposes, B must take $40 of the advance
payment into income in 2018, and the remainder of
the advance payment ($60) ($50 write down + $10
future financial statement revenue) must be includ-
ed in income for B’s next succeeding taxable year,
2019.
(4) Short taxable year rule—(i) In gen-
eral. If the taxpayer’s next succeeding
taxable year is a short taxable year, other
than a taxable year in which the taxpay-
er dies or ceases to exist in a transaction
other than a transaction to which section
381(a) applies, and the short taxable year
consists of 92 days or less, a taxpayer
using the deferral method must include
the portion of the advance payment not
included in the taxable year of receipt in
gross income for the short taxable year to
the extent included in revenue in an AFS.
Any amount of the advance payment not
included in the taxable year of receipt and
the short taxable year must be included in
gross income for the taxable year immedi-
ately following the short taxable year.
(ii) Example. A is a calendar year taxpayer and
is in the business of selling and licensing comput-
er software (off the shelf, fully customized, and
semi-customized) and providing customer support.
On July 1, 2018, A receives an advance payment for
a 2-year software maintenance contract. Under the
contract, A will provide software updates if it devel-
ops an update within the contract period, as well as
online and telephone customer support. A changes its
taxable period to a fiscal year ending March 31 so
that A has a short taxable year beginning January 1,
2019, and ending March 31, 2019. In its AFS, A in-
cludes 1/4 of the payment in revenue for the taxable
year ending December 31, 2018; 1/6 in revenue for
the short taxable year ending March 31, 2019; 1/4 in
revenue for the taxable year ending March 31, 2020;
and 1/4 in revenue for the taxable year ending March
31, 2021. Because the taxable year ending March 31,
2019, is 92 days or less, A must include 1/4 of the
payment in gross income for the taxable year end-
ing December 31, 2018, 1/6 in gross income for the
short taxable year ending March 31, 2019, and the
remaining amount in gross income for the taxable
year ending March 31, 2020.
(5) Financial statement conformity re-
quirement. A taxpayer that uses the defer-
ral method under this paragraph (c) must
use the same financial statement that is
used to apply the rules in section 451(b)
and the accompanying regulations when
applying the deferral method provided in
section 451(c) and these regulations.
(6) Allocation of transaction price. A
taxpayer using the deferral method under
this paragraph (c) must use the allocation
rules provided in proposed §1.451-3(g).
(7) Rules relating to eligible gift card
sales. For purposes of paragraphs (b)(1)
(i)(B) and (c)(1) of this section, if an el-
igible gift card is redeemable by an entity
described in paragraph (b)(3)(ii) of this
section whose financial results are not in-
cluded in the taxpayer’s AFS, a payment
will be treated as included by the taxpayer
in revenue in its AFS to the extent the gift
card is redeemed by the entity during the
taxable year.
(8) Examples. The following examples
illustrate the rules of this paragraph (c).
In each example in paragraphs (c)(8)(i)
through (xxv) of this section, the taxpayer
uses an accrual method of accounting for
federal income tax purposes and files its
returns on a calendar year basis. Except
as stated otherwise, the taxpayer in each
example has an AFS.
(i) Example 1. Services. On November 1, 2018,
A, in the business of giving dancing lessons, re-
ceives an advance payment for a 1-year contract
commencing on that date and providing for up to 48
individual, 1-hour lessons. A provides eight lessons
in 2018 and another 35 lessons in 2019. In its AFS, A
includes 1/6 of the payment in revenue for 2018, and
5/6 of the payment in revenue for 2019. A uses the
deferral method. For federal income tax purposes, A
must include 1/6 of the payment in gross income for
2018, and the remaining 5/6 of the payment in gross
income for 2019.
(ii) Example 2. Services. Assume the same facts
as in Example 1 in paragraph (c)(8)(i) of this section,
except that the advance payment is received for a
3-year contract under which up to 96 lessons are pro-
vided. A provides eight lessons in 2018, 48 lessons in
2019, and 40 lessons in 2020. In its AFS, A includes
1/12 of the payment in revenue for 2018, 1/2 of the
payment in revenue for 2019, and 5/12 of the pay-
ment in gross revenue for 2020. For federal income
tax purposes, A must include 1/12 of the payment in
gross income for 2018, and the remaining 11/12 of
the payment in gross income for 2019.
(iii) Example 3. Goods and Services. On June 1,
2018, B, a landscape architecture firm, receives an
advance payment for goods and services that, under
the terms of the agreement, must be provided by De-
cember 2019. On December 31, 2018, B estimates
that 3/4 of the work under the agreement has been
completed. In its AFS, B includes 3/4 of the payment
in revenue for 2018 and 1/4 of the payment in reve-
nue for 2019. B uses the deferral method. For federal
income tax purposes, B must include 3/4 of the pay-
ment in gross income for 2018, and the remaining
1/4 of the payment in gross income for 2019, regard-
less of whether B completes the job in 2019.
(iv) Example 4. Repair Contracts. On July 1,
2018, C, in the business of selling and repairing
television sets, receives an advance payment for a

Bulletin No. 2019–39 751 September 23, 2019
2-year contract under which C agrees to repair or
replace, or authorizes a representative to repair or
replace, certain parts in the customer’s television set
if those parts fail to function properly. In its AFS,
C includes 1/4 of the payment in revenue for 2018,
1/2 of the payment in revenue for 2019, and 1/4 of
the payment in revenue for 2020. C uses the defer-
ral method. For federal income tax purposes, C must
include 1/4 of the payment in gross income for 2018
and the remaining 3/4 of the payment in gross in-
come for 2019.
(v) Example 5. Online Website Design. D, in
the business of building and designing websites,
receives advance payments that oblige D to build
and design various websites. D tracks each request
for a website with unique identifying numbers. On
July 20, 2018, D receives online payments for 2
websites. One of the website requests is submitted
and processed on September 1, 2018, and the other
is submitted and processed on February 1, 2020. In
its AFS, D includes the payment for the September
1, 2018, website in revenue for 2018 and the pay-
ment for the February 1, 2020, website in revenue
for 2020. D uses the deferral method. For federal
income tax purposes, D must include the payment
for the September 1, 2018, website in gross income
for 2018 and the payment for the February 1, 2020,
website in gross income for 2019.
(vi) Example 6. Gift Cards. E, a hair styling sa-
lon, receives advance payments for gift cards that
may later be redeemed at the salon for hair styling
services or hair care products at the face value of
the gift card. The gift cards look like standard credit
cards, and each gift card has a magnetic strip that,
in connection with E’s computer system, identifies
the available balance. The gift cards may not be re-
deemed for cash and have no expiration date. In its
AFS, E includes advance payments for gift cards in
revenue when redeemed. E is not able to determine
the extent to which advance payments are included
in revenue in its AFS for the taxable year of receipt
and therefore does not meet this requirement of para-
graph (c)(1) of this section. Therefore, E may not use
the deferral method for these advance payments.
(vii) Example 7. Gift Cards. Assume the same
facts as in Example 6 in paragraph (c)(8)(vi) of this
section, except that the gift cards have an expiration
date 12 months from the date of sale, E does not ac-
cept expired gift cards, and E includes unredeemed
gift cards in revenue in its AFS for the taxable year
in which the cards expire. Because E tracks the sale
date and the expiration date of the gift cards for pur-
poses of its AFS, E is able to determine the extent
to which advance payments are included in revenue
for the taxable year of receipt. Therefore, E meets
this requirement of paragraph (c)(1) of this section
and may use the deferral method for these advance
payments.
(viii) Example 8. Online Subscriptions. G is in
the business of compiling and providing business
information for a particular industry in an online
format accessible over the internet. On September 1,
2018, G receives an advance payment from a sub-
scriber for 1 year of access to its online database,
beginning on that date. In its AFS, G includes 1/3 of
the payment in revenue for 2018 and the remaining
2/3 in revenue for 2019. G uses the deferral meth-
od. For federal income tax purposes, G must include
1/3 of the payment in gross income for 2018 and the
remaining 2/3 of the payment in gross income for
2019.
(ix) Example 9. Membership Fees. On December
1, 2018, H, in the business of operating a chain of
“shopping club” retail stores, receives advance pay-
ments for membership fees. Upon payment of the
fee, a member is allowed access for a 1-year period
to H’s stores, which offer discounted merchandise
and services. In its AFS, H includes 1/12 of the pay-
ment in revenue for 2018 and 11/12 of the payment
in revenue for 2019. H uses the deferral method. For
federal income tax purposes, H must include 1/12 of
the payment in gross income for 2018, and the re-
maining 11/12 of the payment in gross income for
2019.
(x) Example 10. Cruise. In 2018, I, in the busi-
ness of operating tours, receives payments from
customers for a 10-day cruise that will take place in
April 2019. Under the agreement, I charters a cruise
ship, hires a crew and a tour guide, and arranges for
entertainment and shore trips for the customers. In
its AFS, I includes the payments in revenue for 2019.
I uses the deferral method. For federal income tax
purposes, I must include the payments in gross in-
come for 2019.
(xi) Example 11. Travel agent services. On No-
vember 1, 2018, J, a travel agent, receives payment
from a customer for an airline flight that will take
place in April 2019. J purchases and delivers the air-
line ticket to the customer on November 14, 2018.
J retains a portion of the customer’s payment (the
excess of the customer’s payment over the cost of
the airline ticket) as its commission. Because J is not
required to provide any services after the ticket is de-
livered to the customer, J earns its commission when
the airline ticket is delivered. The customer may can-
cel the flight and receive a refund from J only to the
extent the airline itself provides refunds. In its AFS,
J includes its commission in revenue for 2019. The
commission is not an advance payment because the
payment is not earned by J, in whole or in part, in
a subsequent taxable year. Thus, J may not use the
deferral method for this payment.
(xii) Example 12. Broadcasting Rights. K,
a professional sports franchise, is a member of a
sports league that enters into contracts with televi-
sion networks for the right to broadcast games to
be played between teams in the league. The money
received by the sports league under the contracts
is divided equally among the member teams. The
league entered into a 3-year broadcasting contract
beginning October 1, 2018. K receives three equal
installment payments on October 1 of each contract
year, beginning in 2018. In its AFS, K includes 1/4
of the first installment payment in revenue for 2018
and 3/4 in revenue for 2019; K includes 1/4 of the
second installment in revenue for 2019 and 3/4 in
revenue for 2020; K includes 1/4 of the third in-
stallment in revenue for 2020 and 3/4 in revenue
for 2021. K uses the deferral method. Each install-
ment payment constitutes an advance payment
under paragraph (b)(1) of this section. For federal
income tax purposes, K must include 1/4 of the first
installment payment in gross income for 2018 and
3/4 in gross income for 2019; 1/4 of the second in-
stallment in gross income for 2019 and 3/4 in gross
income for 2020; and 1/4 of the third installment
in gross income for 2020 and 3/4 in gross income
for 2021.
(xiii) Example 13. Insurance Claims Adminis-
tration. L is in the business of negotiating, placing,
and servicing insurance coverage and administer-
ing claims for insurance companies. On December
1, 2018, L enters into a contract with an insurance
company to provide property and casualty claims ad-
ministration services for a 4-year period beginning
January 1, 2019. Pursuant to the contract, the insur-
ance company makes four equal annual payments
to L; each payment relates to a year of service and
is made during the month prior to the service year
(for example, L is paid on December 1, 2018, for the
service year beginning January 1, 2019). In its AFS,
L includes the first payment in revenue for 2019; the
second payment in revenue for 2020; the third pay-
ment in revenue for 2021; and the fourth payment in
revenue for 2022. L uses the deferral method. Each
annual payment constitutes an advance payment
under paragraph (b)(1) of this section. For federal
income tax purposes, L must include the first pay-
ment in gross income for 2019; the second payment
in gross income for 2020; the third payment in gross
income for 2021; and the fourth payment in gross
income for 2022.
(xiv) Example 14. Internet Services. M is a cable
internet service provider that enters into contracts
with subscribers to provide internet services for a
monthly fee (paid prior to the service month). For
those subscribers who do not own a compatible mo-
dem, M provides a rental cable modem for an addi-
tional monthly charge (also paid prior to the service
month). Pursuant to the contract, M will replace or
repair the cable modem if it proves defective during
the contract period. In December 2018, M receives
payments from subscribers for January 2019 internet
service and cable modem use. In its AFS, M includes
the entire amount of these payments in revenue for
2019. M uses the deferral method. Because a sub-
scriber’s use of a cable modem is ancillary to the
provision of internet services by M, and because the
cable modem warranty is ancillary to the use of the
cable modem, the payments are advance payments.
For federal income tax purposes, M must include the
advance payments in gross income for 2019.
(xv) Example 15. License Agreement. On Janu-
ary 1, 2019, N enters into, and receives advance pay-
ments pursuant to, a 5-year license agreement for the
use of N’s trademark. Under the contract, the licens-
ee pays N both the first-year (2019) license fee and
the fifth-year (2023) license fee upon commence-
ment of the agreement. The fees for the second, third,
and fourth years are payable on January 1 of each
license year. The contract provides the customer with
access to N’s trademark throughout the term of the
agreement. In its AFS, N includes the fees in revenue
for the respective license year. N uses the deferral
method. For federal income tax purposes, N must
include the first-year license fee in gross income for
2019, the second-year and the fifth-year license fee
in gross income for 2020, the third-year license fee
in gross income for 2021, and the fourth-year license
fee in gross income for 2022.
(xvi) Example 16. Computer Software Subscrip-
tion. On July 1, 2018, O, in the business of licens-
ing computer software (off the shelf, fully custom-
ized, and semi-customized) and providing customer

September 23, 2019 752 Bulletin No. 2019–39
support, receives an advance payment for a 2-year
“software subscription contract” under which O will
provide software updates if it develops an update
within the contract period, as well as online and tele-
phone customer support. In its AFS, O includes 1/4
of the payment in revenue for 2018, 1/2 in revenue
for 2019, and the remaining 1/4 in revenue for 2020,
regardless of when O provides updates or custom-
er support. O uses the deferral method. For feder-
al income tax purposes, O must include 1/4 of the
payment in gross income for 2018 and 3/4 in gross
income for 2019.
(xvii) Example 17. Performance Obligation. P
is in the business of licensing computer software
(off the shelf, fully customized, and semi-custom-
ized) and providing customer support. On July 1,
2018, P receives an advance payment of $100 for a
2-year software subscription that includes a 1-year
“software maintenance contract” under which P will
provide integral software updates within the contract
period, as well as a “customer support agreement”
for online and telephone customer support. In its
AFS, P allocates $80 of the payment to the sub-
scription agreement and $20 to the customer support
agreement. With respect to the $80 allocable to the
subscription agreement, P includes 1/4 ($20) in rev-
enue for 2018, 1/2 ($40) in revenue for 2019, and
the remaining 1/4 ($20) in revenue for 2020 . With
respect to the $20 allocable to the customer support
agreement, P includes 1/2 ($10) in revenue for 2018,
and the remaining 1/2 ($10) in revenue for 2019 re-
gardless of when P provides the customer support.
For federal income tax purposes, P must include $30
in gross income for 2018 ($20 allocable to the sub-
scription agreement and $10 allocable to the custom-
er support agreement) and the remaining $70 in gross
income for 2019.
(xviii) Example 18. Gift Cards Administered by
Another. Q corporation operates department stores.
U corporation, V corporation, and W corporation are
wholly owned domestic subsidiaries of Q that file
a consolidated federal income tax return with Q. X
corporation is a controlled foreign subsidiary of Q
that is prohibited from filing a consolidated return
with Q. U sells Brand A goods, V sells Brand B
goods, X sells Brand C goods, and Z is an unrelated
entity that sells Brand D goods. W administers a gift
card program for the Q consolidated group, X, and
Z. Pursuant to the underlying agreements, W issues
gift cards that are redeemable for goods or services
offered by U, V, X, and Z. In addition, U, V, X, and Z
sell gift cards to customers on behalf of W and remit
amounts received to W. The agreements provide that
W is primarily liable to the customer for the value
of the gift card until redemption, and U, V, X, and
Z are obligated to accept the gift card as payment
for goods or services. When a customer purchases
goods or services with a gift card at U, V, X, or Z, W
reimburses that entity for the sales price of the goods
or services purchased with the gift card, up to the
total gift card value. In 2018, W sells gift cards with
a total value of $900,000, and, at the end of 2018,
the unredeemed balance of the gift cards is $100,000.
In the consolidated group’s AFS, the group includes
revenue from the sale of a gift card when the gift
card is redeemed. W tracks sales and redemptions
of gift cards electronically, is able to determine the
extent to which advance payments are included in
revenue in its consolidated AFS for the taxable year
of receipt, and meets the requirements of paragraph
(c)(1) of this section. The payments W receives from
the sale of gift cards are advance payments because
they are payments for eligible gift cards. Thus, W
is eligible to use the deferral method. At the end of
2018, W includes $800,000 in income in its consol-
idated AFS. Under the deferral method, W must in-
clude $800,000 of the payments from gift card sales
in gross income in 2018 and the remaining $100,000
of the payments in gross income in 2019.
(xix) Example 19. Gift Cards of Affiliates. R is a
Subchapter S corporation that operates an affiliated
restaurant corporation and manages other affiliated
restaurants. These other restaurants are owned by
other Subchapter S corporations, partnerships, and
limited liability companies. R has a partnership in-
terest or an equity interest in some of the restaurants.
R administers a gift card program for participating
restaurants. Each participating restaurant operates
under a different trade name. Under the gift card
program, R and each of the participating restaurants
sell gift cards, which are issued with R’s brand name
and are redeemable at all participating restaurants.
Participating restaurants sell the gift cards to cus-
tomers and remit the proceeds to R, R is primarily
liable to the customer for the value of the gift card
until redemption, and the participating restaurants
are obligated under an agreement with R to accept
the gift card as payment for food, beverages, taxes,
and gratuities. When a customer uses a gift card to
make a purchase at a participating restaurant, R is
obligated to reimburse that restaurant for the amount
of the purchase, up to the total gift card value. In
R’s AFS, R includes revenue from the sale of a gift
card when a gift card is redeemed at a participating
restaurant. R tracks sales and redemptions of gift
cards electronically, is able to determine the extent
to which advance payments are included in revenue
in its AFS for the taxable year of receipt, and meets
the requirements of paragraph (c)(1) of this section.
The payments R receives from the sale of gift cards
are advance payments because they are payments for
eligible gift card sales. Thus, for federal income tax
purposes, R is eligible to use the deferral method. In
the taxable year of receipt, R must include the ad-
vance payment in income to the extent included in
its AFS, and must include any remaining amount in
income in the taxable year following the taxable year
of receipt.
(xx) Example 20. Gift Cards for Domestic and
International Hotels. S is a corporation that operates
for the benefit of its franchisee members, who own
and operate domestic and international individual
member hotels. S collects membership fees from the
member hotels in exchange for providing a wide va-
riety of management support services, which include
making reservations for customers at the various
member hotels. S also administers a gift card pro-
gram for its members by selling gift cards that may
be redeemed for hotel rooms and food or beverages
provided by any member hotel. The agreements un-
derlying the gift card program provide that S is en-
titled to the proceeds from the sale of the gift cards,
must reimburse the member hotel for the value of
a gift card redeemed, and until redemption remains
primarily liable to the customer for the value of the
card. In S’s AFS, S includes payments from the sale
of a gift card when the card is redeemed. S tracks
sales and redemptions of gift cards electronically,
is able to determine the extent to which advance
payments are included in revenue in its AFS for the
taxable year of receipt, and meets the requirements
of paragraph (c)(1) of this section. The payments S
receives from the sale of gift cards are advance pay-
ments because they are payments for eligible gift
card sales. Thus, for federal income tax purposes, S
is eligible to use the deferral method. In the taxable
year of receipt, S must include in income the advance
payment to the extent included in its AFS, and must
include any remaining amount in income in the tax-
able year following the taxable year of receipt.
(xxi) Example 21. Discount Voucher. On Decem-
ber 10, 2018, T, in the business of selling home appli-
ances, sells a washing machine for $500. As part of
the sale, T gives the customer a 40 percent discount
voucher for any future purchases of T’s goods up to
$100 in the next 60 days. In its AFS, T treats the dis-
count voucher as a separate performance obligation
and allocates $30 of the $500 sales price to the dis-
count voucher. T includes $12 of the amount allocat-
ed to the discount voucher in revenue for 2018 and
includes $18 of the discount voucher in revenue for
2019. T uses the deferral method. For federal income
tax purposes, T must include the $12 allocable to the
discount voucher in gross income in 2018 and the
remaining $18 allocated to the discount voucher in
gross income in 2019.
(xxii) Example 22. Rewards. On December 31,
2018, U, in the business of selling consumer elec-
tronics, sells a new TV for $1,000 and gives the
customer 50 reward points. Each reward point is re-
deemable for a $1 discount on any future purchase
of U’s products. The reward points are not redeem-
able for cash and have a 2-year expiration date. U
tracks each customer’s reward points and does not
sell reward points separately. In its AFS, U treats the
rewards points as a separate performance obligation
and allocates $45 of the $1,000 sales price to the re-
wards points. U does not include any of the amount
allocated to the reward points in revenue for 2018.
U includes $25 of the reward points in revenue for
2019 and $20 of the reward points in revenue for
2020. U uses the deferral method. For federal income
tax purposes, U does not include any amount of the
reward points in gross income in 2018, and includes
the entire $45 allocated to the reward points in gross
income in 2019.
(xxiii) Example 23. Credit Card Rewards. V, a
wholly owned credit card company, issues credit
cards. V also has a loyalty program in which card-
holders earn reward points for the use of its credit
card to make purchases. Each reward point is re-
deemable for a $1 on any future purchases. V may
not use the deferral method because payments under
credit card agreements including rewards for credit
card purchases are excluded from the definition of
an advance payment under paragraph (b)(1)(ii)(C) of
this section.
(xxiv) Example 24. Airline Reward Miles. On
January 1, 2018, W, in the business of transporting
passengers on airplanes, sells a customer a $700
airline ticket to fly roundtrip in 2018. As part of the
purchase, the customer also receives 7,000 points
(air miles) from W to be used for future air travel.
In its AFS, W allocates $665 to the roundtrip air-

