Internal Revenue Bulletin 1998-51 (PDF rendition): IRS Revenue Procedures

Preserve advance releases and the authoritative Internal Revenue Bulletin rendition; directory timestamps are file-publication metadata, not legal effective dates. HTML bulletins begin June 2003; earlier available issues require full PDF parsing. Whole bulletin rendition: numbered items are identified below; other legal material and publisher context remain included. This is not a new standalone advance release.

INCOME TAX
Rev. Rul. 98–60, page 6.
REIT impermissible tenant service income.If a REIT
receives impermissible tenant service income of one percent
or less of its total income from a property, then only the
impermissible tenant service income fails to qualify as rents
from real property. If the impermissible tenant service
income exceeds one percent, then all income derived by the
REIT from that property fails to qualify as rents from real
property.
Rev. Rul. 98–61, page 8.
Interest rates; underpayments and overpayments.The
rate of interest determined under section 6621 of the Code
for the calendar quarter beginning January 1, 1999, will be
7 percent for overpayment (6 percent in the case of a cor-
poration), 7 percent for underpayments, and 9 percent for
large corporate underpayments. The rate of interest paid on
the portion of a corporate overpayment exceeding $10,000
is 4.5 percent.
Rev. Rul. 98–62, page 4.
LIFO; price indexes; department stores.The October
1998 Bureau of Labor Statistics price indexes are accepted
for use by department stores employing the retail inventory
and last-in, first-out inventory methods for valuing inventories
for tax years ended on, or with reference to, October 31,
1998.
EXEMPT ORGANIZATIONS
Announcement 98–112, page 46.
A list is given of organizations now classified as private foun-
dations.
ADMINISTRATIVE
Rev. Proc. 98–60, page 16.
Methods of accounting; automatic consent.Proce-
dures are provided under which a taxpayer may obtain auto-
matic consent of the Commissioner to change certain meth-
ods of accounting.
Notice 98–61, page 13.
Innocent spouse equitable relief.Interim guidance is pro-
vided for taxpayers seeking equitable relief from federal tax
liability under section 6015(f) or 66(c) of the Code.
Notice 98–62, page 15.
The Service has the option of serving a continuous levy
under section 6331(h) of the Code, although no levies have
been served at this time. When such levies are served in the
future, procedures will require that they be identified as sec-
tion 6331(h) levies.
Notice 98–63, page 15.
Return preparers; identifying numbers.Individual in-
come tax return preparers are reminded that, until the Ser-
vice implements a system of providing alternative identifying
numbers, they must continue to provide their social security
numbers on returns and claims for refund prepared by them
to satisfy the identifying number requirement of section
6109 of the Code.
Announcement 98–113, page 48.
The printed version of Announcement 98–106, 1998–48
I.R.B. 9, relating to changes to codes for Roth IRAs on Form
1099–R, is corrected in its entirety.
Internal Revenue
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Bulletin No. 1998–51
December 21, 1998
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.
Department of the Treasury
Internal Revenue Service
Finding Lists begin on page 50.
IRB 1998-51 12/17/98 2:42 PM Page 1

The IRS Mission
Provide America’s taxpayers top quality service by help-
ing them understand and meet their tax responsibilities
and by applying the tax law with integrity and fairness to
all.
2
Statement of Principles
of Internal Revenue
Tax Administration
The function of the Internal Revenue Service is to adminis-
ter the Internal Revenue Code. Tax policy for raising revenue
is determined by Congress.
With this in mind, it is the duty of the Service to carry out that
policy by correctly applying the laws enacted by Congress;
to determine the reasonable meaning of various Code provi-
sions in light of the Congressional purpose in enacting them;
and to perform this work in a fair and impartial manner, with
neither a government nor a taxpayer point of view.
At the heart of administration is interpretation of the Code. It
is the responsibility of each person in the Service, charged
with the duty of interpreting the law, to try to find the true
meaning of the statutory provision and not to adopt a
strained construction in the belief that he or she is “protect-
ing the revenue.” The revenue is properly protected only
when we ascertain and apply the true meaning of the statute.