Bulletin No. 2019–39 753 September 23, 2019
fare and $35 to the air miles. In its AFS, the $665
allocated to the airfare is included in Year 1 when
the customer takes the roundtrip flight. The $35 al-
located to the air miles is deferred and included in
Year 3 when the customer redeems the air miles. W
uses the deferral method described in paragraph (c)
of this section. For federal income tax purposes, the
$665 is included in gross income in Year 1 and the
$35 allocated to the air miles is included in gross
income in Year 2.
(xxv) Example 25. Chargebacks. Taxpayer X, a
manufacturer of pharmaceuticals, is a calendar-year
accrual method taxpayer with an AFS. In addition
to billing the wholesaler for the sale of the pharma-
ceuticals at the wholesale acquisition cost under the
contract, X generally credits or pays wholesalers a
chargeback of 40% of the wholesale acquisition cost
for sales made by those wholesalers to qualifying
customers. In 2018, X enters into a contract to sell
1,000 units to W, a wholesaler, for $10 per unit, to-
taling $10,000 (1,000 x $10 = $10,000). The contract
also provides that X will issue a 40% chargeback
for sales by W to certain qualifying customers. X
delivers 600 units to W on December 31, 2018, and
bills W $6,000 under the contract. For AFS purposes,
X adjusts its revenue by 40% for all sales to W for
anticipated chargebacks. As such, in its 2018 AFS,
X reports $3,600 ($6,000 - $2,400 = $3,600) of rev-
enue from the contract with W, decreasing revenue
by $2,400 (40% x $6,000 = $2,400) for anticipated
chargeback claims. For federal income tax purposes,
under proposed § 1.451-3(c)(4), X’s 2018 revenue
is $6,000 because revenue is not reduced for antici-
pated chargebacks. Because no portion of the $6,000
is included in revenue on an AFS in a subsequent
taxable year (that is, on an AFS after 2018), none of
the $6,000 is an advance payment under paragraph
(b)(1)(i) of this section.
(d) Deferral method for taxpayers
without an AFS (non-AFS deferral meth-
od)—(1) In general. Only a taxpayer de-
scribed in paragraph (d)(2) of this section
may elect to use the non-AFS deferral
method described in paragraph (d)(4) of
this section.
(2) Taxpayers eligible to use the non-
AFS deferral method. A taxpayer is eligi-
ble to use the non-AFS deferral method if
the taxpayer does not have an applicable
financial statement as defined in proposed
§1.451-3(c)(1) and is able to determine
the extent to which advance payments are
earned in the taxable year of receipt, or a
short taxable year, if applicable.
(3) Advance payment. For purposes of
the non-AFS deferral method, in applying
paragraph (b)(1)(i)(B) of this section, an
advance payment is any portion of the
payment received that is earned by the
taxpayer, in whole or in part, in a subse-
quent taxable year.
(4) Deferral of advance payments
based on when payment is earned—(i) In
general. The non-AFS deferral method
described in this paragraph (d) is a per-
missible method of accounting that may
be used only by a taxpayer described in
paragraph (d)(2) of this section. Under the
non-AFS deferral method of accounting,
a taxpayer includes the advance payment
in gross income for the taxable year of re-
ceipt, including, if applicable, a short tax-
able year described in paragraph (d)(8) of
this section, to the extent that it is earned
in that taxable year and includes the re-
maining portion of the advance payment
in gross income in the next succeeding
taxable year.
(ii) When payment is earned. A pay-
ment is earned when the all events test
described in §1.451-1(a) is met, without
regard to when the amount is received,
as defined under paragraph (b)(5) of this
section, by the taxpayer. If a taxpayer is
unable to determine the extent to which a
payment is earned in the taxable year of
receipt, the taxpayer may determine that
amount:
(A) On a statistical basis if adequate
data are available to the taxpayer;
(B) On a straight line ratable basis over
the term of the agreement if the taxpayer
receives advance payments under a fixed
term agreement and if it is not unreason-
able to anticipate at the end of the taxable
year of receipt that the advance payment
will be earned ratably over the term of the
agreement; or
(C) By the use of any other basis that in
the opinion of the Commissioner results in
a clear reflection of income.
(5) Contracts with multiple obliga-
tions—(i) In general. If a taxpayer re-
ceives a payment that is attributable to
more than one item described in para-
graph (b)(1)(i)(C) of this section, the tax-
payer must allocate the payment to such
items in a manner that is based on objec-
tive criteria.
(ii) Objective criteria. A taxpayer’s al-
location method with respect to a payment
described in paragraph (d)(5)(i) of this
section is based on objective criteria if the
allocation method is based on payments
the taxpayer regularly receives for an item
or items it regularly sells or provides sep-
arately or any method that may be provid-
ed in guidance published in the Internal
Revenue Bulletin (see §601.601(d) of this
chapter).
(6) Acceleration of advance payments.
For purposes of this paragraph (d), the ac-
celeration rules provided in paragraph (c)
(2) of this section apply to a taxpayer that
uses the non-AFS deferral method.
(7) Advance payments in certain acqui-
sitions and other financial statement ad-
justments. For purposes of this paragraph
(d), the rules provided in paragraph (c)
(3) of this section apply to a taxpayer that
uses the non-AFS deferral method.
(8) Short taxable year rule. For purpos-
es of this paragraph (d), the short taxable
year rule provided in paragraph (c)(4) of
this section applies to a taxpayer that uses
the non-AFS deferral method.
(9) Eligible gift card sale. For purpos-
es of paragraphs (b)(1)(i)(B) and (d)(4)
of this section, if an eligible gift card is
redeemable by an entity described in para-
graph (b)(3)(ii), including an entity whose
financial results are not included in the
taxpayer’s financial statement, a payment
will be treated as earned by the taxpayer to
the extent the gift card is redeemed by the
entity during the taxable year.
(10) Examples. The rules of this para-
graph (d) are illustrated by the examples
in paragraphs (d)(10)(i) and (ii). In each
of these examples, the taxpayer uses the
non-AFS deferral method described in
this paragraph (d).
(i) Example 1. A, a video arcade operator, re-
ceives payments in 2018 for game tokens that are
used by customers to play the video games offered
by A. The tokens cannot be redeemed for cash. The
tokens are imprinted with the name of the video ar-
cade, but they are not individually marked for iden-
tification. A completed a study on a statistical basis,
based on adequate data available to A, and concluded
that for payments received in the current year, x per-
cent of tokens are expected to be used in the current
year, y percent of tokens are expected to be used in
the next year, and the remaining z percent of tokens
are expected to never be used. Based on the study,
A treats as earned for 2018 x percent (for tokens ex-
pected to be used in that year) as well as z percent
(for tokens that are expected to never be used). Using
the study, A determines the extent to which advance
payments are earned in the taxable year of receipt.
A may determine the extent to which a payment is
earned in the taxable year of receipt on a statistical
basis provided that any portion that is not included
in the taxable year of receipt is included in the next
succeeding taxable year. Thus, for federal income tax
purposes, A must include x percent and z percent of
the advance payments in gross income for 2018 and
y percent of the advance payments in gross income
for 2019.
(ii) Example 2. B is in the business of providing
internet services. On September 1, 2018, B receives
an advance payment from a customer for a 2-year

September 23, 2019 754 Bulletin No. 2019–39
term for access to its internet services, beginning on
that date. B does not have an AFS. B is unable to
determine the extent to which the payment is earned
in the taxable year of receipt. For federal income tax
purposes, B may determine the extent to which the
payment is earned in the year of receipt on a straight
line ratable basis over the term of the agreement if
it is not unreasonable to anticipate at the end of the
taxable year of receipt that the advance payment will
be earned ratably over the term of the agreement.
(e) Method of accounting. The use of
the deferral method under paragraph (c)
of this section or the non-AFS deferral
method under paragraph (d) of this sec-
tion is the adoption of, or a change in,
a method of accounting under section
446 of the Internal Revenue Code or the
accompanying regulations. In addition,
a change in the manner of recognizing
advance payments in revenue in an AFS
that changes or could change the timing
of the inclusion of income for federal in-
come tax purposes is a change in method
of accounting under section 446 and the
accompanying regulations. A taxpayer
may change its method of accounting to
use the methods described in paragraphs
(c) or (d) of this section, or change its
manner of recognizing advance pay-
ments in revenue in an AFS only with the
consent of the Commissioner as required
under section 446(e) and the correspond-
ing regulations.
(f) Applicability date. The rules of this
section are applicable for taxable years
beginning on or after the date of publi-
cation of the Treasury decision adopting
these rules as final regulations in the Fed-
eral Register. Until the date the Treasury
decision adopting these regulations as fi-
nal regulations is published in the Feder-
al Register, a taxpayer may rely on these
proposed regulations for taxable years
beginning after December 31, 2017, pro-
vided that the taxpayer applies all the ap-
plicable rules contained in these proposed
regulations, and consistently applies these
proposed regulations to all advance pay-
ments. See section 7805(b)(7).
Kirsten Wielobob,
Deputy Commissioner for Services
and Enforcement.
(Filed by the Office of the Federal Register on Sep-
tember 5, 2019, 4:15 p.m., and published in the issue
of the Federal Register for September 9, 2019, 84
F.R. 47191)

Notice of Proposed
Rulemaking
Taxable Year of Income
Inclusion under an Accrual
Method of Accounting
REG-104870-18
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Notice of proposed rulemaking.
SUMMARY: This document contains
proposed regulations regarding the timing
of income inclusion under section 451 of
the Internal Revenue Code (Code). The
proposed regulations reflect changes made
by the Tax Cuts and Jobs Act. These pro-
posed regulations affect taxpayers that use
an accrual method of accounting and have
an applicable financial statement.
DATES: Written or electronic comments
and requests for a public hearing must be
received by November 8, 2019.
ADDRESSES: Send submissions to In-
ternal Revenue Service, CC:PA:LPD:PR
(REG-104870-18), Room 5205, P.O. Box
7604, Ben Franklin Station, Washington,
DC 20044. Submissions may be hand de-
livered Monday through Friday between
the hours of 8 a.m. and 4 p.m. to Cou-
rier’s Desk, Internal Revenue Service,
CC:PA:LPD:PR (REG-104870-18), 1111
Constitution Avenue, NW, Washington,
DC 20224. Alternatively, persons may sub-
mit comments electronically via the Feder-
al eRulemaking Portal at http://www.regu-
lations.gov (IRS REG-104870-18).
FOR FURTHER INFORMATION CON-
TACT: Concerning §§1.446-2, 1.451-
3(d), 1.451-3(i), 1.1275-2(l), and any
other provisions within the jurisdiction of
the Associate Chief Counsel (Financial In-
stitutions and Products), Charles Culmer,
(202) 317-4528; concerning the rest of the
proposed regulations, Charles Gorham,
(202) 317-5091; concerning submissions
of comments and requests for a public
hearing, Regina L. Johnson, (202) 317-
6091 (not toll-free numbers).
SUPPLEMENTARY INFORMATION:
Background
This document contains proposed
amendments to 26 CFR part 1 under sec-
tion 451(b). On December 22, 2017, sec-
tion 451(b) was amended by section 13221
of the Tax Cuts and Jobs Act, Public Law
No. 115-97 (131 Stat. 2054) (the Act) to
provide that, for a taxpayer using an accru-
al method of accounting, the all events test
with respect to any item of gross income
(or portion thereof) is not treated as met
any later than when the item (or portion
thereof) is included in revenue for finan-
cial accounting purposes on an applicable
financial statement (AFS) or other financial
statement specified by the Secretary. The
amendments made to section 451(b) do not
change the time at which income subject to
the all events test is taken into income for
accrual method taxpayers without an AFS
or other specified financial statement. Un-
less otherwise indicated, all references to
section 451(b) hereinafter are references to
section 451(b), as amended by the Act.
In general, section 451 provides that the
amount of any item of gross income is in-
cluded in gross income for the taxable year
in which it is received by the taxpayer, un-
less, under the method of accounting used
in computing taxable income, the amount is
to be properly accounted for as of a differ-
ent period. Under §1.451-1, accrual meth-
od taxpayers generally include items of
income in gross income in the taxable year
when all the events occur that fix the right
to receive the income and the amount of the
income can be determined with reasonable
accuracy (the all events test). All the events
that fix the right to receive income occur
when (1) the required performance takes
place, (2) payment is due, or (3) payment
is made, whichever happens first. Revenue
Ruling 2003-10 (2003-1 CB 288); Revenue
Ruling 84-31 (1984-1 CB 127); Revenue
Ruling 80-308 (1980-2 CB 162).
On April 12, 2018, the Treasury De-
partment and the IRS issued Notice
2018-35 (2018-18 IRB 520) requesting,
in part, comments on future guidance un-
der section 451(b). The record of public
comments received in response to Notice
2018-35 may be requested by sending an
email to Notice.comments@irscounsel.
treas.gov. This document provides guid-

Bulletin No. 2019–39 755 September 23, 2019
ance on the application of section 451(b)
taking into account comments that were
received regarding section 451(b). The ap-
plication of section 451(c) is addressed in
separate guidance published in the same
issue of the Federal Register as these
proposed regulations.
Explanation of Provisions
The proposed regulations describe and
clarify the statutory requirements of sec-
tion 451(b) by providing new §1.451-3.
1. Applicability of Section 451(b)(1)
Section 451(b)(1) generally provides
that, for an accrual method taxpayer with
an AFS or other specified financial state-
ment, the all events test with respect to
any item of gross income, or portion
thereof, is not treated as met any later than
when such item, or portion thereof, has
been taken into account as revenue in an
AFS or other specified financial statement
(the AFS income inclusion rule). The AFS
income inclusion rule generally increases
financial accounting and tax accounting
conformity. On May 28, 2014, the Finan-
cial Accounting Standards Board (FASB)
and the International Accounting Stan-
dards Board (IASB) jointly announced
new financial accounting standards for
revenue recognition, titled “Revenue from
Contracts with Customers (Topic 606).”
See ASC Topic 606 and IASB Internation-
al Financial Reporting Standard (IFRS) 15
(New Standards). Under the New Stan-
dards, items of income may be included as
revenue in an AFS earlier than they would
have been included in income under the
all events test prior to the Act.
A. Taxpayers Subject to the AFS Income
Inclusion Rule
The proposed regulations clarify how
the AFS income inclusion rule applies to
accrual method taxpayers with an AFS.
Some taxpayers use an accrual method of
accounting for all applicable items of in-
come (overall accrual method taxpayers)
and others use an accrual method of ac-
counting for only some items of income.
Both types of taxpayers (collectively, ac-
crual method taxpayers) compute taxable
income, at least in part, under an accrual
method. Accordingly, proposed §1.451-
3(b) provides that the AFS income in-
clusion rule generally applies to accrual
method taxpayers with an AFS when the
timing of income inclusion for one or
more items of income is determined using
the all events test.
The proposed regulations do not in-
clude special rules regarding the applica-
bility of the AFS income inclusion rule to
foreign persons. The Treasury Department
and the IRS are aware that applying the
AFS income inclusion rule to a controlled
foreign corporation (CFC) may create
mismatches between the CFC’s taxable
income for U.S. Federal and foreign tax
purposes. As a result, certain taxpayers
may lose the ability to credit foreign taxes
imposed on a CFC’s income, particularly
where such taxes relate to amounts inclu-
dible in gross income under section 951A
and are therefore ineligible to be carried
back or forward under section 904(c).
Comments are requested regarding wheth-
er special rules are needed to address the
applicability of the AFS income inclusion
rule to foreign persons, including whether
and how the rules for determining the tax-
able income of a CFC can be adjusted to
better align the U.S. Federal and foreign
income tax bases.
B. Exceptions to the AFS Income
Inclusion Rule
Proposed §1.451-3(d) clarifies that the
AFS income inclusion rule applies only
to taxpayers that have one or more AFS
covering the entire taxable year. This ap-
proach is consistent with the exception in
section 451(b)(1)(B)(i), which provides
that the AFS income inclusion rule does
not apply to taxpayers without an AFS for
a taxable year. In addition, some accrual
method taxpayers may have an AFS in
one taxable year and no AFS in another
taxable year. To address this situation,
the proposed regulations provide that the
AFS income inclusion rule applies on a
year-by-year basis and, therefore, an ac-
crual method taxpayer with an AFS in one
taxable year that does not have an AFS in
another taxable year must apply the AFS
income inclusion rule in the taxable year
that it has an AFS, and does not apply the
rule in the taxable year in which it does
not have an AFS.
Consistent with section 451(b)(1)(B)
(ii), proposed §1.451-3(d) also provides
that the AFS income inclusion rule does
not apply to items of income in connection
with a mortgage servicing contract. A let-
ter addressed to the Treasury Department
indicated that it is unclear whether this ex-
clusion can be applied to income relating
to interest rate lock commitments (IRLCs)
entered into by mortgage lenders. The pro-
posed regulations do not address this issue
because section 475 generally would re-
quire mortgage lenders to include income
relating to IRLCs in taxable income in ac-
cordance with the mark-to-market meth-
od of accounting. As a result, a mortgage
lender generally would not apply section
451(b) to determine when income relating
to IRLCs is includible in income.
C. Transactions Treated Differently for
Federal Income Tax and AFS Purposes
Except as provided in proposed §1.451-
3(e), proposed §1.451-3(e) clarifies that
the AFS income inclusion rule does not
change the treatment of a transaction for
Federal income tax purposes. The treat-
ment of a transaction or event in a taxable
year may be different for Federal income
tax and AFS purposes. For example, a
rental agreement that is treated as a lease
for Federal income tax purposes may be
treated as a sale or financing for AFS pur-
poses, or vice versa. Similarly, a transac-
tion that is deemed to occur (for example,
under a mark-to-market method) for AFS
purposes may not be deemed to occur for
Federal income tax purposes. The AFS
income inclusion rule generally was not
intended to require taxpayers to rechar-
acterize a transaction for Federal income
tax purposes to conform to the characteri-
zation of the transaction in the taxpayer’s
AFS. As stated in the Conference Report,
“The provision does not revise the rules
associated with when an item is realized
for Federal income tax purposes and, ac-
cordingly, does not require the recognition
of income in situations where the Federal
income tax realization event has not yet
occurred.” H.R. Rep. No. 115-466, at 428
fn. 872 (2017) (Conf. Rep.).
However, as also stated in the Confer-
ence Report, the AFS income inclusion
rule was intended to include unbilled re-
ceivables for partially performed services:

September 23, 2019 756 Bulletin No. 2019–39
“Under the provision, an accrual meth-
od taxpayer with an applicable finan-
cial statement will include an item in
income under section 451 upon the
earlier of when the all events test is met
or when the taxpayer includes such
item in revenue in an applicable finan-
cial statement. For example, under the
provision, any unbilled receivables for
partially performed services must be
recognized to the extent the amounts
are taken into income for financial
statement purposes.”
H.R. Rep. No. 115-466, at 428 fn. 874
(2017) (Conf. Rep.). Commenters sug-
gested that the intent to include unbilled
receivables conflicts with the intent to
not change the treatment of a transaction
to match the taxpayer’s AFS treatment.
The Treasury Department and the IRS do
not agree. In applying the AFS income
inclusion rule to unbilled receivables, a
taxpayer is not changing the treatment of
the transaction when it includes in income
amounts included in its AFS. Moreover,
these proposed regulations also apply to
unbilled receivables for the sale of goods
because there is no distinction in section
451(b) between unbilled receivables for
services and unbilled receivables for the
sale of goods, and service providers and
sellers of goods that are including unbilled
receivables in revenue for AFS purposes
should be treated similarly for Federal in-
come tax purposes under section 451(b).
Accordingly, the proposed regulations
provide that the AFS inclusion rule ap-
plies to unbilled receivables included in
revenue for AFS purposes related to both
services and goods.
Commenters raised concerns about the
interaction between sections 61 and 461
with the AFS income inclusion rule. For
AFS purposes, taxpayers may be required
to include variable consideration when
determining the transaction price of a
contract. Under the New Standards, vari-
able consideration includes items such as
discounts, rebates, refunds, credits, price
concessions, incentives, performance bo-
nuses, penalties, and other similar items.
Variable consideration may also include
promised consideration that taxpayers are
not yet entitled to under the contract be-
cause it is contingent on the occurrence or
nonoccurrence of a future event. For Fed-
eral income tax purposes, these items of
variable consideration may be contingent
future income under section 61 or liabili-
ties subject to section 461. Section 451(b)
could be read to accelerate the timing of
contingent future income and liabilities to
match their inclusion in revenue for AFS
purposes. However, section 451(b) was
intended to change only the timing of in-
come to ensure that those items of income
are not included later than when they are
included for AFS purposes. See H.R. Rep.
No. 115-466, at 428 fn. 874 (2017) (Conf.
Rep.) and Joint Committee on Taxation,
General Explanation of Public Law 115-
97 (JCS-1-18) at 166 (Dec. 20, 2018).
Accordingly, proposed §1.451-3(c)(6)
provides that the transaction price that is
used to determine whether an amount has
been included in revenue does not include
items to which a taxpayer’s entitlement is
contingent on the occurrence or nonoc-
currence of a future event, reductions for
amounts subject to section 461 (including
allowances, adjustments, rebates, charge-
backs, refunds, rewards, and amounts
included in the cost of goods sold), and
amounts collected for third parties. How-
ever, in order to reduce compliance bur-
den and prevent abuse and undue admin-
istrative burden, proposed §1.451-3(c)(6)
presumes that an amount included in the
transaction price for AFS purposes is not
contingent future income unless, upon ex-
amination of all of the facts and circum-
stances existing at the end of the taxable
year, it can be established to the satisfac-
tion of the Commissioner that the amount
is contingent on the occurrence or nonoc-
currence of a future event.
In addition, section 451(b) was intend-
ed to accelerate income inclusion when
(i) the taxpayer’s customer controls the
asset that is created or enhanced, or (ii)
the taxpayer has a right to partial payment,
even when a contract requires delivery,
acceptance, and title transfer before a tax-
payer can bill its customer. See Examples
2 and 4 of the Joint Committee on Taxa-
tion, General Explanation of Public Law
115-97 (JCS-1-18) at 162-163 (Dec. 20,
2018). Accordingly, proposed §1.451-3(c)
(6)(ii) provides that an amount included
in the transaction price for AFS purposes
may not be treated as contingent on the
occurrence or nonoccurrence of a future
event if the taxpayer has been paid or has
an equitable, contractual, or other right to
partial payment for performance complet-
ed to date. Additionally, proposed §1.451-
3(c)(6)(iii) provides that transaction price
may not be reduced for amounts subject to
section 461, including, in the case of cred-
it card transactions, reward amounts.
Comments are requested on the interac-
tion among sections 61, 461, and 451(b),
and specific situations in which future
contingent income and liabilities might
be included in revenue for AFS purposes.
Comments are requested, for example, on
the applicability of the proposed rules to
escalating rental agreements not subject
to section 467, where amounts included
in revenue in an AFS as rent for one year
of a multi-year rental agreement exceed
actual rent received for that year. Specif-
ically, does the excess of the amount in-
cluded in revenue as rent over the amount
of actual rent in a particular year represent
a contingency or merely an allocation of
the overall transaction price? Comments
are requested on the extent to which cer-
tain contract terms might affect the result.
Comments also are requested on the pro-
posed presumption that the AFS income
inclusion rule should apply when an item
is included in revenue in an AFS and what
a taxpayer should be required to demon-
strate in order to successfully rebut the
presumption. Finally, comments are re-
quested on how reassessments of variable
consideration after the taxable year of the
commencement of the contract should be
treated for Federal income tax purposes.
D. Interaction with Exclusion Provisions
and Effect on Non-Recognition
Transactions
Commenters noted that the AFS in-
come inclusion rule may appear to over-
turn numerous exclusion provisions and
adversely affect the treatment of non-rec-
ognition transactions in the Code. For
example, the AFS income inclusion rule
could be read to apply to a transaction
that is treated as a sale of property with
profit or loss for AFS purposes but that is
treated as a reorganization under section
368 for Federal income tax purposes. The
proposed regulations clarify that the AFS
income inclusion rule does not change the
applicability of any exclusion provision,
or the treatment of non-recognition trans-
actions, in the Code, the Income Tax Reg-

Bulletin No. 2019–39 757 September 23, 2019
ulations, or other guidance published in
the Internal Revenue Bulletin, consistent
with Congressional intent that the provi-
sion does not revise the rules associated
with the time at which an item is realized
for Federal income tax purposes. H.R.
Rep. No. 115-466, at 428 fn. 872 (2017)
(Conf. Rep.) and Joint Committee on Tax-
ation, General Explanation of Public Law
115-97 (JCS-1-18) at 166 (Dec. 20, 2018).
E. Special Methods of Accounting
Section 451(b)(2) provides that the
AFS income inclusion rule does not ap-
ply to any item of gross income for which
the taxpayer uses a special method of ac-
counting provided under any provision
of Chapter 1, other than any provision
of part V of subchapter P. Commenters
raised questions about the interaction
between the AFS income inclusion rule
and special methods of accounting. In re-
sponse, proposed §1.451-3(b) amplifies
the meaning of the term “special method
of accounting” and, except as provided in
proposed §1.451-3(b), provides that the
AFS income inclusion rule does not ap-
ply to any item of income, or portion of
an item of income, when the timing of
income inclusion is determined under a
required or permitted special method of
accounting used for Federal income tax
purposes. The proposed regulations also
clarify that when a taxpayer uses a special
method of accounting, the special meth-
od of accounting determines the timing of
the income inclusion. The proposed reg-
ulations provide a non-exclusive list of
examples of special methods of account-
ing. In addition, the proposed regulations
make clear that because the AFS income
inclusion rule affects the time at which the
all events test is met, the rule applies only
to items of income that are subject to the
all events test. For a discussion of special
methods of accounting under the provi-
sions of part V of subchapter P (relating
to income from certain debt instruments),
see section 7 of this preamble.
2. Application of the AFS Income
Inclusion Rule to Multi-year Contracts
Section 451(b) does not address how
to apply the AFS income inclusion rule
and all events test to a multi-year contract.
Proposed §1.451-3(k) provides that a tax-
payer with a multi-year contract applies
the all events test by applying a cumula-
tive approach reflecting amounts previ-
ously included under section 451 rather
than an annualized approach.
An annualized approach would look
at payments received in each taxable year
in isolation and compare the amounts in-
cluded in the taxpayer’s AFS and under
the all events test to determine whether an
amount should be included for Federal in-
come tax purposes. This approach would
generally result in an overall acceleration
of income relative to income included in
revenue for AFS purposes, could cause
amounts to be included for Federal in-
come tax purposes earlier than under a
contract’s terms, and could result in dou-
ble counting of income. Section 451(b)(1)
does not require this treatment.
A cumulative approach better reflects
the economic reality of a multi-year
transaction. Accordingly, the proposed
regulations require taxpayers to take into
account the cumulative amounts previ-
ously included in prior taxable years in
determining a given contract year’s in-
come inclusions under section 451(b)(1).
Comments are requested regarding the
treatment of multi-year contracts under
the AFS income inclusion rule.
3. Applicable Financial Statement (AFS)
The proposed regulations describe and
clarify the definition of AFS under section
451(b)(3). Section 451(b)(3) generally
defines AFS to mean financial statements
prepared according to generally accepted
accounting principles (GAAP financial
statements), certain financial statements
prepared according to international finan-
cial reporting standards (IFRS financial
statements), and financial statements filed
with certain regulatory or government
bodies. Section 451(b)(1)(A)(ii) provides
the Secretary with authority to specify
other financial statements for purposes of
section 451(b)(1).
The list of financial statements quali-
fying as an AFS under section 451(b)(3)
is similar, but not identical, to the list of
financial statements in Revenue Procedure
2004-34 (2004-1 CB 991). The general
priority for identifying the AFS in section
451(b)(3)(A) through (C) is similar to the
priority provided in Revenue Procedure
2004-34. Certain financial statements that
have traditionally been treated as AFS
under Revenue Procedure 2004-34, such
as IFRS financial statements used for (1)
credit purposes, (2) reporting to share-
holders, partners, or other proprietors or to
beneficiaries, and (3) any other substantial
nontax purposes, are not expressly includ-
ed in section 451(b)(3). However, the leg-
islative history indicates that Congress in-
tended for Revenue Procedure 2004-34 to
be followed. See H.R. Rep. No. 115-466,
at 429 (2017) (Conf. Rep.). Accordingly,
proposed §1.451-3(c)(1) is generally con-
sistent with the list of AFS from Revenue
Procedure 2004-34.
The proposed regulations also clarify
the financial statements filed with certain
regulatory or government bodies that qual-
ify as an AFS under section 451(b)(3)(C),
which is similar to section 4.06(3) of Rev-
enue Procedure 2004-34. The proposed
regulations clarify that financial state-
ments that are filed with a state govern-
ment or state agency, or a self-regulatory
organization, also qualify as an AFS under
section 451(b)(3)(C). For example, the
Financial Industry Regulatory Authority
and state agencies that regulate insurance
companies or public utilities are agencies
requiring reports that qualify as an AFS.
Proposed §1.451-3(h) addresses vari-
ous issues relating to how financial results
are reported for certain taxpayers. These
proposed regulations propose rules con-
sistent with the rules provided in §1.56-1
because Congress indicated a desire for
rules similar to those found in Revenue
Procedure 2004-34 and the rules in Rev-
enue Procedure 2004-34 follow certain
rules in §1.56-1. See IRS Announcement
2004-48 (2004-22 IRB 998).
Section 451(b)(5) and proposed
§1.451-3(h)(1), (2), and (3) provide that,
for purposes of the general rule in sec-
tion 451(b)(1), if the financial results of a
taxpayer are reported on the AFS, as de-
fined in section 451(b)(3), for a group of
entities, such statement shall be treated as
the AFS of the taxpayer. When a consoli-
dated or combined AFS or other financial
statement lists items separately for each
member taxpayer, the amount of revenue
attributable to a particular taxpayer is de-
termined based on its respective separately
stated item. If the amounts are aggregated,

September 23, 2019 758 Bulletin No. 2019–39
however, the taxpayer must rely on the
source documents that were used to create
the group’s AFS to determine its percent-
age of each aggregated item reported on
the consolidated or combined AFS. The
source documents should be used to de-
termine the taxpayer’s respective share
of revenue on the AFS, so as to properly
reflect the correct amount of gross income
under section 451(b).
Proposed §1.451-3(h)(4) provides
guidance for taxpayers with a financial
reporting period that is different than the
taxpayer’s taxable year. The proposed
regulations provide that the taxpayer must
use one of three permissible methods in
order to determine whether an item of in-
come has been included in revenue on an
AFS. Under one method a taxpayer uses
the accounting principles used to create its
AFS to determine the items of income to
be reported in revenue as if its financial
reporting period coincided with its taxable
year. Under the second method a taxpayer
makes a reasonable estimate of revenue
for the pro rata portion of the taxable year
for which the financial statement year and
taxable year do not align. Under the third
method, if a taxpayer’s financial account-
ing year ends five or more months after
the end of its taxable year, the taxpayer
computes revenue based on the revenue
reported on the AFS for the financial ac-
counting year ending within its taxable
year.
Proposed §1.451-3(h)(5) provides
guidance on a restatement of a taxpayer’s
financial statements. The rules general-
ly provide that the taxpayer must deter-
mine the reason for the restatement of the
AFS. For example, if a taxpayer restates
revenue on an AFS and such restate-
ment changes the time at which an item
of income or a portion thereof is taken
into account as revenue on the AFS, the
change constitutes a change in method of
accounting under section 446. This rule is
consistent with current practice regarding
the determination of a change in method
of accounting.
The regulations under section 6001 re-
quire a taxpayer to keep books and records
sufficient to establish the amount of gross
income, deductions, credits, or other mat-
ters required to be shown in an income tax
return, which includes the identification
of items includible in gross income under
section 451. This requirement includes
any books and records sufficient to es-
tablish a taxpayer’s calculation of income
when its financial results are included in
an AFS of a group of entities.
4. Revenue in an AFS
Proposed §1.451-3(c)(4) defines the
term revenue for purposes of section
451(b)(1) broadly to include all items of
income under section 61 (gains, profits,
and income for Federal income tax pur-
poses). This definition is consistent with
the current application of the all events
test under §1.451-1(a) and ensures greater
financial accounting and tax accounting
conformity.
One commenter discussed the effect of
the New Standards on sections 451(b) and
(c). The commenter noted that, under the
New Standards, certain revenue may be in-
cluded earlier than under section 451 prior
to amendment by the Act. The commenter
also noted that an amount booked to re-
tained earnings should be treated as rev-
enue for purposes of section 451(b) even
though that amount may not be shown
as book revenue for financial accounting
purposes. A narrow reading of the term
revenue could result in items of income
that are taken into account on an AFS and
that otherwise would be required to be in-
cluded in gross income escaping section
451(b) altogether. For example, taxpayers
may include items, or portions of items,
in other comprehensive income on an AFS
that are excluded from the revenue line(s)
on the AFS. Accordingly, a broad reading
of revenue ensures that the correct amount
of income that is taken into account in an
AFS is subject to section 451(b).
Multiple commenters proposed allow-
ing a cost offset when income is included
under the AFS income inclusion rule. For
example, one commenter suggested that,
in determining the amount of income to
include under section 451(b), taxpayers
selling goods should reduce AFS revenue
by the cost of goods sold associated with
a sale that does not presently reduce AFS
revenue. The commenter acknowledged
that costs are not taken into account for
Federal income tax purposes until the all
events test is satisfied, which includes the
economic performance rules under section
461. Because of the resulting inconsisten-
cy with sections 461 and 471, these reg-
ulations do not follow the commenter’s
suggestion that a cost offset or cost of
goods sold reduction should apply without
regard to the economic performance rules
of section 461 and inventory accounting
rules of section 471.
Congress has addressed various cost
recovery mechanisms in the past. In 1955,
Congress repealed the reserve method
for estimated expenses under section 462
of the Code. See An Act to Repeal Sec-
tions 452 and 462 of the Internal Revenue
Code of 1954, Public Law No. 84-74, sec-
tion 1(b) (1955). Section 462 of the Code
was a companion to section 452, which
allowed taxpayers to report certain types
of prepaid income over time. In the Sen-
ate Report discussing the repeal of sec-
tions 452 and 462, Congress noted that
“the problem presented by section 462
is that of the timing of deductions when
a taxpayer changes accounting methods.”
S. Rep. 84-372, at 4 (1955). The Senate
noted that taxpayers would be entitled to
the deductions even without section 462.
In addition, section 462 increased the pos-
sibility of distortions of income because
expenses were being deducted when the
amount had not yet been incurred.
Thirty years later, Congress repealed
the use of the reserve method for deter-
mining losses from bad debts under sec-
tion 166 in the Tax Reform Act of 1986.
In repealing the reserve method, Congress
noted that this method was inconsistent
with the rules for other deductions un-
der the all events test and could result
in deductions being allowed for Federal
income tax purposes for losses that may
never occur. S. Rep. No. 99-313, at 155
(1986). Moreover, “if a deduction is al-
lowed prior to the taxable year in which
the loss occurs, the value of the deduction
to the taxpayer will be overstated.” S.
Rep. No. 99-313, at 155 (1986).
These proposed regulations do not
allow a cost offset provision because
similar potential distortions of income
could result. An allowance to account for
future cost of goods sold, for future es-
timated costs, or other cost offsets also
is inconsistent with sections 461 (in par-
ticular section 461(h)), 263A, and 471,
and the regulations under those sections.
In addition, these proposed regulations
do not allow a cost offset provision be-