The Service also has the responsibility of applying and
administering the law in a reasonable, practical manner.
Issues should only be raised by examining officers when
they have merit, never arbitrarily or for trading purposes.
At the same time, the examining officer should never hesi-
tate to raise a meritorious issue. It is also important that
care be exercised not to raise an issue or to ask a court to
adopt a position inconsistent with an established Service
position.
Administration should be both reasonable and vigorous. It
should be conducted with as little delay as possible and
with great courtesy and considerateness. It should never
try to overreach, and should be reasonable within the
bounds of law and sound administration. It should, howev-
er, be vigorous in requiring compliance with law and it
should be relentless in its attack on unreal tax devices and
fraud.
IRB 1998-51 12/17/98 2:42 PM Page 2

The Internal Revenue Bulletin is the authoritative instrument
of the Commissioner of Internal Revenue for announcing offi-
cial 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 and may be obtained
from the Superintendent of Documents on a subscription
basis. Bulletin contents of a permanent nature are consoli-
dated semiannually into Cumulative Bulletins, which are sold
on a single-copy basis.
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 in-
ternal 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 rulings
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 pub-
lished rulings and procedures, the effect of subsequent leg-
islation, regulations, court decisions, rulings, and proce-
dures must be considered, and Service personnel and oth-
ers concerned are cautioned against reaching the same con-
clusions 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 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 Sub-
parts. Also included in this part are Bank Secrecy Act Admin-
istrative 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.
With the exception of the Notice of Proposed Rulemaking
and the disbarment and suspension list included in this part,
none of these announcements are consolidated in the Cumu-
lative Bulletins.
The first 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 first Bulletin of the succeeding semi-
annual period, respectively.
3
Introduction
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.
For sale by the Superintendent of Documents, U.S. Government Printing Office, Washington, DC 20402.
IRB 1998-51 12/17/98 2:42 PM Page 3

Section 162.—Trade or
Business Expenses
What procedures must a lawyer, handling cases
on a contingent fee basis, use to obtain automatic
consent of the Commissioner to change its method
of accounting for advances paid to clients. See Rev.
Proc. 98–60, page 16.
Section 165.—Losses
26 CFR 1.165–2: Obsolescence of nondepreciable
property.
What procedures must a taxpayer use to obtain
automatic consent of the Commissioner to change
its method of accounting for package design costs.
See Rev. Proc. 98–60, page 16.
Section 166.—Bad Debts
What procedures must a taxpayer use to obtain
automatic consent of the Commissioner to change
from the § 585 reserve method of accounting to the
§ 166 specific charge-off method. See Rev. Proc.
98–60, page 16.
Section 167.—Depreciation
26 CFR 1.167(a)–11: Depreciation based on class
lives and asset depreciation ranges for property
placed in service after December 31, 1970.
26 CFR 1.167(e)–1: Change in method.
What procedures must a taxpayer use to obtain
automatic consent of the Commissioner to change
its method of accounting for depreciation. See Rev.
Proc. 98–60, page 16.
Section 168.—Accelerated Cost
Recovery System
What procedures must a taxpayer use to obtain
automatic consent of the Commissioner to change
its method of accounting for depreciation. See Rev.
Proc. 98–60, page 16.
Section 174.—Research and
Experimental Expenditures
26 CFR 1.174–1: Research and exprimental
expenditures in general.
26 CFR 1.174–3: Treatment as expenses.
26 CFR 1.174–4: Treatment as deferred expenses.
What procedures must a taxpayer use to obtain
automatic consent of the Commissioner to change
its method of accounting for research and experi-
mental expenditures. See Rev. Proc. 98–60, page 16.
Section 197.—Amortization of
Goodwill and Other Intangibles
What procedures must a taxpayer use to obtain
automatic consent of the Commissioner to change
its method of accounting for amortization. See Rev.
Proc. 98–60, page 16.