Bulletin No. 2019–39 759 September 23, 2019
cause there is nothing in the statute or
legislative history that indicates that in
amending section 451 Congress intended
to change sections 461, 263A or 471, and
the regulations under those sections. See
also, General Explanation of Public Law
115-97 (JCS-1-18) at 150-151, and 164-
165 (Dec. 20, 2018).
Nevertheless, the Treasury Department
and the IRS continue to consider wheth-
er any exceptions are an appropriate use
of the Secretary’s authority under section
461(h) or 460. To facilitate further con-
sideration of any potential exceptions, de-
tailed comments that specifically address
the following issues are requested:
1. Under what authority would it be
appropriate for the Secretary to per-
mit a taxpayer to use a book percent-
age-of-completion method (PCM) as
its tax method? When inventory is
involved, what limitations could be
instituted to ensure that book PCM
could not be used to recover costs
related to inventoriable goods prior
to the time when such costs could
be recovered under sections 471 and
263A? Under what specific authority
would it be appropriate to permit a
book PCM method to be used to re-
cover costs related to inventoriable
goods?
2. Would elective use of book PCM for
tax purposes provide an appropriate
cost offset? Would such a method be
characterized as one that reports con-
tract revenue according to a taxpay-
er’s book method, while accounting
for costs, including nondeductible
costs, as deductions under the Code?
If not, how would such a method ac-
count for costs for Federal income tax
purposes?
3. Rather than make book PCM elective,
would it be appropriate for the defini-
tion of “unique item” for purposes of
section 460 to be expanded?
4. Section 460 requires use of the look-
back method to compensate for im-
proper acceleration or deferral of
income under PCM. It also requires
that all contract income be reported
no later than the year following con-
tract completion. Would elective use
of a PCM under section 460 without
these provisions invite abuse? If so,
how could such abuse be prevented?
5. Allocation of Transaction Price
The proposed regulations describe and
clarify the allocation of transaction price
under section 451(b)(4). Section 451(b)(4)
provides that, in the case of a contract with
multiple performance obligations, the allo-
cation of the transaction price to each per-
formance obligation shall be equal to the
amount allocated to each performance ob-
ligation for purposes of including such item
in revenue in the AFS of the taxpayer. Con-
sistent with the definition of performance
obligation found in the New Standards,
proposed §1.451-3(c)(3) defines “perfor-
mance obligation” to mean a promise in a
contract with a customer to transfer to the
customer either a good or service (or a bun-
dle of goods or services) that is distinct, or
a series of distinct goods or services that
are substantially the same and that have the
same pattern of transfer to the customer.
See ASC Topic 606 and IFRS 15.
Comments are requested on allocation
of the transaction price (i) to performance
obligations that are not contractually
based, (ii) for arrangements that include
both income subject to section 451 and
long-term contracts subject to section
460, and (iii) when the income realization
event for Federal income tax purposes dif-
fers from the income realization event for
AFS purposes.
6. Taxpayers Including Income Over Time
for AFS Purposes
Commenters proposed allowing tax-
payers that include items of income as
revenue in an AFS over a period of time
under the New Standards (AFS over-time
method) to follow that method for Federal
income tax purposes. Allowing taxpayers
to follow their AFS over-time method for
Federal income tax purposes would poten-
tially defer income beyond what is permit-
ted under section 451(b), section 451(c),
and the all events test. The AFS income
inclusion rule operates only to acceler-
ate income inclusion; the AFS income
inclusion rule can never cause income
inclusion to occur later than when the all
events test is satisfied. Allowing taxpay-
ers to follow their AFS over-time method
for Federal income tax purposes may also
affect the treatment of costs in a manner
that is inconsistent with sections 461 and
471. However, the Treasury Department
and the IRS continue to study the com-
menters’ proposal and request additional
comments on this issue. Specifically, addi-
tional comments are requested regarding:
the size of taxpayers likely to be affect-
ed; the industries likely to be affected; the
number of taxpayers likely to be affected;
the compliance burden and administrative
complexity likely to be avoided; and the
degree to which an over-time method un-
der the New Standards accelerates or de-
fers income relative to the all events test
and the AFS income inclusion rule.
7. Rules for Certain Debt Instruments
A. Credit Card Fees and Other Fees
The Treasury Department and the IRS
have treated certain credit card fees associ-
ated with pools of credit card receivables as
creating or increasing original issue discount
(OID) on those pools. See Revenue Proce-
dure 2004-33 (2004-1 CB 989) (the IRS will
not challenge the treatment of late fees as
creating or increasing OID); Revenue Pro-
cedure 2005-47 (2005-2 CB 269) (the IRS
will not challenge the treatment of cash ad-
vance fees as creating or increasing OID);
Revenue Procedure 2013-26 (2013-22 IRB
1160) (safe harbor method of accounting for
OID on a pool of credit card receivables for
purposes of section 1272(a)(6)); and Chief
Counsel Notice CC-2010-018 (Sept. 27,
2010) (as a result of the Tax Court’s deci-
sion in Capital One Financial Corp. and
Subsidiaries v. Commissioner, 133 T.C. 136
(2009), the IRS will no longer challenge or
litigate the issue of whether interchange fee
income creates or increases OID).
With the enactment of section 451(b),
however, Congress expressed its inten-
tion to overturn the tax treatment of those
credit card fees as OID, including the use
of the OID timing rules, and subject them
to the all events test. The Conference Re-
port to the Act states, “[section 451(b)]
directs accrual method taxpayers with an
applicable financial statement to apply
the income recognition rules under sec-
tion 451 before applying the special rules
under part V of subchapter P ...” (which
includes the OID rules). H.R. Rep. No.
115-466, at 428 (2017) (Conf. Rep.). In
particular, the legislative history describes
the treatment of credit card late fees, cred-

September 23, 2019 760 Bulletin No. 2019–39
it card cash advance fees, and interchange
fees as creating or increasing OID for
Federal tax purposes and lists these fees
as examples of amounts to which section
451(b), as amended, would apply. Id. at
427, 429. These three credit card fees are
not generally treated as discount for AFS
purposes.
Congress clearly expressed its inten-
tion to overturn the tax treatment of credit
card late fees, cash advance fees, and in-
terchange fees (specified credit card fees)
and to subject these fees to the all events
test as modified by section 451(b). Id. at
429. The legislative history quoted in the
preceding paragraph further suggests that
Congress intended that other fees associ-
ated with a lending transaction that might
otherwise be accounted for in calculating
OID are to be subjected to the AFS income
inclusion rule before the application of the
OID rules. Based on the legislative his-
tory, however, taxpayers have stated that
section 451(b) was not intended to affect
the application of the general OID timing
rules to OID other than with respect to
items not treated as discount for financial
reporting purposes, such as the specified
credit card fees. Id. at 427-429. Moreover,
taxpayers have stated that the application
of section 451(b) to OID other than items
not treated as discount for financial report-
ing purposes would result in significant
administrative burden and very little addi-
tional tax revenue. The Treasury Depart-
ment and the IRS agree with commenters
on this issue. Therefore, in the absence of
a clear indication in the legislative history
that Congress intended for section 451(b)
to override the general timing rules for
OID, and in order to reduce administrative
burden, the proposed section 451(b) regu-
lations would not apply to determine the
time at which OID generally is includible
in income. See §1.451-3(c)(5)(ix) of the
proposed regulations.
The proposed regulations contain two
provisions that implement Congressio-
nal intent regarding the treatment of fees,
including the specified credit card fees.
First, under proposed §1.451-3(i), if a fee
is not treated by a taxpayer as discount
or as an adjustment to the yield of a debt
instrument over the life of the instrument
(such as points) in its AFS and the fee oth-
erwise would be treated as creating or in-
creasing OID for Federal income tax pur-
poses (specified fee), then the rules in the
proposed regulations under section 451(b)
apply before the rules in sections 1271
through 1275 and the regulations there-
under. For example, proposed §1.451-3(i)
applies to the specified credit card fees.
Second, proposed §1.1275-2(l) includes a
proposed amendment to the final regula-
tions under section 1275 to clarify that an
item of income that is subject to the timing
rules in the proposed regulations under
section 451(b) (such as the specified cred-
it card fees) is not taken into account in
determining the amount of OID (if any) on
the debt instrument. Removing specified
fees and specified credit card fees from the
calculation of OID will permit taxpayers
to apply only the rules of section 451(b)
to these fees, without also having to apply
the rules relevant to OID. In addition, the
Treasury Department and the IRS propose
to obsolete Revenue Procedure 2004-33,
Revenue Procedure 2005-47, Revenue
Procedure 2013-26, and Chief Counsel
Notice CC-2010-018. The Treasury De-
partment and the IRS request comments
on the proposed obsolescence of these
documents.
B. Market Discount
Taxpayers requested guidance as to
whether market discount is includible in
income under section 451(b). The Trea-
sury Department and the IRS previous-
ly announced that proposed regulations
would provide that accrued market dis-
count is not includible in income under
section 451(b). Notice 2018-80 (2018-42
IRB 609), issued September 27, 2018.
A bond is generally treated as hav-
ing market discount when the principal
amount of the bond exceeds the holder’s
basis immediately after it was acquired by
the holder. Under section 1276(a), mar-
ket discount is includible in income only
upon disposition of a market discount
bond at a gain or the receipt of a partial
principal payment, unless the holder of
the bond elects otherwise. In each case,
the market discount inclusion is limited
to accrued market discount as defined in
section 1276(b). In general, the timing
rules for income inclusion in section 1276
are a codification of the pre-1984 timing
rules for market discount and confirm that
the all events test generally does not de-
termine when accrued market discount
is includible in income. The proposed
regulations therefore include the market
discount rules on the list of special meth-
ods of accounting to which section 451(b)
does not apply.
Statement of Availability of IRS
Documents
The IRS notices, revenue rulings, and
revenue procedures cited in this pream-
ble are published in the Internal Revenue
Bulletin (or Cumulative Bulletin) and are
available from the Superintendent of Doc-
uments, U.S. Government Publishing Of-
fice, Washington, DC 20402, or by visit-
ing the IRS website at http://www.irs.gov.
Proposed Applicability Date
These regulations are proposed general-
ly to apply to taxable years beginning on or
after the date the final regulations are pub-
lished in the Federal Register. However,
in the case of a specified fee (other than a
specified credit card fee), proposed §1.451-
3(i)(2) is proposed to apply for a taxpayer’s
first taxable year beginning one year after
the date the Treasury decision adopting
these regulations as final is published in the
Federal Register. In general, this delayed
effective date for specified fees is provid-
ed because the treatment of these fees is
unclear for tax purposes (and in some cas-
es for financial reporting purposes). This
additional time will allow the Treasury
Department and the IRS to determine the
types of fees that should be subject to sec-
tion 451(b), which will provide taxpayers
with more certainty in complying with sec-
tion 451(b) and will help to minimize con-
troversies with the IRS with respect to fees.
Until the date the Treasury decision
adopting these regulations as final reg-
ulations is published in the Federal
Register, a taxpayer may rely on these
proposed regulations (other than the pro-
posed regulations relating to specified
fees) for taxable years beginning after
December 31, 2017, provided that the
taxpayer: (1) applies all the applicable
rules contained in these proposed reg-
ulations (other than those applicable to
specified fees), and (2) consistently ap-
plies these proposed regulations to all
items of income during the taxable year

Bulletin No. 2019–39 761 September 23, 2019
(other than specified fees). Until the date
the Treasury decision adopting these reg-
ulations as final regulations is published
in the Federal Register, in the case of
specified credit card fees, a taxpayer may
rely on these proposed regulations for
taxable years beginning after December
31, 2018, provided that the taxpayer: (1)
applies all the applicable rules contained
in these proposed regulations for speci-
fied credit card fees, and (2) consistently
applies these proposed regulations to all
items of income during the taxable year
(other than specified fees).
Special Analyses
I. Regulatory Planning and Review
Executive Orders 13771, 13563, and
12866 direct agencies to assess costs and
benefits of available regulatory alterna-
tives and, if regulation is necessary, to se-
lect regulatory approaches that maximize
net benefits, including potential economic,
environmental, public health and safety
effects, distributive impacts, and equi-
ty. Executive Order 13563 emphasizes
the importance of quantifying both costs
and benefits, reducing costs, harmonizing
rules, and promoting flexibility. The Ex-
ecutive Order 13771 designation for any
final rule resulting from the proposed reg-
ulation will be informed by comments re-
ceived. The preliminary Executive Order
13771 designation for this proposed rule
is regulatory.
The proposed regulation has been des-
ignated by the Office of Information and
Regulatory Affairs (OIRA) as subject to
review under Executive Order 12866 pur-
suant to the Memorandum of Agreement
(MOA, April 11, 2018) between the Trea-
sury Department and the Office of Man-
agement and Budget regarding review of
tax regulations. The Office of Information
and Regulatory Affairs has designated
these proposed regulations as significant
under section 1(b) of the MOA. Accord-
ingly, these proposed regulations have
been reviewed by OIRA.
1. Background
In plain language, section 451 of the
Internal Revenue Code (the “Code”) and
the proposed regulations deal with differ-
ences between when income is recognized
for Federal tax purposes and when it is
recognized on businesses’ financial ac-
counting statements. The recently enact-
ed section 451(b) more closely aligns the
timing rules of the tax system with general
financial accounting standards.
Under section 451(a) of the Code, any
item of gross income is required to be in-
cluded as income by the taxpayer (“recog-
nized“) when it is received by the taxpayer
unless, under the taxpayer’s method of ac-
counting, the income is properly accounted
for in a different period. For this purpose,
businesses and individuals are general-
ly required to use the accounting method
that is used regularly to keep their financial
records. This may be a cash receipts and
disbursements accounting method, under
which income is recognized when pay-
ment is actually or constructively received,
or it may be an accounting system based
on income and expense accrual principles.
Certain corporations and some partnerships
are required to use an accrual method, and
generally taxpayers employing inventories
in their trade or business must use an ac-
crual method with regard to purchases and
sales of inventory.
Current regulations require taxpayers
using an accrual accounting method to re-
port income in the taxable year in which
all events that fix the right to receive
such income have occurred, provided the
amount can be determined with reason-
able accuracy. Under IRS guidance, this
“all events test” is met upon the earliest
of when (i) payment is earned through
performance by the taxpayer (e.g., provi-
sion of the contracted goods or services),
(ii) payment is due to the taxpayer, or
(iii) payment is received by the taxpayer.
In contrast, U.S. generally accepted
accounting principles (“GAAP”) and in-
ternational financial reporting standards
(“IFRS”), having different purposes from
tax law, may often dictate alternative
rules as regards the timing of revenue
recognition. Differences between these
financial accounting standards and the
Code in the timing of revenue recogni-
tion may arise for a number of reasons.
For example, under certain circumstanc-
es, financial accounting rules may require
revenue to be recognized when the costs
of providing goods or services pursuant
to a contract are incurred, while the all
events test may not be satisfied until the
contract obligation is fulfilled. If meeting
the taxpayer’s performance obligation
occurs over more than a single account-
ing period, then this timing pattern can
result in a disparity between the year in
which the associated revenue is booked
for financial accounting purposes and
the year in which the associated taxable
gross income is recognized.
Congress enacted new section 451(b)
in part because conformity in the timing
of income recognition between the accru-
al system of accounting and the tax sys-
tem (“book-tax conformity”) will gener-
ally “promote simplification and reduced
compliance costs.” See Senate Budget
Explanation of the Bill (2017-11-20) at
p. 161.
Section 451(b) applies only to tax-
payers that use the accrual method and
have an Applicable Financial Statement
(“AFS”). In plain language, an AFS is
a financial statement certified as having
been prepared under GAAP or IFRS. All
publicly traded U.S. corporations possess
an AFS, as do many privately held cor-
porations and partnerships, which may
have such certified accounting statements
for credit purposes or for shareholder or
partner reporting purposes. The income
recognition rules for accrual-method tax-
payers without an AFS and cash-method
taxpayers are not altered by the enact-
ment of section 451(b) or by the pro-
posed regulations. The Treasury Depart-
ment and the IRS project that there were
approximately 3.1 million tax-reporting
entities in taxable year 2016 that used an
accrual method of accounting. They fur-
ther project that fewer than 10 percent of
these, or approximately 296,000 entities
had an AFS, and thus could have been
affected by section 451(b) and the pro-
posed regulations had these been in effect
in taxable year 2016.
For these taxpayers, Section 451(b)
modifies the all-events test by stating that
the test is not met for any item of income
any later than when it is taken into account
as revenue in an AFS or other designated
financial statement (the “AFS income in-
clusion rule”). Thus, this new rule requires
taxpayers to recognize income upon the

September 23, 2019 762 Bulletin No. 2019–39
earlier of when the all-events test is met
or when the taxpayer includes the amount
in revenue (broadly defined) in its AFS
(“AFS income inclusion rule”). The AFS
income inclusion rule operates only in one
direction — to accelerate in time the rec-
ognition of gross income for tax purpos-
es. This acceleration occurs in situations
where income has been recognized for fi-
nancial accounting purposes before the all
events test has been satisfied.
2. Need for the proposed regulations
The proposed regulations deliver cer-
tainty and clarity to taxpayers affected by
the Act’s introduction of the new section
451(b) and allow them to comply with the
new statutory provision with a higher lev-
el of confidence.
The Treasury Department and IRS
published a Notice in April 2018, re-
questing public comments regarding the
application of the AFS income inclusion
rule, the meaning of various concepts and
terms used in section 451(b), and other
implementation issues not explicitly ad-
dressed in the statute. As explained earlier
in this Preamble, the proposed regulations
address the comments and questions sub-
sequently raised by the public.
3. Overview of the proposed regulations
The proposed regulations include ap-
plicability and definitional guidance re-
garding section 451(b). Specifically, the
proposed regulations: (1) clarify how the
AFS inclusion rule applies to multi-year
contracts; (2) describe and clarify the defi-
nition of an AFS for a group of entities;
(3) define the meaning of the term revenue
in an AFS; (4) define a transaction price
and clarify how that price is to be allocat-
ed to separate performance obligations in
a contract with multiple obligations; and
(5) describe and clarify rules for transac-
tions involving certain debt instruments.
4. Economic analysis
A. Baseline
The Treasury Department and the IRS
have assessed the benefits and costs of the
proposed regulations relative to a no-ac-
tion baseline reflecting anticipated Feder-
al income tax-related behavior in the ab-
sence of these proposed regulations.
B. Summary of Economic Effects
The proposed regulations provide in-
creased certainty, clarity, and consisten-
cy in the application of section 451(b) by
providing definitions and clarifications
regarding the statute’s terms and rules.
In the absence of such guidance, the
chances that different taxpayers would
interpret the statute differently would be
exacerbated. Similarly situated taxpayers
might interpret the statutory provisions
pertaining to the recognition of income
differently, with one taxpayer pursuing a
project that another comparable taxpay-
er might decline to make because of dif-
ferent interpretations of how the income
would be treated under section 451(b). If
this second taxpayer’s activity were more
profitable, an economic loss arises. Even
in situations where taxpayers would gen-
erally adopt similar interpretations of the
Code under the baseline, the lack of guid-
ance increases opportunities for that in-
terpretation to differ from what Congress
intended. In this case, guidance provides
value by bringing economic decisions
closer in line with Congressional intent. In
the context of economic activity by busi-
nesses that are subject to section 451(b) or
that interact with such businesses, the pro-
posed regulations thus help to ensure that
similar economic activities, representing
similar timing of income, are taxed sim-
ilarly, thereby improving U.S. economic
performance.
The Treasury Department and the IRS
have not undertaken quantitative esti-
mates of these possible efficiency gains
because any such quantitative estimates
would be highly uncertain. For example,
the proposed regulations include provi-
sions to clarify how income should be
included from multi-year contracts. The
Treasury Department and the IRS do not
have readily available data or models
to determine how businesses might ap-
ply the AFS inclusion rule to multi-year
contracts in the absence of the proposed
regulations or under alternative regu-
latory approaches. Furthermore, even
in the event that most businesses could
be presumed to adopt a particular treat-
ment under the baseline, the Treasury
Department and the IRS further do not
have readily available data or models of
the volume or pattern of their multi-year
contract payments and they thus cannot
project with any degree of precision the
differences in tax treatment taxpayers
would experience between the proposed
regulations and the baseline or alterna-
tive regulatory approaches. Such differ-
ences are a key component of the margin-
al effective tax rate that these contracts
would experience, which in turn would
determine how economic activity would
be affected by the proposed regulations
relative to the baseline or alternative reg-
ulatory approaches.
The Treasury Department and the IRS
further project that issuance of the pro-
posed regulations will reduce compli-
ance and enforcement costs relative to the
baseline because the enhanced certainty
and clarity they provide should make it
easier for businesses to calculate their tax
liability relative to the baseline. Greater
efficiencies should also result from the
promulgation of the proposed regulations,
relative to the baseline, by reducing tax-
payer disputes with the IRS that other-
wise would have to be dealt with through
sub-regulatory guidance or resolved
through increased litigation. By providing
greater certainty of how the law will be
applied, the Treasury Department and the
IRS project that the proposed regulations
will reduce these implementation costs.
The Treasury Department and the IRS
have not made a quantitative estimate of
the reduction in compliance and enforce-
ment costs resulting from the proposed
regulations. They have not made such an
estimate in part because models of com-
pliance cost are not currently available to
provide a reasonably precise estimate of
compliance costs in the absence of the
proposed regulations.
With these limitations in mind, part
II.4.C of this Special Analyses section ex-
plains the rationale behind the approach-
es taken by the proposed regulations and
qualitatively evaluates the alternatives
considered.
The Treasury Department and the IRS
solicit comments on the economic effects
of the proposed regulations.

Bulletin No. 2019–39 763 September 23, 2019
C. Economic Effects of Specific
Provisions
The proposed regulations embody
certain regulatory decisions that reflect
the regulatory discretion of the Treasury
Department and the IRS. These decisions
specify more fully how the AFS income
inclusion rule is to be implemented.
The Treasury Department and IRS
solicit comments on the economics of
each of the items discussed below and
of any other items of the proposed reg-
ulations not discussed in this section.
The Treasury Department and the IRS
particularly solicit comments that pro-
vide data, other evidence, or models that
could enhance the rigor of the process
by which the final regulations might be
developed.
i. Application of the AFS Income
Inclusion Rule to Multi-year Contracts
The proposed regulations clarify how
section 451(b) applies to multi-year con-
tracts. The Treasury Department and the
IRS considered two alternative approach-
es for such contracts: (i) an annualized
approach and (ii) a cumulative approach.
Under an annualized approach, for each
year under the contract a taxpayer would
compare the income included as revenue in
its AFS for that year and the gross income
recognized under the all events test for that
same year to determine its gross income
inclusion, with the proviso that the total
amount of gross income recognized under
the contract is not to exceed the total con-
tract price. In contrast, under a cumulative
approach, in each year a taxpayer would
compare the cumulative amount of revenue
included in its AFS up to and including that
year with the cumulative amount of gross
income recognized under the all events test
up to and including that year.
Example 4 of the proposed regulations,
the summary table of which is reproduced
in the first three rows of the following ta-
ble, shows the treatment of gross income
under a cumulative approach. The fourth
row in this table shows the treatment of
gross income under the annualized ap-
proach.
2018201920202021Total
Payments$25x$25x$25x$25x$100x
AFS Revenue$50x$0x$20x$30x$100x
Gross Income (cumulative)$50x$0x$25x$25x$100x
Gross Income (annualized)$50x$25x$25x$0x$100x
An annualized approach could accel-
erate the recognition of taxable income to
a greater degree than what is reflected in
revenue for AFS purposes. In this example,
such an approach would ignore in 2019 the
fact that cumulative AFS revenue of $50x
had been recognized as taxable gross in-
come in 2018. Accordingly, the annualized
approach would require that an additional
$25x of income be recognized in 2019,
since a payment of that amount was re-
ceived in that year. In effect, an annualized
approach would accelerate the recognition
of $25x from 2021 to 2019 relative to gross
income recognition under the cumulative
AFS income inclusion rule.
The Treasury Department and IRS
concluded that the extent of acceleration
of income that may occur when using an
annualized approach would be excessive
relative to the cumulative approach when
considered against the intents and purpos-
es of the statute. The proposed regulations
therefore adopt the cumulative approach.
ii. Applicable Financial Statement
covering a group of entities
The proposed regulations provide rules
for taxpayers whose financial results are
included on an AFS covering a group of
entities. These rules specify that, if a tax-
payer’s financial results are reported on
the AFS for a group of entities, the tax-
payer’s AFS is the group’s AFS. Howev-
er, if the taxpayer also reports financial
results on a separate AFS that is of equal
or higher priority, then the separate AFS is
the taxpayer’s AFS. The rules also spec-
ify how a taxpayer using a group AFS is
to determine the amount of revenue allo-
cated to the taxpayer. The Treasury De-
partment and the IRS considered as an
alternative not providing substantive rules
on how taxpayers should apply the AFS
income inclusion rule when their financial
results are included in an AFS for a group
of entities. This alternative was rejected
because it would have increased compli-
ance burdens and potentially led to simi-
larly situated taxpayers applying the AFS
income inclusion rule differently.
The Code does not specify how the
AFS income inclusion rule is to function
whenever the AFS accounting period and
the taxable year do not coincide. The pro-
posed regulations do not adopt a single,
one-size-fits-all approach, but rather pro-
vide taxpayers three separate options for
addressing this situation. A change from
one option to another, however, would
be considered a change in method of ac-
counting requiring the permission of the
IRS. By providing taxpayers with sever-
al options, the proposed regulations will
minimize taxpayer compliance costs when
dealing with non-congruent tax and finan-
cial accounting periods relative to an al-
ternative approach of specifying a single
option, with no significant revenue impli-
cations or effects on economic decisions.
iii. Revenue in an AFS
The proposed regulations describe and
clarify the definition of revenue to broadly
include all items of income under section
61. Because this definition of revenue is
based on tax principles, there may be items
of revenue included in this definition that
adjust retained earnings on financial state-
ments but are not reflected in the revenue
line on such financial statements. The Trea-
sury Department and the IRS considered
and rejected a narrower definition of reve-
nue or a definition that was tied to the AFS
definition of revenue. The definition of rev-
enue advanced in the proposed regulations
is consistent with the current application of
the all events test under §1.451-1(a) and
ensures that all financial statement items
are taken into account for tax purposes.
In contrast, a narrow definition of revenue

September 23, 2019 764 Bulletin No. 2019–39
would allow, or even encourage, taxpayers
to avoid the AFS income inclusion rule by
not classifying an item as revenue on their
financial statement.
iv. Allocation of Transaction Price
Section 451(b)(4) specifies that, in the
case of a contract which contains multiple
performance obligations, the allocation of
the transaction price to each obligation is
determined using the allocation used in the
AFS. The Code, however, does not define
either transaction price or performance ob-
ligation, thus the proposed regulation de-
fines these terms. The proposed regulations
clarify that a transaction price does not in-
clude amounts collected on behalf of third
parties. Transaction price also does not in-
clude amounts that are contingent on the
occurrence or non-occurrence of a future
event. Without these exclusions, section
451(b) could be used to override other pro-
visions of the Code concerning the defini-
tion of what constitutes gross income. This
result would be at odds with the purpose of
section 451, which is not to determine the
existence or the amount of gross income,
but rather to determine the timing of its
recognition. Consequently, alternatives to
these rules were not considered here.
Amounts included in the transaction
price for an AFS are presumed to be not
contingent, unless the taxpayer demon-
strates otherwise. The Treasury Depart-
ment and the IRS project that this rule
will lead to reduced compliance burden
for taxpayers, and reduced administrative
costs for taxpayers and IRS and should
lead to fewer taxpayer disputes on this is-
sue relative to an alternative presumption
regarding possible contingent amounts.
v. Rules for certain debt instruments
Section 451(b)(2) states that the AFS
inclusion rule does not apply to items of
gross income for which a taxpayer uses a
special method of accounting provided un-
der the Code. However, the Code does not
apply this exception to special accounting
rules that apply to original issue discount
(“OID”), market discount, and certain oth-
er items with respect to debt instruments
under part V of Subchapter P of the Code.
The proposed regulations implement
this provision regarding special methods of
accounting, and clarify the effect of section
451(b) on the excepted Subchapter P rules.
The proposed regulations implement
this provision by providing a non-exhaus-
tive list of special methods of accounting,
and by clarifying how section 451(b) ap-
plies to certain credit card receivables. The
proposed regulations specifically except
from section 451(b) the timing rules for
accrued market discount on bonds and the
general OID timing rules, as well as the tim-
ing rules for OID determined with respect
to special debt instruments (contingent pay-
ment and variable rate debt instruments,
certain hedged debt instruments, and in-
flation-indexed debt instruments). Never-
theless, following the legislative history of
the Act (see Conference Report, p. 276),
the proposed regulations provide that credit
card late fees, credit card cash advance fees,
and interchange fees are subject to the AFS
income inclusion rule. The proposed reg-
ulations further specify that if these credit
card fees are subject to a taxpayer’s AFS,
they are not to be taken into account in de-
termining whether a debt instrument asso-
ciated with them has OID. Existing rules
continue to apply to these items for taxpay-
ers not possessing an AFS. The Treasury
Department and the IRS expect that this
treatment will provide a straightforward ap-
plication of section 451(b) consistent with
Congressional intent without unnecessarily
complicating OID calculations and adding
to taxpayer compliance burdens.
The Treasury Department and the IRS
considered and rejected a broader appli-
cation of the AFS income inclusion rule
to include all amounts determined under
the OID and market discount accounting
methods, even in cases where the items are
treated as discount or as an adjustment to
the yield of a debt instrument over the life
of the instrument in its AFS for financial
reporting purposes. The proposed regula-
tions do not subject these amounts to the
AFS income inclusion rule because these
special accounting methods do not gener-
ally rely on the all events test to determine
the timing of income inclusion and these
current special accounting methods pro-
vide workable income-recognition timing
rules that appropriately measure income.
The Treasury Department and the IRS ex-
pect that subjecting these items to the AFS
income inclusion rule of section 451(b)
would disrupt and complicate current tax
accounting practices with no general eco-
nomic benefit.
II. Paperwork Reduction Act
These proposed regulations do not im-
pose any additional information collection
requirements in the form of reporting,
recordkeeping requirements or third-par-
ty disclosure requirements. However,
because section 451(b) and the proposed
regulations provide methods of account-
ing affecting the timing of income inclu-
sion, the consent of the Commissioner un-
der section 446(e) is required before using
such method. The IRS expects that these
taxpayers will request this consent by fil-
ing Form 3115, Application for Change in
Accounting Method. Filing of Form 3115
(for taxpayers who are required to do so or
who elect certain methods of accounting
described in the proposed regulations) is
the sole collection of information require-
ment imposed by the statute and the pro-
posed regulations. See subsequent para-
graphs for a description of taxpayers who
would be required to change the method
of accounting under the statute and the
proposed regulations.
For purposes of the Paperwork Reduc-
tion Act, the reporting burden associated
with these collections of information will
be reflected in the IRS Form 3115 Paper-
work Reduction Act Submissions (OMB
control number 1545-0074 for individual
income tax returns; OMB control num-
ber 1545-0123 for business taxpayers).
On December 17, 2018, the Treasury De-
partment and the IRS published Revenue
Procedure 2018-60, 2018-51 IRB 1045,
which provides procedures for taxpayers
to make a change in method of accounting
to comply with section 451(b)(1)(A) and/
or (b)(4). Taxpayers are able to request
these section 451 changes using reduced
filing requirements, such as by filing a
short Form 3115, or for certain taxpayers,
by using a streamlined method change
procedure that involves not filing a Form
3115. See also the revenue procedure ac-
companying these regulations for similar
simplified method change procedures to
make a change in method of accounting to
comply with these proposed regulations.
In 2018, the IRS released and invited
comment on a draft of Form 3115 in or-
der to give members of the public the op-
portunity to benefit from certain specific

Bulletin No. 2019–39 765 September 23, 2019
provisions made to the Code. The IRS re-
ceived no comments on the forms during
the comment period. Consequently, the
IRS made the forms available in January
2019 for use by the public. The IRS notes
that Form 3115 applies to changes of ac-
counting methods generally and is there-
fore broader than section 451(b).
Additionally, proposed §1.451-3(h)
provides additional methods of accounting
that require a taxpayer to request consent
of the Commissioner under section 446(e)
before using such method. Under proposed
§1.451-3(h)(4)(iii), for a taxpayer with a
financial accounting year that is different
from its tax accounting year, a change in the
method by which the taxpayer computes its
revenue is a change in method of account-
ing. Under proposed §1.451-3(h)(5), a re-
statement of an AFS that changes the tim-
ing of which an item of income, or portion
thereof, is taken into account in revenue on
the AFS is also a change in method of ac-
counting. The Treasury Department and the
IRS expect that taxpayers will request this
consent by filing Form 3115.
For a taxpayer with an AFS required
to comply with section 451(b) and/or pro-
posed §1.451-3, a change in the taxpayer’s
revenue recognition policies for financial
accounting purposes requires the taxpayer
to seek the consent of the Commissioner
under section 446(e) to use the method for
Federal income tax purposes. See proposed
§1.451-3(l). The reporting burden associat-
ed with the collection of information for a
statement in lieu of the Form 3115 will be
reflected in the Paperwork Reduction Act
Submission associated with Revenue Pro-
cedure 2018-31, 2018-22 IRB 637 (or suc-
cessor) (OMB control number 1545-1551).
See the revenue procedure accompanying
these proposed regulations.
The current status of the Paperwork
Reduction Act submissions that will be
revised as a result of the information col-
lections in the proposed regulations is
provided in the accompanying table. As
described above, the reporting burdens as-
sociated with the information collections
in the proposed regulations are included in
the aggregated burden estimates for OMB
control numbers 1545-0074 (in the case
of individual filers of Form 3115), 1545-
0123 (in the case of business filers of Form
3115), and 1545-1551 (in the case of filers
subject to Revenue Procedure 2018-31).
The overall burden estimates associated
with the OMB control numbers below are
aggregate amounts that relate to the entire
package of forms associated with the appli-
cable OMB control number and will in the
future include, but not isolate, the estimated
burden of the tax forms that will be creat-
ed or revised as a result of the information
collections in the proposed regulations.
These numbers are therefore unrelated to
the future calculations needed to assess
the burden imposed by the proposed regu-
lations. These burdens have been reported
for other income tax regulations that rely
on the same information collections and
the Treasury Department and the IRS urge
readers to recognize that these numbers are
duplicates and to guard against overcount-
ing the burdens imposed by tax provisions
prior to the Act. No burden estimates spe-
cific to the forms affected by the proposed
regulations are currently available. The
Treasury Department and the IRS have
not estimated the burden, including that
of any new information collections, relat-
ed to the requirements under the proposed
regulations. For the OMB control numbers
discussed in the preceding paragraphs, the
Treasury Department and the IRS estimate
PRA burdens on a taxpayer-type basis rath-
er than a provision-specific basis. Those es-
timates capture both changes made by the
Act and those that arise out of discretionary
authority exercised in the proposed regula-
tions (when final) and other regulations that
affect the compliance burden for that form.
The Treasury Department and IRS re-
quest comment on all aspects of information
collection burdens related to the proposed
regulations, including estimates for how
much time it would take to comply with
the paperwork burdens described above for
each relevant form and ways for the IRS
to minimize the paperwork burden. In ad-
dition, when available, drafts of IRS forms
are posted for comment at https://apps.irs.
gov/app/picklist/list/draftTaxForms.htm.
IRS forms are available at https://www.
irs.gov/forms-instructions. Forms will not
be finalized until after they have been ap-
proved by OMB under the PRA.
Form/
Revenue Procedure
Type of Filer
OMB
Number(s)
Status
Form 3115
All other Filers (mainly trusts
and estates) (Legacy system)
1545-2070
Published in the Federal Register on 2/15/17. Public com-
ment period closed on 4/17/17.
Link: https://www.federalregister.gov/documents/2017/02/15/2017-02985/proposed-information-collec-
tion-comment-request
Business (NEW Model)1545-0123
Published in the Federal Register on 10/8/18. Public com-
ment period closed on 12/10/18.
Link: https://www.federalregister.gov/documents/2018/10/09/2018-21846/proposed-collection-comment-
request-for-forms-1065-1065-b-1066-1120-1120-c-1120-f-1120-h-1120-nd
Individual (NEW Model)1545-0074
Limited scope submission (1040 only) on 10/11/18 at OIRA
for review. Full ICR submission for all forms in 2019.
Link: https://www.reginfo.gov/public/do/PRAViewICR?ref_nbr=201808-1545-031
Revenue Procedure
2018-31
IRS Research estimates1545-1551
Published in the Federal Register on 8/31/16. Public Com-
ment period closed on 9/30/16.
Link: https://www.federalregister.gov/documents/2016/08/31/2016-20993/submission-for-omb-re-
view-comment-request

September 23, 2019 766 Bulletin No. 2019–39
D. Regulatory Flexibility Act
It is hereby certified that these regula-
tions will not have a significant economic
impact on a substantial number of small
entities within the meaning of section
601(6) of the Regulatory Flexibility Act
(5 U.S.C. chapter 6).
New section 451(b) of the Act requires
that an item of income be included in
gross income for tax purposes no later
than when the item is counted as revenue
in an applicable financial statement. This
typically moves the recognition of income
forward by a year or two compared to
previous law. These proposed regulations
provide general guidance on the rule, in-
cluding the scope of the rule, exceptions
to the rule, definitions of key terms, and
examples demonstrating applicability of
the rule.
The Treasury Department and the IRS
have estimated the number of small busi-
ness entities that may be affected by the
statute and these proposed regulations.
The statute and proposed regulations af-
fect only those business entities that (i)
use an accrual method of accounting, and
(ii) have an applicable financial state-
ment.
Regarding an accrual method of ac-
counting, many small business entities
use the cash receipts and disbursements
method of accounting (cash method), as
opposed to an accrual method, and thus
are not subject to this provision. The per-
cent of returns that use an accrual method
of accounting, by entity types and for en-
tities with gross receipts not greater than
$25 million, are shown in the accompany-
ing table.
Total returns and returns using accrual method of accounting (Taxable year 2016)
Entities with gross receipts not greater than $25 million
Entity
Total returns
(thousands)
Returns using an accrual
method of accounting
(thousands)
Percent of returns using
accrual method of
accounting
C corporations1,56770045
S corporations4,5511,14025
Partnerships3,74386023
Sole proprietors and LLCs25,5243581
All entities35,3853,0589
Source: Internal Revenue Service, Statistics of Income.
The Treasury Department and the IRS
next examined the second condition,
that only entities with an Applicable Fi-
nancial Statement (“AFS”) are affected
by the statute and the proposed regula-
tions. The Treasury Department and the
IRS do not have readily available data to
measure the prevalence of entities with
an AFS. However, Schedule M-3, which
is used to reconcile an entity’s net in-
come or loss for tax purposes with its
book income or loss, reports whether
an entity has a certified audited income
statement. Unfortunately for the current
exercise, the Schedule M-3 is required
to be filed only by entities possessing
at least $10 million of assets. Neverthe-
less, it is this population that is far more
likely to possess an AFS. Furthermore,
data are currently available only for
electronic filers.
For taxable year 2016, approximate-
ly 87 percent of accrual-method entities
filing Forms 1120, 1120-S, and 1065
with gross receipts of $25 million or less
were filers of electronic tax forms. About
11 percent, or 265,000 of these returns,
included a Schedule M-3. About 40 per-
cent of the returns with Schedule M-3, or
106,000, indicated they had a certified
audited income statement.
2
Based on the
assumption that filers of paper tax forms
have the same incidence as electronic
filers and that entities that do not file a
Schedule M-3 generally do not have an
AFS, then the Treasury Department and
the IRS estimate that roughly 122,000
(=106,000/0.87) entities with gross re-
ceipts of $25 million or less are accru-
al-method entities that have an AFS.
If 5 percent of entities that do not file a
Schedule M-3 also have an AFS then ap-
proximately 247,000 entities with gross
receipts of $25 million or less are poten-
tially affected by the proposed regula-
tions. These estimates of affected filing
entities are reproduced in the following
table.
1
Data are based on estimates from the IRS’s Research, Applied Analytics and Statistics Division using data from the Compliance Data Warehouse.