Section 263.—Capital
Expenditures
26 CFR 1.263(a)–2: Examples of capital expenditures.
What procedures must a taxpayer use to obtain
automatic consent of the Commissioner to change
its method of accounting for package design costs.
See Rev. Proc. 98–60, page 16.
Section 263A.—Capitalization
and Inclusion in Inventory Costs
of Certain Expenses
26 CFR 1.263A–1: Uniform capitalization of costs.
What procedures must a taxpayer use to obtain
automatic consent of the Commissioner to change
its method of accounting. See Rev. Proc. 98–60,
page 16.
26 CFR 1.263A–3: Rules relating to property
acquired for resale.
What procedures must a taxpayer use to obtain
automatic consent of the Commissioner to change
its method of accounting. See Rev. Proc. 98–60,
page 16.
Section 446.—General Rule for
Methods of Accounting
26 CFR 1.446–1: General rule for methods of ac-
counting.
What procedures must a taxpayer use to obtain
automatic consent of the Commissioner to change
its method of accounting for package design costs.
See Rev. Proc. 98–60, page 16.
Section 451.—General Rule for
Taxable Year of Inclusion
What procedures must a taxpayer use to obtain au-
tomatic consent of the Commissioner to change its
method of accounting for the income from an advance
payment related to the sale of a multi-year service
warranty contract. See Rev. Proc. 98–60, page 16.
Section 454.—Obligations
Issued at a Discount
26 CFR 1.454–1: Obligations issued at a discount.
What procedures must a taxpayer use to obtain
automatic consent of the Commissioner to change
its method of accounting for the interest income on
Series E or EE U.S. savings bonds. See Rev. Proc.
98–60, page 16.
Section 455.—Prepaid
Subscription Income
26 CFR 1.455–6: Time and manner of making elec-
tion.
What procedures must a taxpayer use to obtain
automatic consent of the Commissioner to change
its method of accounting for prepaid subscription in-
come. See Rev. Proc. 98–60, page 16.
Section 461.—General Rule for
Taxable Year of Deduction
26 CFR 1.461–4: Economic performance.
What procedures must a taxpayer use to obtain
automatic consent of the Commissioner to change
its method of accounting. See Rev. Proc. 98–60,
page 16.
Section 471.—General Rule for
Inventories
26 CFR 1.471–1: Need for inventories.
26 CFR 1.471–2: Valuation of inventories.
26 CFR 1.471–3: Inventories at cost.
What procedures must a taxpayer use to obtain
automatic consent of the Commissioner to change
its method of accounting for certain cash discounts.
See Rev. Proc. 98–60, page 16.
Section 472.—Last-in, First-out
Inventories
26 CFR 1.472-1: Last-in, first-out inventories.
LIFO; price indexes; department
stores. The October 1998 Bureau of
Labor Statistics price indexes are ac-
cepted for use by department stores em-
ploying the retail inventory and last-in,
first-out inventory methods for valuing
inventories for tax years ended on, or with
reference to, October 31, 1998.
Rev. Rul. 98–62
The following Department Store Inven-
tory Price Indexes for October 1998 were
issued by the Bureau of Labor Statistics.
The indexes are accepted by the Internal
Revenue Service, under § 1.472–1(k) of
the Income Tax Regulations and Rev.
Proc. 86–46, 1986–2 C.B. 739, for appro-
priate application to inventories of depart-
ment stores employing the retail inven-
tory and last-in, first-out inventory
methods for tax years ended on, or with
reference to, October 31, 1998.
The Department Store Inventory Price
Indexes are prepared on a national basis
December 21, 199841998–51 I.R.B.