Bulletin No. 2019–39 767 September 23, 2019
Corporation and Partnership Returns Using An Accrual Method of Accounting
Taxable year 2016
(Thousands of returns)
Entities with gross receipts not greater than $25 million
E-Filed
Returns
Paper-Filed
Returns
Total
Returns
Returns2,4413612,802
Returns with a Schedule M-3265
39*374*
Returns with a Schedule M-3 and an audited income
statement
106
16*122*
Returns without a Schedule M-32,176
322*2,498*
Returns without a Schedule M-3, but with an audited
income statement
109**16**125**
Returns with an audited income statement
215**32** 247**
*Estimates are obtained by assuming paper-filed returns are similar to e-filed returns as regards the incidence of a filing entity
having a Schedule M-3 and an audited income statement.
**Estimates are obtained by assuming that 5% of returns without a Schedule M-3 have an audited income statement. This com-
pares with approximately 40% of returns with a Schedule M-3 having such a statement.
Source: Non-italic entries are estimates taken from the IRS’s Research, Applied Analytics and Statistics Division using data from
the Compliance Data Warehouse. The total number of accrual method returns of corporations and partnerships (2,802,000) differs
slightly from that reported in the earlier table (2,700,000) due to the use of different data sources for the two estimates. Italicized
entries are additional estimates obtained in the manner indicated in the table notes.
This rule would not have a significant
economic impact on small entities affect-
ed. The costs to comply with these pro-
posed regulations are not significant. Tax-
payers needing to make method changes
pursuant to section 451(b) or the proposed
regulations will be required to file a Form
3115. The Treasury Department and the
IRS have provided streamlined proce-
dures for certain taxpayers to change their
method of accounting to comply with sec-
tion 451(b), and plan to provide stream-
lined procedures for taxpayers to change
to the methods of accounting described
in these proposed regulations. See Reve-
nue Procedure 2018-60, and the revenue
procedure accompanying these regula-
tions. Under the streamlined procedures,
certain taxpayers would either complete
only a portion of the Form 3115 or would
not complete the Form 3115 at all to com-
ply with section 451(b). The streamlined
method change procedures are available
to taxpayers (other than a tax shelter) who
satisfy the gross receipts test under sec-
tion 448(c) and for taxpayers making such
a method change which results in a zero
section 481(a) adjustment. (For tax years
beginning in 2018, an entity satisfied the
gross receipts test if its average annual
gross receipts was $25 million or less. For
tax years beginning in 2019, this thresh-
old increased to $26 million or less.) In
addition, the Treasury Department and the
IRS plan to issue a streamlined procedure,
using a short Form 3115, for taxpayers
using a section 451(b) method who have
a change in their AFS for revenue recog-
nition that requires a method change for
tax purposes. See the revenue procedure
accompanying these regulations.
As noted in the revenue procedure ac-
companying these regulations, the esti-
mated cumulative annual reporting and/
or recordkeeping burden for the statutory
method changes described under OMB
control number 1545-1551, before publi-
cation of the revenue procedure, is 27,336
respondents, and a total annual reporting
and/or recordkeeping burden of 30,580
hours. The estimated annual burden per
respondent/recordkeeper under OMB con-
trol number 1545-1551 before publication
of this revenue procedure varies from 1/6
hour to 8½ hours, depending on individual
circumstances, with an estimated average
of 1¼ hours. The estimated cumulative
annual reporting and/or recordkeeping
burden for the method changes described
under OMB control number 1545-1551
after that revenue procedure is account-
ed for is 27,346 respondents, and a total
annual reporting and/or recordkeeping
burden is 31,479 hours, leaving the aver-
age reporting and recordkeeping burden
essentially unchanged. These burdens are
essentially unaffected by these proposed
regulations.
Notwithstanding this certification, the
Treasury Department and the IRS invite
comments from the public about the im-
pact of this proposed rule on small enti-
ties.
Pursuant to section 7805(f), these reg-
ulations will be submitted to the Chief
Counsel for Advocacy of the Small Busi-
ness Administration for comment on their
impact on small business.
IV. Unfunded Mandates Reform Act
Section 202 of the Unfunded Mandates
Reform Act of 1995 requires that agencies
assess anticipated costs and benefits and

September 23, 2019 768 Bulletin No. 2019–39
take certain other actions before issuing a
final rule that includes any Federal man-
date that may result in expenditures in any
one year by a state, local, or tribal govern-
ment, in the aggregate, or by the private
sector, of $100 million in 1995 dollars,
updated annually for inflation. In 2018,
that threshold is approximately $150 mil-
lion. This rule does not include any Fed-
eral mandate that may result in expendi-
tures by state, local, or tribal governments,
or by the private sector in excess of that
threshold.
V. Executive Order 13132: Federalism
Executive Order 13132 (entitled
“Federalism”) prohibits an agency from
publishing any rule that has federalism
implications if the rule either imposes
substantial, direct compliance costs on
state and local governments, and is not
required by statute, or preempts state law,
unless the agency meets the consultation
and funding requirements of section 6 of
the Executive Order. This rule does not
have federalism implications and does
not impose substantial direct compliance
costs on state and local governments or
preempt state law within the meaning of
the Executive Order.
Comments and Requests for a Public
Hearing
Before these proposed regulations are
adopted as final regulations, consideration
will be given to any comments that are
submitted timely to the IRS as prescribed
in this preamble under the “ADDRESS-
ES” heading. The Treasury Department
and the IRS request comments on all
aspects of the proposed rules. All com-
ments will be available at http://www.
regulations.gov or upon request. A public
hearing will be scheduled if requested in
writing by any person that timely submits
written comments. If a public hearing is
scheduled, notice of the date, time, and
place for the public hearing will be pub-
lished in the Federal Register.
Drafting Information
The principal author of these proposed
regulations is Charles Gorham, IRS Office
of the Associate Chief Counsel (Income
Tax and Accounting). However, other per-
sonnel from the Treasury Department and
the IRS participated in their development.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and record-
keeping requirements.
Proposed Amendments to the
Regulations
Accordingly, 26 CFR part 1 is pro-
posed to be amended as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation for
part 1 is amended by adding entries in nu-
merical order to read, in part, as follows:
Authority: 26 U.S.C. 7805 * * *
* * * * *
Section 1.451-3 also issued under 26
U.S.C. 451(b)(1)(A)(ii) and (b)(3)(C).
* * * * *
§1.446-1 [Amended]
Par. 2. Section 1.446-1 is amended by
adding “(See §1.451-1 for rules relating to
the taxable year of inclusion.)” between
the first and second sentences of para-
graph (c)(1)(ii)(A).
Par. 3. Section 1.446-2 is amended by
removing “or” at the end of paragraph (a)
(2)(i)(E), removing the period at the end
of paragraph (a)(2)(i)(F) and adding in its
place “; or” and adding paragraph (a)(2)
(i)(G).
The addition reads as follows:
§1.446-2 Method of accounting for in-
terest.
(a) * * *
(2) * * *
(i) * * *
(G) Section 1.451-3(i) (special order-
ing rule for specified fees).
* * * * *
§1.451-1 [Amended]
Par. 4. Section 1.451-1 is amended by:
a. Adding “(the all events test)” to the
end of the second sentence of para-
graph (a);
b. Redesignating paragraphs (b) through
(g) as (d) through (i); and
c. Adding new paragraphs (b) and re-
served (c).
The additions read as follows:
§1.451-1 General rule for taxable year
of inclusion.
* * * * *
(b) Special rule for timing of income
inclusion for taxpayers with an applica-
ble financial statement using an accrual
method of accounting. For the timing of
income inclusion with respect to taxpay-
ers with an applicable financial statement
using an accrual method of accounting,
see also §1.451-3.
(c) [Reserved]
* * * * *
Par. 5. Section 1.451-3 is added to read
as follows:
§1.451-3 Timing of income inclusion
for taxpayers with an applicable financial
statement using an accrual method of ac-
counting.
(a) Table of contents. This paragraph
(a) lists captioned paragraphs contained in
§1.451-3.
§1.451-3 Timing of income inclusion
for taxpayers with an applicable financial
statement using an accrual method of ac-
counting.
(a) Table of contents.
(b) General rule.
(c) Definitions.
(1) Applicable financial statement.
(i) GAAP Statements.
(ii) IFRS Statements.
(iii) Other Statements.
(iv) Additional rules for determining
priority.
(2) Equity method.
(3) Performance obligation.
(4) Revenue.
(5) Special method of accounting.
(6) Transaction price.
(d) Exceptions to the AFS income in-
clusion rule.
(e) No change in the treatment of a
transaction.
(f) No change to exclusion provisions
and non-recognition treatments.
(g) Contracts with multiple perfor-
mance obligations.
(1) In general.
(2) Example.
(h) Additional AFS issues.
(1) AFS covering groups of entities
(i) In general.
(ii) Example.
(2) Separately stated items.
(3) Non-separately stated items.

Bulletin No. 2019–39 769 September 23, 2019
(4) Computation of revenue when the
AFS covers mismatched reportable peri-
ods.
(i) In general.
(ii) Permissible methods to determine
revenue.
(iii) Method of accounting.
(5) Restatement of AFS.
(i) Special ordering rule for certain
items of income with respect to debt in-
struments
(1) In general.
(2) Specified fees.
(3) Example.
(j) Treatment of adjustments to de-
ferred revenue in an AFS
(1) In general.
(2) Example.
(k) Cumulative rule for multi-year con-
tracts.
(l) Methods of accounting
(1) In general.
(2) Transition rule for changes in meth-
od of accounting
(i) In general.
(ii) Special rules for OID.
(iii) Qualified change in method of ac-
counting.
(m) Examples.
(1) Example 1. Mismatched reportable
periods.
(2) Example 2. Provision of installa-
tion services.
(3) Example 3. Provision of goods.
(4) Example 4. Provision of services in-
cluded in AFS without deferral of advance
payments under section 451(c)(1)(B).
(5) Example 5. Provision of services
included in AFS with deferral of advance
payments under section 451(c)(1)(B).
(6) Example 6. Sale of goods with AFS
revenue adjustments.
(7) Example 7. Chargebacks.
(8) Example 8. Sale of property using a
special method of accounting.
(9) Example 9. Non-recognition provi-
sions not changed for Federal income tax
purposes.
(n) Applicability date
(1) In general.
(2) Delayed application with respect to
certain fees.
(3) Early application of this section.
(i) In general.
(ii) Certain fees.
(A) Specified credit card fees.
(B) Specified fees.
(b) General rule. If a taxpayer has an
applicable financial statement (AFS), the
all events test under §1.451-1(a) with
respect to any item of gross income, or
portion thereof, is met no later than when
that item, or portion thereof, is taken into
account as revenue in the taxpayer’s AFS
(the AFS income inclusion rule). Ex-
cept as provided in paragraph (i) of this
section for certain items of income with
respect to debt instruments, the AFS in-
come inclusion rule does not apply to any
item of gross income, or portion thereof,
when the timing of income for that item,
or portion thereof, is determined using a
special method of accounting, as defined
in paragraph (c)(5) of this section. If a
special method of accounting is used, in-
come is taken into account as prescribed
by that special method of accounting. See,
however, paragraph (d) of this section for
exceptions for taxpayers without an AFS
and income in connection with a mortgage
servicing contract.
(c) Definitions. For purposes of this
section, the following definitions apply:
(1) Applicable financial statement.
Subject to the rules in paragraph (c)(1)
(iv) of this section, applicable financial
statement (AFS) means the taxpayer’s
financial statement listed in paragraphs
(c)(1)(i) through (iii) of this section that
has the highest priority, including priori-
ty within paragraphs (c)(1)(i)(B) and (c)
(1)(ii)(B) of this section. The financial
statements are, in order of descending
priority:
(i) GAAP Statements. A financial state-
ment that is certified as being prepared in
accordance with generally accepted ac-
counting principles (GAAP) and is:
(A) A Form 10-K (or successor form),
or annual statement to shareholders, filed
with the United States Securities and Ex-
change Commission (SEC);
(B) An audited financial statement of
the taxpayer that is used for:
(1) Credit purposes;
(2) Reporting to shareholders, partners,
or other proprietors, or to beneficiaries; or
(3) Any other substantial non-tax pur-
pose; or
(C) A financial statement, other than a
tax return, filed with the Federal govern-
ment or any Federal agency, other than the
SEC or the Internal Revenue Service;
(ii) IFRS Statements. A financial state-
ment that is certified as being prepared in
accordance with international financial re-
porting standards (IFRS) and is:
(A) Filed by the taxpayer with an agen-
cy of a foreign government that is equiv-
alent to the SEC, and has reporting stan-
dards not less stringent than the standards
required by the SEC;
(B) An audited financial statement of
the taxpayer that is used for:
(1) Credit purposes;
(2) Reporting to shareholders, partners,
or other proprietors, or to beneficiaries; or
(3) Any other substantial non-tax pur-
pose; or
(C) A financial statement, other than a
tax return, filed with the Federal govern-
ment or any Federal agency, other than the
SEC or the Internal Revenue Service, or a
foreign government or agency of a foreign
government, other than an agency that is
equivalent to the SEC or the Internal Rev-
enue Service; or
(iii) Other Statements. A financial
statement, other than a tax return, filed
with the Federal government or any Fed-
eral agency, a state government or state
agency, or a self-regulatory organization
(for example, a financial statement filed
with a state agency that regulates insur-
ance companies or the Financial Industry
Regulatory Authority). Additional finan-
cial statements included in this paragraph
(c)(1)(iii) may be provided in guidance
published in the Internal Revenue Bulletin
(see §601.601(d) of this chapter).
(iv) Additional rules for determining
priority. If a taxpayer restates revenue in
an AFS prior to the date that the taxpayer
files its Federal income tax return for such
taxable year, for purposes of determining
priority, the restated AFS must be used in-
stead of the original AFS. A taxpayer with
different financial accounting and taxable
years that is required to file both annual
financial statements and periodic financial
statements covering less than a year with
a government agency must use the annual
statement filed with the agency to deter-
mine priority.
(2) Equity method. Equity method
means a method of accounting for finan-
cial accounting purposes under which an
investment is initially recorded at cost
and subsequently increased or decreased
in carrying value by the investor’s pro-

September 23, 2019 770 Bulletin No. 2019–39
portionate share of income and losses and
such income or losses are reported as sep-
arate items on the investor’s statement of
income.
(3) Performance obligation. Perfor-
mance obligation means a promise in
a contract with a customer to transfer to
the customer either a good or service, or
a combination of both, that is distinct; or
a series of distinct goods or services, or a
combination of both, that are substantially
the same and that have the same pattern of
transfer to the customer.
(4) Revenue. Revenue means all trans-
action price amounts includible in gross
income under section 61. The character-
ization of a transaction price in the AFS
is not determinative of whether it is taken
into account as revenue in a taxpayer’s
AFS. For example, any transaction price
amount that is reported as other compre-
hensive income in an AFS is taken into
account as revenue in an AFS.
(5) Special method of accounting. Spe-
cial method of accounting means a meth-
od of accounting permitted or required
under any provision of the Code, the In-
come Tax Regulations, or other guidance
published in the Internal Revenue Bulle-
tin (see §601.601(d) of this chapter) un-
der which an item of income is taken into
account in a taxable year other than the
taxable year in which the all events test
is met. See, however, paragraph (i) of this
section relating to certain items of income
with respect to debt instruments. The fol-
lowing are examples of special methods
of accounting to which the AFS income
inclusion rule generally does not apply:
(i) The crop method of accounting un-
der sections 61 and 162;
(ii) Methods of accounting provided in
sections 453 through 460;
(iii) Methods of accounting for hedg-
ing transactions under §1.446-4;
(iv) Methods of accounting for REMIC
inducement fees under §1.446-6;
(v) Methods of accounting for gain
on shares in a money market fund under
§1.446-7;
(vi) Methods of accounting for certain
rental payments under section 467;
(vii) The mark-to-market method of ac-
counting under section 475;
(viii) Timing rules for income and gain
associated with a transaction that is inte-
grated under §1.988-5, and income and
gain under the nonfunctional currency
contingent payment debt instrument rules
in §1.988-6;
(ix) Except as otherwise provided in
paragraph (i) of this section, timing rules
for original issue discount (OID) under
section 811(b)(3) or 1272 (and the regu-
lations under section 1272), income under
the contingent payment debt instrument
rules in §1.1275-4, income under the vari-
able rate debt instrument rules in §1.1275-
5, income and gain associated with a trans-
action that is integrated under §1.1275-6,
and income under the inflation-indexed
debt instrument rules in §1.1275-7;
(x) Timing rules for de minimis OID
under §1.1273-1(d) and for de minimis
market discount (as defined in section
1278(a)(2)(C));
(xi) Timing rules for accrued market
discount under sections 1276 and 1278(b);
and
(xii) Methods of accounting provided
in sections 1502 and 1503 and the regula-
tions thereunder, including the method of
accounting relating to intercompany trans-
actions under §1.1502-13.
(6) Transaction price. The transaction
price means the gross amount of consid-
eration to which a taxpayer expects to be
entitled for AFS purposes in exchange for
transferring promised goods, services, or
other property, including amounts referred
to in paragraph (i) of this section, but not
including:
(i) Amounts collected on behalf of third
parties (for example, some sales taxes)
that are otherwise not income to the tax-
payer;
(ii) Increases in consideration to which a
taxpayer’s entitlement is contingent on the
occurrence or nonoccurrence of a future
event (for example, bonuses contingent on
performance and insurance contract com-
missions contingent on renewal) for the
period in which the amount is contingent.
Amounts included in the transaction price
for AFS purposes are presumed to not be
contingent on the occurrence or nonoccur-
rence of a future event, unless, upon ex-
amination of all the facts and circumstanc-
es existing at the end of the taxable year, it
can be established to the satisfaction of the
Commissioner that the amount is contin-
gent on the occurrence or nonoccurrence
of a future event. An amount included in
the transaction price for AFS purposes
that is actually or constructively received,
that is due and payable, or for which the
taxpayer has an enforceable right to pay-
ment for performance completed to date,
however, will not be treated as contingent
on the occurrence or nonoccurrence of a
future event; or
(iii) Reductions for amounts subject to
section 461, including allowances, adjust-
ments, rebates, chargebacks, refunds, re-
wards (for example, estimated redemption
costs associated with loyalty programs),
and amounts included in costs of goods
sold.
(d) Exceptions to the AFS income in-
clusion rule. The AFS income inclusion
rule does not apply unless all of the tax-
payer’s taxable year is covered by an AFS.
In addition, the AFS income inclusion rule
does not apply to any item of income in
connection with a mortgage servicing
contract.
(e) No change in the treatment of a
transaction. Except as provided in para-
graph (i)(2) of this section, the AFS in-
come inclusion rule does not change the
treatment of a transaction for Federal
income tax purposes. The following are
examples of transactions where the treat-
ment for AFS purposes does not change
the treatment of the transaction for Feder-
al income tax purposes:
(1) A transaction treated as a lease, li-
cense, or similar transaction for Federal
income tax purposes that is treated as a
sale or financing for AFS purposes, and
vice versa;
(2) A transaction that is not required to
be marked-to-market for Federal income
tax purposes but that is marked-to-market
for AFS purposes;
(3) Asset sale and liquidation treatment
under section 336(e) or 338(h)(10);
(4) A distribution of a corporation or
the allocable share of partnership items
or an income inclusion under section 951,
951A, or 1293(a) for Federal income tax
purposes that is accounted for under the
equity method for AFS purposes;
(5) A distribution of previously taxed
earnings and profits of a foreign corpora-
tion; and
(6) A deposit or conduit payment for
Federal income tax purposes that is treat-
ed as revenue for AFS purposes.
(f) No change to exclusion provisions
and the treatment of non-recognition