Part I. Rulings and Decisions Under the Internal Revenue Code of 1986
IRB 1998-51 12/17/98 2:42 PM Page 4

and include (a) 23 major groups of depart-
ments, (b) three special combinations of
the major groups - soft goods, durable
goods, and miscellaneous goods, and (c) a
store total, which covers all departments,
including some not listed separately, ex-
cept for the following: candy, food,
liquor, tobacco, and contract departments
1998–51 I.R.B.5December 21, 1998
BUREAU OF LABOR STATISTICS, DEPARTMENT STORE
INVENTORY PRICE INDEXES BY DEPARTMENT GROUPS
(January 1941 = 100, unless otherwise noted)
Percent Change
GroupsOct.Oct.from Oct.1997
19971998to Oct. 1998
1
1. Piece Goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 534.5548.92.7
2. Domestics and Draperies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 638.4637.5–0.1
3. Women’s and Children’s Shoes . . . . . . . . . . . . . . . . . . . . . . . . . . . 672.2679.2 1.0
4. Men’s Shoes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 910.2921.61.3
5. Infants’ Wear . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 615.5640.24.0
6. Women’s Underwear . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 560.1572.62.2
7. Women’s Hosiery . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 301.6308.9 2.4
8. Women’s and Girls’ Accessories . . . . . . . . . . . . . . . . . . . . . . . . . . 541.7551.61.8
9. Women’s Outerwear and Girls’ Wear. . . . . . . . . . . . . . . . . . . . . . . 431.3423.5–1.8
10. Men’s Clothing. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 625.3620.1–0.8
11. Men’s Furnishings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 601.0607.81.1
12. Boys’ Clothing and Furnishings. . . . . . . . . . . . . . . . . . . . . . . . . . . 505.9521.03.0
13. Jewelry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 995.5982.7–1.3
14. Notions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 844.4757.6–10.3
15. Toilet Articles and Drugs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 916.4946.43.3
16. Furniture and Bedding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 666.2673.71.1
17. Floor Coverings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 578.2601.03.9
18. Housewares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 812.1817.10.6
19. Major Appliances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 243.3238.3–2.1
20. Radio and Television. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74.570.6–5.2
21. Recreation and Education
2
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 108.6102.8–5.3
22. Home Improvements
2
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 132.7129.5–2.4
23. Auto Accessories
2
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107.9107.90.0
Groups 1 – 15: Soft Goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 610.1612.70.4
Groups 16 – 20: Durable Goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 463.9460.5–0.7
Groups 21 – 23: Misc. Goods
2
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 111.6107.3–3.9
Store Total
3
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 558.5556.9–0.3
1
Absence of a minus sign before percentage change in this column signifies price increase.
2
Indexes on a January 1986 = 100 base.
3
The store total index covers all departments, including some not listed separately, except for the following: candy, food, liquor, to-
bacco, and contract departments.
IRB 1998-51 12/17/98 2:42 PM Page 5

DRAFTING INFORMATION
The principal author of this revenue
ruling is Stan Michaels of the Office of
Assistant Chief Counsel (Income Tax and
Accounting). For further information re-
garding this revenue ruling, contact Mr.
Michaels on (202) 622-4970 (not a toll-
free call).
26 CFR 1.472–6: Change from LIFO inventory
method.
26 CFR 1.472–8: Dollar value method of pricing
LIFO inventories.
What procedures must a taxpayer use to obtain
automatic consent of the Commissioner to change
from the LIFO method of accounting for all its LIFO
inventory, or to change to an alternate LIFO inven-
tory method. See Rev. Proc. 98–60, page 16.
Section 475.—Mark to Market
Accounting Method for Dealers
in Securities
What procedures must a taxpayer use to obtain
automatic consent of the Commissioner to change
its method of accounting for certain mark to market
items for dealers in securities. See Rev. Proc. 98–60,
page 16.
Section 481.—Adjustments
Required by Changes in
Methods of Accounting
26 CFR 1.481–1: Adjustments in general.
26 CFR 1.481–4: Adjustments taken into account
with consent.
What procedures must a taxpayer use to obtain
automatic consent of the Commissioner to change
a method of accounting. See Rev. Proc. 98–60,
page 16.
Section 585.—Reserves for
Losses on Loans of Banks
What procedures must a taxpayer use to obtain
automatic consent of the Commissioner to change
from the § 585 reserve method of accounting to the
§ 166 specific charge-off method. See Rev. Proc.
98–60, page 16.
Section 1272.—Current
Inclusion in Income of Original
Issue Discount
26 CFR 1.1272–1: Current inclusion of OID in
income.
What procedures must a taxpayer use to obtain
automatic consent of the Commissioner to change
its method of accounting for OID income. See Rev.
Proc. 98–60, page 16.
Section 1273.—Determination
of Amount of Original Issue
Discount
26 CFR 1.1273–1: Definition of OID.
26 CFR 1.1273–2: Determination of issue price and
issue date.
What procedures must a taxpayer use to obtain
automatic consent of the Commissioner to change its
method of accounting for certain de minimisoriginal
issue discount. See Rev. Proc. 98–60, page 16.
Section 1281.—Current
Inclusion in Income of Discount
on Certain Short-term
Obligations
What procedures must a taxpayer use to obtain
automatic consent of the Commissioner to change
its method of accounting for interest income on
short-term obligations, or for stated interest on
short-term loans of cash method banks in the
Eighth Circuit. See Rev. Proc. 98–60, page 16.
Section 1363.—Effect of
Election on Corporation
What procedures must a taxpayer use to obtain
automatic consent of the Commissioner to change
its method of accounting. See Rev. Proc. 98–60,
page 16.
Section 856.—Definition of Real
Estate Investment Trust
26 CFR 1.856–1: Definition of a real estate
investment trust.
REIT impermissible tenant service
income.If a REIT receives impermissible
tenant service income equal to or less than
one percent of its total income from a
property, then only the impermissible ten-
ant service income fails to qualify as rents
from real property. If the impermissible
tenant service income exceeds one per-
cent, then all income derived by the REIT
from that property fails to qualify as rents
from real property.
Rev. Rul. 98–60
ISSUE
If a real estate investment trust (REIT)
receives “impermissible tenant service in-
come” within the meaning of § 856(d)(7)
of the Internal Revenue Code for services
rendered by the REIT to one or more ten-
ants of a multi-tenant property, in what
situations will other amounts received by
the REIT with respect to the property con-
tinue to qualify as “rents from real prop-
erty” under § 856(d)?
FACTS
Situation 1
Y, a REIT that files its returns on a cal-
endar year basis, owns a high-rise apart-
ment building, Building P. Building P
has 100 apartments, of which 95 are stan-
dard, unfurnished apartments rented on an
annual basis. The remaining five apart-
ments are guest apartments. A guest
apartment is a furnished apartment avail-
able for lease on a short-term basis to
guests of tenants. Employees of Yrender
maid service in connection with the lease
of guest apartments. Yalso provides heat
and light to all of the tenants in Building
P. Ydoes not render any other services to
the tenants of Building Por engage in any
other activity at Building Pthat could
give rise to impermissible tenant service
income.
For 1998, Yderives a total of $1,000x
from all the tenants of Building P, of
which $90xis from visitors who rented
guest apartments. Of the $90xreceived
from tenants of the guest apartments, the
amount received with respect to maid ser-
vice is $9x, which is greater than 150 per-
cent of the direct costs of Yin rendering
the service. Of the $1,000xreceived from
all the tenants, the amount paid to Yfor
heat and light is $100x($1xfor each unit,
including the guest units), which also is
greater than 150 percent of the direct
costs of Yfor providing heat and light.
The amount of rent attributable to per-
sonal property leased in connection with
the rental of each guest apartment in
Building Pfor 1998 does not exceed 15
percent of the total rent for such apart-
ment attributable to both the real property
and the personal property as provided in
§ 856(d)(1).
Situation 2
The facts are the same as those in Situ-
ation 1 except that Yderives $110xfrom
visitors who rented guest apartments. Of
the $110xreceived from tenants of the
guest apartments, the amount received
with respect to maid service is $11x,
December 21, 199861998–51 I.R.B.
IRB 1998-51 12/17/98 2:42 PM Page 6

which is greater than 150 percent of the
direct costs of Yin rendering the service.