Bulletin No. 2019–39 771 September 23, 2019
transactions. The AFS income inclusion
rule does not change the applicability of
any exclusion provision, or the treatment
of non-recognition transactions, in the
Code, the Income Tax Regulations, or
other guidance published in the Internal
Revenue Bulletin (see §601.601(d) of this
chapter). The following are examples of
exclusion provisions and non-recognition
transactions that are not affected by the
AFS income inclusion rule:
(1) Any non-recognition transaction,
within the meaning of section 7701(a)
(45), (for example, a liquidation described
in sections 332 and 337, an exchange de-
scribed in section 351, a distribution de-
scribed in section 355, a reorganization
described in section 368, a contribution
described in section 721, or transactions
described in sections 1031 through 1045);
and
(2) Items specifically excluded from
income under sections 101 through 140.
(g) Contracts with multiple perfor-
mance obligations—(1) In general. For
purposes of this section, if a taxpayer’s
contract with a customer has more than
one performance obligation, transaction
price is allocated to performance obliga-
tions as transaction price is allocated to
performance obligations in the taxpayer’s
AFS.
(2) Example. Taxpayer A, a manufacturer and
servicer of airplane parts, is a calendar-year accrual
method taxpayer with an AFS. In 2018, A enters into
a $100x contract to sell airplane parts and to service
those parts, as necessary, in 2018, 2019, and 2020.
For AFS purposes, A allocates $40x of the total con-
tract price to the delivery of parts in 2018, $10x to
the provision of services in 2018, $20x to the provi-
sion of services in 2019, and $30x to the provision
of services in 2020. In 2018, A delivers parts and
provides services. On its 2018 AFS, A includes the
$40x for the delivery of parts and the $10x for the
provision of services in revenue. Under paragraph
(g)(1) of this section, because the contract involves
multiple performance obligations, A must use its
transaction price AFS allocation to determine wheth-
er income from the sale of airplane parts and services
are included in revenue in its AFS for purposes of
this section. Accordingly, under the AFS income in-
clusion rule in paragraph (b) of this section, for the
$40x sale of airplane parts and the $10x provision
of services in 2018 the all events test is not met any
later than A’s 2018 taxable year.
(h) Additional AFS issues—(1) AFS
covering groups of entities—(i) In gener-
al. For purposes of this section, if a tax-
payer’s financial results are reported on
the AFS for a group of entities, the tax-
payer’s AFS is the group’s AFS. However,
if the taxpayer’s financial results are also
reported on a separate AFS that is of equal
or higher priority to the group’s AFS un-
der paragraph (c)(1) of this section, then
the taxpayer’s AFS is the separate AFS.
(ii) Example. Taxpayer B, a reseller of computers
and electronics, is a calendar-year accrual method
taxpayer. In 2018, B’s financial results are included
in its parent corporation’s consolidated Form 10-K
filed with the SEC, but it files a separate Federal in-
come tax return. Under paragraph (h)(1) of this sec-
tion, because its financial results are reported on the
AFS for its parent corporation, B must use its parent
corporation’s consolidated Form 10-K as its AFS.
Accordingly, under the AFS income inclusion rule
in paragraph (b) of this section, for the sale of com-
puters and electronics the all events test is not met
any later than when the sale is included in its parent
corporation’s consolidated Form 10-K.
(2) Separately stated items. If a group’s
AFS is treated as the taxpayer’s AFS, the
taxpayer must look to any separately stat-
ed items to determine the amount of reve-
nue allocated to the taxpayer.
(3) Non-separately stated items. If a
group’s AFS does not separately state
items, the portion of the revenue allocable
to the taxpayer is determined by relying
on the source documents that were used to
create the group’s AFS.
(4) Computation of revenue when the
AFS covers mismatched reportable peri-
ods—(i) In general. If a taxpayer’s AFS
is prepared on the basis of a financial ac-
counting year that differs from the taxpay-
er’s taxable year, the taxpayer must use
one of the permissible methods listed in
paragraph (h)(4)(ii) of this section to de-
termine revenue for purposes of the AFS
income inclusion rule.
(ii) Permissible methods to determine
revenue. For purposes of paragraph (h)
(4)(i) of this section, a taxpayer must use
one of the following methods to determine
revenue for the taxable year in order to ap-
ply the AFS income inclusion rule:
(A) The taxpayer computes revenue
by using the accounting principles used
to create its AFS to determine whether an
item would be included in revenue in an
AFS for the taxable year as if its financial
reporting period was the same as its tax-
able year, for example, by conducting an
interim closing of its books.
(B) The taxpayer computes revenue by
including a pro rata portion of the revenue
for each financial accounting year that in-
cludes any part of the taxpayer’s taxable
year. If the taxpayer’s AFS for part of the
taxable year is not available by the due
date of the return (with extension), the
taxpayer must make a reasonable estimate
of revenue for the pro rata portion of the
taxable year for which an AFS is not yet
available. See §1.451-1(a) for adjustments
after actual amounts are determined.
(C) If a taxpayer’s financial accounting
year ends five or more months after the
end of its taxable year, the taxpayer com-
putes revenue for Federal income tax pur-
poses based on the revenue reported on the
AFS prepared for the financial accounting
year ending within the taxpayer’s taxable
year. For purposes of this paragraph (h)
(4)(ii)(C), if a taxpayer uses a 52-53 week
year for financial accounting or Federal
income tax purposes, the last day of such
year shall be deemed to occur on the last
day of the calendar month ending closest
to the end of such year.
(iii) Method of accounting. A change
in the method of computing revenue un-
der this paragraph (h)(4) is a change in
method of accounting under section 446.
A taxpayer may change its method of
accounting only with the consent of the
Commissioner as required under section
446(e) and the corresponding regulations.
(5) Restatement of AFS. If a taxpayer
restates revenue on an AFS and such re-
statement changes the timing of when an
item of income, or a portion thereof, is tak-
en into account as revenue on the AFS, the
change constitutes a change in method of
accounting under section 446. A taxpayer
may change its method of accounting only
with the consent of the Commissioner
as required under section 446(e) and the
corresponding regulations. If a taxpayer
restates revenue on an AFS to correct an
error or the restatement results in a change
in the estimate of the taxpayer’s pro rata
portion of revenue under paragraph (h)(4)
(ii)(B) of this section, see §1.451-1(a).
(i) Special ordering rule for certain
items of income with respect to debt in-
struments—(1) In general. If an item of
income, or portion thereof, with respect to
a debt instrument is described in paragraph
(i)(2) of this section, the rules of this sec-
tion apply before the rules in sections 1271
through 1275 and §§1.1271-1 through
1.1275-7 (OID rules). Therefore, an item
of income, or portion thereof, described in
paragraph (i)(2) of this section may not be
taken into income later than when that item,

September 23, 2019 772 Bulletin No. 2019–39
or portion thereof, is taken into account as
revenue in the taxpayer’s AFS, regardless
of whether the timing of income inclusion
for that item is normally determined using
a special method of accounting. See also
§1.1275-2(l) for the treatment of the items
described in paragraph (i)(2) of this section
under the OID rules.
(2) Specified fees. Paragraph (i)(1) of
this section applies to fees (specified fees)
that are not treated as discount or as an
adjustment to the yield of a debt instru-
ment over the life of the instrument (such
as points) in the taxpayer’s AFS and,
but for paragraph (i) of this section and
§1.1275-2(l), would be treated as creat-
ing or increasing OID for Federal income
tax purposes. For example, the following
specified fees (specified credit card fees)
are described in this paragraph (i)(2):
(i) A payment of additional interest or
a similar charge provided with respect to
amounts that are not paid when due on a
credit card account (for example, credit
card late fees);
(ii) Amounts charged under a credit
card agreement when the cardholder uses
the credit card to conduct a cash advance
transaction (for example, credit card cash
advance fees); and
(iii) Amounts a credit or debit card
issuer is entitled to upon a purchase of
goods or services by one of its cardhold-
ers (for example, interchange fees, which
are sometimes labeled merchant discount
in certain private label credit card trans-
actions).
(3) Example. Taxpayer C, a credit card issuer, is a
calendar-year accrual method taxpayer with an AFS.
In 2019, a cardholder uses C’s credit card to purchase
$100 of merchandise from a merchant and the card-
holder earns a reward of 1% of the purchase price of
$100 ($1) as part of C’s cardholder loyalty program.
Upon purchase, C becomes entitled to an interchange
fee equal to 2% of the purchase price of $100 ($2). In
2019, C reports the $2 of interchange fees as revenue
in its AFS. C’s $2 of interchange fees is described
in paragraph (i)(2)(iii) of this section. Under para-
graph (i)(1) of this section, C must apply the rules in
this section before applying the OID rules. See also
§1.1275-2(l). Therefore, C’s $2 of interchange fees
is included in taxable income in 2019, the year it is
included as revenue in C’s AFS. Under paragraph (c)
(6)(iii) of this section, the $2 of interchange revenue
is not reduced by the $1 reward. Even if C reports
interchange fees net of rewards in its AFS for 2019
($2 of interchange fee minus $1 reward liability), un-
der paragraph (c)(6) of this section, C includes $2
of interchange revenue in taxable income in 2019.
See §§162 and 461(h) for the treatment of the reward
by C.
(j) Treatment of adjustments to de-
ferred revenue in an AFS—(1) In general.
For purposes of this section, if a taxpayer
treats an item of income as deferred reve-
nue in its AFS and writes down or adjusts
that item, or portion thereof, to an equity
account (for example, retained earnings)
or otherwise writes down or adjusts that
item of deferred revenue in a subsequent
taxable year, revenue for that subsequent
taxable year includes that item, or portion
thereof, that is written down or adjusted.
(2) Example. Taxpayer D, a remanufacturer of in-
dustrial equipment, is a calendar-year accrual method
taxpayer with an AFS. In 2018, D enters into a con-
tract with a customer to remanufacture equipment in
2019 and 2020 for $100x. The contract is not a long-
term contract under section 460. In its 2018 AFS, D
treats the $100x as deferred revenue. In 2019, all the
stock of D is acquired by an unrelated third party. In its
2019 AFS, D adjusts deferred revenue to $90x (the ex-
pected cost to provide the services) by charging $10x
($100x - $90x = $10x) to retained earnings. In its 2019
AFS, D includes $50x of the $90x of deferred reve-
nue in revenue. Under paragraph (j)(1) of this section,
D’s adjustment to deferred revenue in 2019 is treated
as revenue under paragraph (c)(4) of this section in
2019. Therefore, under the AFS income inclusion rule
in paragraph (b) of this section, D is treated as includ-
ing $60x ($50x + $10x = $60x) in revenue in its 2019
AFS, and the all events test is met for that $60x no
later than D’s 2019 taxable year.
(k) Cumulative rule for multi-year con-
tracts. In the case of a multi-year contract,
a taxpayer must take into account the cu-
mulative amounts included in income in
prior taxable years on the contract, if any,
in order to determine the amount to be
included for the taxable years remaining
in the contract. For purposes of this para-
graph (k), multi-year contract means a
contract that spans more than one taxable
year.
(l) Methods of accounting—(1) In
general. A change in the method of rec-
ognizing revenue in an AFS that changes
or could change the timing of the rec-
ognition of income for Federal income
tax purposes is a change in method of
accounting under section 446. A taxpay-
er may change its method of accounting
only with the consent of the Commission-
er as required under section 446(e) and
the corresponding regulations. Accord-
ingly, a taxpayer that changes the method
of accounting used to recognize revenue
in its AFS is required to secure consent of
the Commissioner before computing in-
come using this new method for Federal
income tax purposes.
(2) Transition rule for changes in meth-
od of accounting—(i) In general. Except
as provided in paragraph (l)(2)(ii) of this
section, a taxpayer that makes a quali-
fied change in method of accounting for
the taxpayer’s first taxable year begin-
ning after December 31, 2017, is treated
as making a change in method initiated
by the taxpayer for purposes of section
481(a)(2). A taxpayer obtains the consent
of the Commissioner to make a qualified
change in method of accounting by using
the applicable administrative procedures
that govern voluntary automatic changes
in method of accounting under section
446(e). See section §1.446-1(e)(3).
(ii) Special rules for OID and speci-
fied fees. The rules of paragraph (l)(2)(i)
of this section apply to a qualified change
in method of accounting required under
section 451(b) and paragraph (i) of this
section for the taxpayer’s first taxable
year beginning after December 31, 2018,
if the change relates to a specified cred-
it card fee (as defined in paragraph (i)(2)
of this section). The rules of paragraph (l)
(2)(i) of this section apply to a qualified
change in method of accounting required
under section 451(b) and paragraph (i) of
this section for the taxpayer’s first taxable
year beginning one year after the date the
Treasury decision adopting these regula-
tions as final is published in the Federal
Register, if the change relates to a speci-
fied fee (as defined in paragraph (i)(2) of
this section) other than a specified credit
card fee. For purposes of this paragraph
(l)(2)(ii), the section 481(a) adjustment
period for any adjustment under section
481(a) for a qualified change in method of
accounting required under section 451(b)
and paragraph (i) of this section is six tax-
able years.
(iii) Qualified change in method of ac-
counting. For purposes of paragraph (l)
(2) of this section, a qualified change in
method of accounting means any change
in method of accounting that is required
by section 13221 of the Tax Cuts and Jobs
Act, Public Law No. 115-97 (131 Stat.
2054) (TCJA), or was prohibited under
the Internal Revenue Code of 1986 prior
to TCJA section 13221 and is now permit-
ted as a result of TCJA section 13221.
(m) Examples. The following examples
illustrate the provisions of this section:

Bulletin No. 2019–39 773 September 23, 2019
(1) Example 1. Mismatched reportable periods.
Taxpayer A is a calendar-year accrual method tax-
payer with an AFS. For AFS purposes, A’s financial
results are reported on a June 30 fiscal year. Using
the method described in paragraph (h)(4)(ii)(A) of
this section, for the taxable year 2018, A uses the fi-
nancial results reported on its June 30, 2018, AFS
to determine whether an item of income was taken
into account as revenue in A’s AFS from January 1,
2018, through June 30, 2018, and uses its June 30,
2019, AFS to determine whether an item of income
is taken into account as revenue in A’s AFS from July
1, 2018, through December 31, 2018.
(2) Example 2. Provision of installation services.
Taxpayer B is a calendar-year accrual method tax-
payer with an AFS. In 2018, B enters into a contract
with a customer to provide manufacturing equipment
installation services for $100,000. Throughout the
contract, the customer retains control of the equip-
ment. B has an enforceable right to payment for ser-
vices partially performed. The contract is not a long-
term contract under section 460. B begins providing
the installation services in 2018 and completes the
installation services in 2019. Under the contract, B
bills the customer $50,000 in 2018 when installation
begins. B includes $60,000 in revenue in its 2018
AFS and $40,000 in revenue in its 2019 AFS. Un-
der the AFS income inclusion rule in paragraph (b)
of this section, because $60,000 of revenue from the
installation services is included in B’s 2018 AFS, the
all events test for that $60,000 of income is met in
B’s 2018 taxable year.
(3) Example 3. Provision of goods. Taxpayer C is
a calendar-year accrual method taxpayer with an AFS.
In 2018, C enters into a contract with a customer to
provide 50 customized computers for $80,000. Under
the contract, C can bill $80,000 after the customer ac-
cepts delivery of the computers. However, because of
the customization, the contract provides that C can be
paid for work performed to date, even if the contract
is not completed for reasons other than C’s failure to
perform. C delivers all of the computers in 2018. Cus-
tomer accepts delivery of the computers and C bills
the customer in 2019. C includes all $80,000 in reve-
nue in its 2018 AFS. Under the AFS income inclusion
rule in paragraph (b) of this section, because $80,000
of revenue from the provision of goods is included in
C’s 2018 AFS, the all events test for that $80,000 of
income is met in C’s 2018 taxable year. Under para-
graph (c)(6)(ii) of this section, the limitation on C’s
ability to bill until after the customer accepts delivery
of the computers is not a future event that restricts C’s
enforceable right to payment for the goods.
(4) Example 4. Provision of services included
in AFS without deferral of advance payments under
section 451(c)(1)(B). Taxpayer D, an engineering
services provider, is a calendar-year accrual meth-
od taxpayer with an AFS. In 2018, D enters into
a contract with a customer to provide services for
four years for a total of $100x. Under the contract,
D receives $25x each year of the contract. D does
not elect to defer advance payments under section
451(c)(1)(B). For AFS purposes, D reports $50x,
$0, $20x, and $30x of revenue from the contract
in 2018, 2019, 2020, and 2021, respectively. Under
paragraph (g)(1) of this section, the allocation of the
transaction price in D’s AFS is used to determine
when all or part of that item is taken into account
for purposes of paragraph (b) of this section. In
2018, D includes all of the $25x payment in income
from the contract under the all events test. In addi-
tion, under paragraph (b) of this section, because
$50x of revenue from the provision of services is
included in D’s 2018 AFS, the all events test for
that portion of the provision of services is not met
later than D’s 2018 taxable year. Therefore, D must
include the additional $25x ($50x – $25x = $25x)
reported on the AFS as income in 2018. In 2019,
under paragraph (k) of this section, D includes $0
of the $25x payment in income from the contract
because the payment received in 2019 relates to
income included in 2018. In 2020, D includes all
of the $25x payment in income from the contract
under the all events test. In 2021, D includes the
remaining $25x payment in income under the con-
tract under the all events test. This example is sum-
marized in the table below:
2018201920202021Total
Payments$25x$25x$25x$25x$100x
AFS Revenue$50x$0$20x$30x$100x
Income$50x$0$25x$25x$100x
(5) Example 5. Provision of services included in
AFS with deferral of advance payments under sec-
tion 451(c)(1)(B). The facts are the same as in Ex-
ample 4 in paragraph (m)(4) of this section, except
D elects to defer advance payments under section
451(c)(1)(B). Under paragraph (g)(1) of this section,
the allocation of the transaction price in D’s AFS is
used to determine when all or part of that item is tak-
en into account for purposes of paragraph (b) of this
section. In 2018, D includes all of the $25x payment
in income from the contract under the all events test.
In addition, under paragraph (b) of this section, be-
cause $50x of revenue from the provision of services
is included in D’s 2018 AFS, the all events test for
that portion of the provision of services is not met
later than D’s 2018 taxable year. Therefore, D must
include an additional $25x ($50x – $25x = $25x)
of income in 2018. In 2019, under paragraph (k) of
this section, D includes $0 of the $25x payment in
income from the contract because the payment re-
ceived in 2019 relates to income included in 2018.
In 2020, D includes $20x of the $25x payment in
income from the contract under the deferral method
for advance payments under section 451(c)(1)(B). In
2021, D includes the $5x that was deferred in 2020
under the deferral method for advance payments
under section 451(c)(1)(B) and the remaining $25x
payment in income under the contract under the all
events test. This example is summarized in the table
below:
2018201920202021Total
Payments$25x$25x$25x$25x$100x
AFS Revenue$50x$0$20x$30x$100x
Income$50x$0$20x$30x$100x
(6) Example 6. Sale of goods with AFS revenue
adjustments. Taxpayer E, a manufacturer of auto-
mobile parts, is a calendar-year accrual method
taxpayer with an AFS. E normally sells parts for
$10 per part with a 2% bonus if the parts are de-
livered on time. Traditionally, 5% of parts sold are
returned. In 2018, E enters a contract to sell 1,000
parts to a customer for $10 per part, for a total of
$10,000 (1,000 x $10 = $10,000). The contract also
provides that E will receive a 2% bonus if it delivers
all the parts to the customer by February 1, 2019. E
delivers 500 parts to the customer on December 31,
2018. On December 31, 2018, the additional 500
parts were scheduled for shipment to the customer
on January 4, 2019. For AFS purposes, E expects to
earn the 2% bonus and to have 5% of the parts re-
turned. In its 2018 AFS, E reports $4,850 ($5,000 +
$100 - $250 = $4,850) of revenue from the contract,
including a $100 (2% x $5,000 = $100) adjustment
for the expected bonus and a $250 (5% x $5,000
= $250) adjustment for anticipated returns. Under
paragraph (c)(6)(iii) of this section, E’s transac-
tion price does not include anticipated returns. See
§1.461-4(g)(3) for rules on when the return liability
is incurred. Under paragraph (c)(6)(ii) of this sec-
tion, the performance bonus is presumed not to be
contingent on the occurrence or nonoccurrence of
a future event. However, at the end of the year, all
parts have yet to be delivered within the February 1,
2019 deadline. Under the contract, E has no right to
payment of the bonus at the end of the year. There-
fore, the presumption is rebutted. In addition, under
paragraph (g)(1) of this section, the allocation of
the transaction price in E’s AFS is used to deter-
mine when all or part of that item is taken into ac-
count for purposes of paragraph (b) of this section.
Accordingly, under paragraph (b) of this section,
because $5,000 of revenue from the sale of parts is
taken into account in E’s 2018 AFS, the all events