LAW AND ANALYSIS
For an entity to qualify as a REIT, the
entity must derive at least 95 percent of its
gross income from certain sources de-
scribed in § 856(c)(2) and at least 75 per-
cent of its gross income from certain
sources described in § 856(c)(3). Rents
from real property are among the sources
described in both § 856(c)(2) and
§ 856(c)(3).
Section 856(d)(1) provides that rents
from real property include (subject to the
exclusions in § 856(d)(2)): (i) rents from
interests in real property, (ii) charges for
services customarily furnished or ren-
dered in connection with the rental of real
property (whether or not the charges are
separately stated), and (iii) rent attribut-
able to personal property that is leased
under, or in connection with, a lease of
real property, but only if the rent attribut-
able to the personal property for the tax-
able year does not exceed 15 percent of
the total rent for the year attributable to
both the real and personal property leased
under, or in connection with, the lease.
Section 856(d)(2)(C) (as modified by
the Taxpayer Relief Act of 1997) excludes
from the definition of rents from real
property any impermissible tenant service
income as defined in § 856(d)(7). Section
856(d)(7)(A) provides that impermissible
tenant service income means, with respect
to any real or personal property, any
amount received or accrued directly or in-
directly by a REIT for furnishing or ren-
dering services to the tenants of the prop-
erty or managing or operating the
property.
Section 856(d)(7)(C)(i) excludes from
impermissible tenant service income
amounts received for services furnished
or rendered, or management or operation
provided, through an independent con-
tractor from whom the REIT itself does
not derive or receive any income.
Section 856(d)(7)(C)(ii) excludes from
the definition of impermissible tenant ser-
vice income any amount that would be
excluded from unrelated business taxable
income (UBTI) under § 512(b)(3) if re-
ceived by an organization described in
§ 511(a)(2). Section 512(b)(3)(A)(i) ex-
cludes rents from real property from
UBTI. Section 1.512(b)–1(c)(5) of the
Income Tax Regulations provides, how-
ever, that payments for the occupancy of
space where services are also rendered to
the occupant are not rents from real prop-
erty. Generally, services are considered
rendered to the occupant if they are pri-
marily for the occupant’s convenience
and are other than those usually or cus-
tomarily rendered in connection with the
rental of space for occupancy only.
Under § 1.512(b)–1(c)(5), the provision
of maid service is given as an example of
a service that is considered rendered to
the occupant. Maid service provided by
an employee of a REIT is, therefore, an
impermissible tenant service that gives
rise to impermissible tenant service in-
come under § 856(d)(7). Conversely,
under § 1.512(b)–1(c)(5), the provision of
heat and light is given as an example of a
service that is not considered rendered to
the occupant. Accordingly, the provision
of heat and light by a REIT is a permissi-
ble tenant service.
Section 1.512(b)–1(c)(5) taints all pay-
ments received under a lease as other than
rents from real property where any imper-
missible tenant service is provided to the
tenant. Accordingly, a strict application
of § 1.512(b)–1(c) in the context of
§ 856(d)(7)(C)(ii) could cause all tenant
service income (that is, service income
and income from management and opera-
tions) derived under a lease to fail to qual-
ify for this exception where any imper-
missible tenant service is rendered to the
tenant. However, the legislative history
discussing § 856(d)(7) indicates that only
income attributable to impermissible ten-
ant services should be treated as imper-
missible tenant service income after the
application of § 856(d)(7)(C)(ii) (unless
§ 856(d)(7)(B) applies). H.R. Conf. Rep.
No. 105–220, 105th Cong., 1st Sess. 696
(1997) (“The value of the impermissible
servicesmay not exceed one percent of
the gross income from the property” (em-
phasis added)). Accordingly, under
§ 856(d)(7)(C)(ii), an amount attributable
to a service or activity is excluded from
impermissible tenant service income un-
less the service or activity to which that
amount relates would cause the related
rents to be treated as UBTI if received by
an organization described in § 511(a)(2).
Section 856(d)(7)(D) provides that the
amount treated as received for any service
(or management or operation) must not be
less than 150 percent of the direct cost of
the REIT in furnishing or rendering the
service (or providing the management or
operation).
Section 856(d)(7)(B) provides that, if
the amount of impermissible tenant ser-
vice income with respect to a property for
any taxable year exceeds one percent of
all amounts received or accrued during
such taxable year directly or indirectly by
the REIT with respect to the property, the
impermissible tenant service income of
the REIT with respect to the property in-
cludes all such amounts.
In Situation 1, the $9xattributable to
the impermissible tenant services ren-
dered to tenants of the guest apartments is
impermissible tenant service income
within the meaning of § 856(d)(7). Thus,
pursuant to § 856(d)(2)(C), the $9xfails
to qualify as rents from real property. Be-
cause the provision of heat and light is a
permissible tenant service, no amount at-
tributable to this service (including
amounts paid by tenants of the guest
units) is treated as impermissible tenant
service income in applying the one per-
cent de minimisrule. The $9xof imper-
missible tenant service income received
by Yfrom Building Pfor 1998 does not
exceed one percent of the $1,000xre-
ceived or accrued directly or indirectly by
Ywith respect to Building P. Therefore,
the rendering of impermissible tenant ser-
vices to tenants of the guest apartments
does not prevent otherwise qualifying
amounts received by Yfrom the tenants of
Building P(including tenants of the guest
apartments) from qualifying as rents from
real property under § 856(d), and the total
impermissible tenant service income re-
ceived with respect to Building Pis $9x.
In Situation 2, the $11xattributable to
the impermissible tenant services ren-
dered to tenants of the guest apartments is
impermissible tenant service income
within the meaning of § 856(d)(7). The
$11xof impermissible tenant service in-
come received by Yfrom Building Pfor
1998 exceeds one percent of the $1,000x
received or accrued directly or indirectly
by Ywith respect to Building P. There-
fore, all $1,000xderived by Yfrom Build-
ing Pis impermissible tenant service in-
come that, pursuant to § 856(d)(2)(C),
fails to qualify as rents from real property.
Rev. Rul. 72–353, 1972–2 C.B. 413, il-
lustrates how § 856(d)(2)(A), which ex-
1998–51 I.R.B.7December 21, 1998
IRB 1998-51 12/17/98 2:42 PM Page 7

cludes rents derived under net profit
leases from the definition of rents from
real property, is applied in a multiple ten-
ant situation. In Rev. Rul. 72–353, a
REIT leased office space in a building to
10 different tenants under separate leases.
Nine of the leases provided for a fixed-
sum rental. The tenth lease, however,
provided for a rental based on a percent-
age of the tenant’s net profits. Rev. Rul.
72–353 holds that the payments by the
tenth tenant to the REIT, which do not
qualify as rents from real property, do not
prevent amounts paid to the REIT by the
other tenants of the office building that
otherwise qualified as rents from real
property from so qualifying.
Section 856(d)(7)(B) allows a REIT to
provide a limited amount of impermissi-
ble tenant services with respect to prop-
erty without causing all of the income
from the property to fail to qualify as
rents from real property. In the case of
many of the services that Congress in-
tended to cover, it would be very difficult
to allocate the services to particular ten-
ants. Consistent with this intent,
§ 856(d)(7)(B) expressly applies on a
property-by-property basis. Conse-
quently, the one-percent limitation in that
section is applied to aggregate amounts
received with respect to a property.
Rev. Rul. 72–353, which makes a de-
termination under § 856(d)(2)(A) on a
lease-by-lease basis, is distinguishable.
Section 856(d)(2)(A) relates to contingent
rents determined by reference to any per-
son’s income or profits derived from a
property. In contrast to amounts allocable
to tenant services, the presence or absence
of contingent rents can be determined on
a lease-by-lease basis in all cases.
HOLDING
(1) In Situation 1,only the $9xattrib-
utable to the impermissible tenant ser-
vices rendered to tenants of the guest
apartments fails to qualify as rents from
real property.