September 23, 2019 774 Bulletin No. 2019–39
test for $5,000 of income allocated to those parts is
met in E’s 2018 taxable year.
(7) Example 7. Chargebacks. Taxpayer F, a
manufacturer of pharmaceuticals, is a calendar-year
accrual method taxpayer with an AFS. In addition
to billing the wholesaler for the sale of the pharma-
ceutical at the wholesale acquisition cost under the
contract, F generally credits or pays wholesalers a
chargeback of 40% of the wholesale acquisition cost
for sales made by those wholesalers to qualifying
customers. In 2018, F enters into a contract to sell
1,000 units to W, a wholesaler, for $10 per unit, to-
taling $10,000 (1,000 x $10 = $10,000). The contract
also provides that F will issue a 40% chargeback for
sales by W to certain qualifying customers. F deliv-
ers 600 units to W on December 31, 2018, and bills
W $6,000 under the contract. For AFS purposes,
F adjusts its revenue by 40% for all sales to W for
anticipated chargebacks. As such, in its 2018 AFS,
F reports $3,600 ($6,000 - $2,400 = $3,600) of rev-
enue from the contract with W, decreasing revenue
by $2,400 (40% x $6,000 = $2,400) for anticipated
chargeback claims. For Federal income tax purposes,
under paragraph (c)(6)(iii) of this section, F’s 2018
revenue is $6,000 because F’s revenue is not reduced
for anticipated chargebacks.
(8) Example 8. Sale of property using a special
method of accounting. Taxpayer G, a provider of
financial services, is a calendar-year accrual meth-
od taxpayer with an AFS. In 2018, G sells a build-
ing for $100x, payable in five annual payments of
$20x starting in 2018. In its 2018 AFS, G reports
all $100x of revenue from the sale of the building.
For Federal income tax purposes, G uses the install-
ment method under section 453 for the sale of the
building. Under paragraph (c)(5) of this section, the
installment method under section 453 is a special
method of accounting because it requires income
to be taken into account in a taxable year other than
the taxable year in which the all events test is met.
Therefore, under paragraph (b) of this section, this
section does not apply to G’s sale of the building
because it is using a special method of accounting
and the income is taken into account as prescribed
in section 453.
(9) Example 9. Non-recognition provisions not
changed for Federal income tax purposes. Taxpayer
H (Distributing) is a calendar-year accrual method
C corporation with an AFS. On December 31, 2018,
Distributing (i) contributes assets to a wholly owned
subsidiary (Controlled) in exchange for Controlled
stock and $100x, and (ii) distributes all of Con-
trolled’s stock pro rata to its shareholders. The trans-
action qualifies as a reorganization under section
368(a)(1)(D) and a distribution to which section 355
applies (D reorganization). Distributing’s realized
gain on the transferred assets for book and tax pur-
poses is $150x. On January 15, 2019, in pursuance
of the plan of reorganization, Distributing distributes
the $100x to its shareholders. Consequently, no gain
to Distributing is recognized under section 361(b)(1)
(A). On Distributing’s 2018 AFS, Distributing rec-
ognizes revenue of $150x related to the D reorgani-
zation. Under paragraph (f) of this section, nothing
in section 451(b) or this section changes the applica-
bility of any deferral, non-recognition, or exclusion
provision of the Code, the Income Tax Regulations,
or other guidance published in the Internal Revenue
Bulletin. Section 361 provides that Distributing does
not recognize any gain from the D reorganization.
Pursuant to paragraph (f) of this section, nothing in
section 451(b) or this section would change the result
that Distributing does not recognize gain on Distrib-
uting’s (i) contribution of assets to Controlled, (ii)
receipt of Controlled stock and cash, and (iii) distri-
bution of Controlled stock and cash to Distributing’s
shareholders.
(10) Example 10. Insurance contract renewals.
The taxpayer, an insurance agent, is engaged by an
insurance carrier to sell insurance. By written bind-
ing contract between the taxpayer and the insurance
carrier, the taxpayer is entitled to receive a $50
commission from the insurance carrier at the time
a policy is sold to a customer. The written binding
contract also provides that the taxpayer is entitled
to receive an additional $25 commission each time
a policy is renewed. The taxpayer sells 1,000 one-
year policies in year one, of which 800 are renewed
in year two and 700 are renewed in year three. The
taxpayer does not have any ongoing obligation to
provide additional services to the insurance carrier
or the customers after the initial sale of the policy.
The taxpayer includes $86,000 in revenue in its AFS
for year one, which includes $50,000 of consider-
ation for policies sold in year one and an estimate of
$36,000 of consideration for the policies expected
to be renewed in years two and three. Under para-
graph (c)(6)(ii) of this section, because the taxpayer
is able to demonstrate by written binding contract
that the amounts related to future insurance contract
renewals are contingent on the occurrence of a fu-
ture event (that is the customer contract renewal),
the taxpayer’s transaction price from commissions
is $50,000 ($50 * 1,000) in year one, $20,000 ($25
* 800) in year two, and $17,500 ($25 * 700) in year
three.
(n) Applicability date—(1) In general.
Except as provided in paragraph (n)(2)
of this section, these regulations are pro-
posed to apply for taxable years beginning
after the date the Treasury decision adopt-
ing these regulations as final is published
in the Federal Register.
(2) Delayed application with respect
to certain fees. Notwithstanding para-
graph (n)(1) of this section, paragraph (i)
(2) of this section is proposed to apply
to specified fees (as defined in paragraph
(i)(2) of this section) other than specified
credit card fees (as defined in paragraph
(i)(2) of this section) for taxable years
beginning one year after the date the
Treasury decision adopting these regula-
tions as final is published in the Federal
Register.
(3) Early application of this section—
(i) In general. Except as provided in para-
graph (n)(3)(ii) of this section, until the
date the Treasury decision adopting these
regulations as final regulations is pub-
lished in the Federal Register, a taxpayer
may rely on these proposed regulations for
taxable years beginning after December
31, 2017, if the taxpayer applies all the ap-
plicable rules contained in these proposed
regulations (other than those applicable to
specified fees), and consistently applies
these proposed regulations to all items of
income during the taxable year (other than
specified fees).
(ii) Certain fees—(A) Specified credit
card fees. Until the date the Treasury de-
cision adopting these regulations as final
regulations is published in the Federal
Register, in the case of a specified cred-
it card fee, a taxpayer may rely on these
proposed regulations for taxable years
beginning after December 31, 2018, if the
taxpayer applies all the applicable rules
contained in these proposed regulations
for a specified credit card fee, and consis-
tently applies these proposed regulations
to all items of income during the taxable
year (other than specified fees that are not
specified credit card fees).
(B) Specified fees. Paragraph (n)(3)(i)
of this section does not apply to specified
fees that are not specified credit card fees.
Par. 6. Section 1.1275-2 is amended by
adding paragraph (l) to read as follows:
§1.1275-2 Special rules relating to
debt instruments.
* * * * *
(l) OID rule for income item subject to
section 451(b)—(1) In general. Notwith-
standing any other rule in sections 1271
through 1275 and §§1.1271-1 through
1.1275-7, if, and to the extent, a taxpay-
er’s item of income with respect to a debt
instrument is subject to the timing rules
in §1.451-3(i) (including credit card late
fees, credit card cash advance fees, or in-
terchange fees), then the taxpayer does not
take the item into account to determine
whether the debt instrument has any OID.
As a result, the taxpayer does not treat the
item as creating or increasing any OID on
the debt instrument.
(2) Applicability dates—(i) In general.
Except as provided in paragraphs (l)(2)
(ii) and (iii) of this section, paragraph (l)
(1) of this section applies for taxable years
beginning after the date the Treasury deci-
sion adopting these regulations as final is
published in the Federal Register.

Bulletin No. 2019–39 775 September 23, 2019
(ii) Early adoption. Until the date the
Treasury decision adopting these regula-
tions as final regulations is published in
the Federal Register, a taxpayer may rely
on these proposed regulations for taxable
years beginning after December 31, 2018,
for a specified credit card fee as defined
in §1.451-3(i)(2), if applied consistently
to all specified credit card fees subject to
§1.451-3(i).
(iii) Applicability date for purposes of
accounting method changes. Paragraph
(l)(1) of this section will not apply for
purposes of applying section 13221(e) of
the Tax Cuts and Jobs Act, Public Law
No. 115-97 (131 Stat. 2054) to determine
the section 481(a) adjustment period
for any adjustment under section 481(a)
for a qualified change in method of ac-
counting required under section 451(b)
and §1.451-3(i) for the items subject to
§1.451-3(i).
Kirsten Wielobob,
Deputy Commissioner for Services
and Enforcement.
(Filed by the Office of the Federal Register on Sep-
tember 5, 2019, 4:15 p.m., and published in the issue
of the Federal Register for September 9, 2019, 84
F.R. 47191)

Bulletin No. 2019–39 i September 23, 2019
Definition of Terms
Revenue rulings and revenue procedures
(hereinafter referred to as “rulings”) that
have an effect on previous rulings use the
following defined terms to describe the
effect:
Amplified describes a situation where
no change is being made in a prior pub-
lished position, but the prior position is
being extended to apply to a variation of
the fact situation set forth therein. Thus, if
an earlier ruling held that a principle ap-
plied to A, and the new ruling holds that
the same principle also applies to B, the
earlier ruling is amplified. (Compare with
modified, below).
Clarified is used in those instances
where the language in a prior ruling is be-
ing made clear because the language has
caused, or may cause, some confusion. It
is not used where a position in a prior rul-
ing is being changed.
Distinguished describes a situation
where a ruling mentions a previously pub-
lished ruling and points out an essential
difference between them.
Modified is used where the substance
of a previously published position is being
changed. Thus, if a prior ruling held that a
principle applied to A but not to B, and the
new ruling holds that it applies to both A
and B, the prior ruling is modified because
it corrects a published position. (Compare
with amplified and clarified, above).
Obsoleted describes a previously pub-
lished ruling that is not considered deter-
minative with respect to future transactions.
This term is most commonly used in a ruling
that lists previously published rulings that
are obsoleted because of changes in laws or
regulations. A ruling may also be obsoleted
because the substance has been included in
regulations subsequently adopted.
Revoked describes situations where the
position in the previously published ruling
is not correct and the correct position is
being stated in a new ruling.
Superseded describes a situation where
the new ruling does nothing more than
restate the substance and situation of a
previously published ruling (or rulings).
Thus, the term is used to republish under
the 1986 Code and regulations the same
position published under the 1939 Code
and regulations. The term is also used
when it is desired to republish in a single
ruling a series of situations, names, etc.,
that were previously published over a
period of time in separate rulings. If the
new ruling does more than restate the sub-
stance of a prior ruling, a combination of
terms is used. For example, modified and
superseded describes a situation where the
substance of a previously published ruling
is being changed in part and is continued
without change in part and it is desired to
restate the valid portion of the previous-
ly published ruling in a new ruling that is
self contained. In this case, the previously
published ruling is first modified and then,
as modified, is superseded.
Supplemented is used in situations in
which a list, such as a list of the names of
countries, is published in a ruling and that
list is expanded by adding further names
in subsequent rulings. After the original
ruling has been supplemented several
times, a new ruling may be published that
includes the list in the original ruling and
the additions, and supersedes all prior rul-
ings in the series.
Suspended is used in rare situations to
show that the previous published rulings
will not be applied pending some future
action such as the issuance of new or
amended regulations, the outcome of cas-
es in litigation, or the outcome of a Ser-
vice study.
Abbreviations
The following abbreviations in current use
and formerly used will appear in material
published in the Bulletin.
A—Individual.
Acq.—Acquiescence.
B—Individual.
BE—Beneficiary.
BK—Bank.
B.T.A.—Board of Tax Appeals.
C—Individual.
C.B.—Cumulative Bulletin.
CFR—Code of Federal Regulations.
CI—City.
COOP—Cooperative.
Ct.D.—Court Decision.
CY—County.
D—Decedent.
DC—Dummy Corporation.
DE—Donee.
Del. Order—Delegation Order.
DISC—Domestic International Sales Corporation.
DR—Donor.
E—Estate.
EE—Employee.
E.O.—Executive Order.
ER—Employer.
ERISA—Employee Retirement Income Security Act.
EX—Executor.
F—Fiduciary.
FC—Foreign Country.
FICA—Federal Insurance Contributions Act.
FISC—Foreign International Sales Company.
FPH—Foreign Personal Holding Company.
F.R.—Federal Register.
FUTA—Federal Unemployment Tax Act.
FX—Foreign corporation.
G.C.M.—Chief Counsel’s Memorandum.
GE—Grantee.
GP—General Partner.
GR—Grantor.
IC—Insurance Company.
I.R.B.—Internal Revenue Bulletin.
LE—Lessee.
LP—Limited Partner.
LR—Lessor.
M—Minor.
Nonacq.—Nonacquiescence.
O—Organization.
P—Parent Corporation.
PHC—Personal Holding Company.
PO—Possession of the U.S.
PR—Partner.
PRS—Partnership.
PTE—Prohibited Transaction Exemption.
Pub. L.—Public Law.
REIT—Real Estate Investment Trust.
Rev. Proc.—Revenue Procedure.
Rev. Rul.—Revenue Ruling.
S—Subsidiary.
S.P.R.—Statement of Procedural Rules.
Stat.—Statutes at Large.
T—Target Corporation.
T.C.—Tax Court.
T.D.—Treasury Decision.
TFE—Transferee.
TFR—Transferor.
T.I.R.—Technical Information Release.
TP—Taxpayer.
TR—Trust.
TT—Trustee.
U.S.C.—United States Code.
X—Corporation.
Y—Corporation.
Z—Corporation.

September 23, 2019 ii Bulletin No. 2019–39
Numerical Finding List
1
Bulletin 2019–39
Announcements:
2019-07, 2019-27 I.R.B. 62
2019-08, 2019-32 I.R.B. 621
Notices:
2019-12, 2019-27 I.R.B. 57
2019-40, 2019-27 I.R.B. 59
2019-41, 2019-28 I.R.B. 256
2019-42, 2019-29 I.R.B. 352
2019-27, 2019-31 I.R.B. 484
2019-43, 2019-31 I.R.B. 487
2019-24, 2019-31 I.R.B. 489
2019-45, 2019-32 I.R.B. 593
2019-48, 2019-36 I.R.B. 678
2019-46, 2019-37 I.R.B. 695
2019-49, 2019-37 I.R.B. 699
2019-50, 2019-37 I.R.B. 700
2019-47, 2019-39 I.R.B. 731
Proposed Regulations:
REG-105476-18, 2019-27 I.R.B. 63
REG-106282-18, 2019-28 I.R.B. 259
REG-101828-19, 2019-29 I.R.B. 412
REG-106877-18, 2019-30 I.R.B. 441
REG-121508-18, 2019-30 I.R.B. 456
REG-105474-18, 2019-31 I.R.B. 493
REG-118425-18, 2019-31 I.R.B. 539
REG-130700-14, 2019-36 I.R.B. 681
REG-101378-19, 2019-37 I.R.B. 702
REG-104554-18, 2019-39 I.R.B. 737
REG-104870-18, 2019-39 I.R.B. 754
Revenue Rulings:
2019-16, 2019-28 I.R.B. 96
2019-17, 2019-32 I.R.B. 583
2019-18, 2019-35 I.R.B. 668
2019-19, 2019-36 I.R.B. 674
2019-20, 2019-36 I.R.B. 675
2019-21, 2019-38 I.R.B. 708
Revenue Procedures:
2019-24, 2019-29 I.R.B. 353
2019-28, 2019-32 I.R.B. 596
2019-29, 2019-32 I.R.B. 620
2019-30, 2019-33 I.R.B. 638
2019-31, 2019-33 I.R.B. 643
2019-32, 2019-33 I.R.B. 659
2019-33, 2019-34 I.R.B. 662
2019-34, 2019-35 I.R.B. 669
2019-23, 2019-38 I.R.B. 725
2019-36, 2019-38 I.R.B. 729
2019-37, 2019-39 I.R.B. 731
Treasury Decisions:
9863, 2019-27 I.R.B. 1
9864, 2019-27 I.R.B. 6
9865, 2019-27 I.R.B. 27
9867, 2019-28 I.R.B. 98
9868, 2019-28 I.R.B. 252
9866, 2019-29 I.R.B. 261
9861, 2019-30 I.R.B. 433
9869, 2019-30 I.R.B. 438
9862, 2019-31 I.R.B. 477
9872, 2019-32 I.R.B. 585
9871, 2019-33 I.R.B. 624
9873, 2019-33 I.R.B. 630
1
A cumulative list of all revenue rulings, revenue procedures, Treasury decisions, etc., published in Internal Revenue Bulletins 2018–27 through 2018–52 is in Internal Revenue Bulletin
2018–52, dated December 27, 2018.

Bulletin No. 2019–39 iii September 23, 2019
Finding List of Current Actions on
Previously Published Items
1
Bulletin 2019–39
1
A cumulative list of all revenue rulings, revenue procedures, Treasury decisions, etc., published in Internal Revenue Bulletins 2018–27 through 2018–52 is in Internal Revenue Bulletin
2018–52, dated December 27, 2018.

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