(2) In Situation 2,all $1,000xof in-
come derived from Building P fails to
qualify as rents from real property.
EFFECT ON OTHER REVENUE
RULINGS
Rev. Rul. 72–353 is distinguished.
DRAFTING INFORMATION
The principal author of this revenue
ruling is Eric E. Boody of the Office of
Assistant Chief Counsel (Financial Insti-
tutions and Products). For further infor-
mation regarding this revenue ruling con-
tact Mr. Boody on (202) 622-3960 (not a
toll-free call).
Section 6621.— Determination
of Interest Rate
26 CFR 301.6621–1: Interest rate.
Interest rates; underpayments and
overpayments.The rate of interest deter-
mined under section 6621 of the Code for
the calendar quarter beginning January 1,
1999, will be 7 percent for overpayment
(6 percent in the case of a corporation),
7 percent for underpayments, and 9 per-
cent for large corporate underpayments.
The rate of interest paid on the portion of
a corporate overpayment exceeding
$10,000 is 4.5 percent.
Rev. Rul. 98–61
Section 6621 of the Internal Revenue
Code establishes the rates for interest on
tax overpayments and tax underpayments.
Under § 6621(a)(1), the overpayment rate
beginning January 1, 1999, is the sum of
the federal short-term rate plus 3 percent-
age points (2 percentage points in the case
of a corporation), except the rate for the
portion of a corporate overpayment of tax
exceeding $10,000 for a taxable period is
the sum of the federal short-term rate plus
0.5 of a percentage point for interest com-
putations made after December 31, 1994.
Under § 6621(a)(2), the underpayment
rate is the sum of the federal short-term
rate plus 3 percentage points.
Section 6621(c) provides that for pur-
poses of interest payable under § 6601 on
any large corporate underpayment, the
underpayment rate under § 6621(a)(2) is
determined by substituting “5 percentage
points” for “3 percentage points.” See §
6621(c) and § 301.6621–3 of the Regula-
tions on Procedure and Administration for
the definition of a large corporate under-
payment and for the rules for determining
the applicable date. Section 6621(c) and
§ 301.6621–3 are generally effective for
periods after December 31, 1990.
Section 6621(b)(1) provides that the
Secretary will determine the federal short-
term rate for the first month in each calen-
dar quarter.
Section 6621(b)(2)(A) provides that the
federal short-term rate determined under
§ 6621(b)(1) for any month applies during
the first calendar quarter beginning after
such month.
Section 6621(b)(2)(B) provides that in
determining the addition to tax under §
6654 for failure to pay estimated tax for
any taxable year, the federal short-term
rate that applies during the third month
following such taxable year also applies
during the first 15 days of the fourth
month following such taxable year.
Section 6621(b)(3) provides that the
federal short-term rate for any month is
the federal short-term rate determined
during such month by the Secretary in ac-
cordance with § 1274(d), rounded to the
nearest full percent (or, if a multiple of
1/2 of 1 percent, the rate is increased to
the next highest full percent).
Notice 88–59, 1988– C.B. 546, an-
nounced that, in determining the quarterly
interest rates to be used for overpayments
and underpayments of tax under § 6621,
the Internal Revenue Service will use the
federal short-term rate based on daily
compounding because that rate is most
consistent with § 6621 which, pursuant to
§ 6622, is subject to daily compounding.
Rounded to the nearest full percent, the
federal short- term rate based on daily
compounding determined during the
month of October 1998 is 4 percent. Ac-
cordingly, an overpayment rate of 7 per-
cent (6 percent in the case of a corpora-
tion) and an underpayment rate of 7
percent are established for the calendar
quarter beginning January 1, 1999. The
overpayment rate for the portion of a cor-
porate overpayment exceeding $10,000
for the calendar quarter beginning Janu-
ary 1, 1999, is 4.5 percent. The underpay-
ment rate for large corporate underpay-
ments for the calendar quarter beginning
January 1, 1999, is 9 percent. These rates
apply to amounts bearing interest during
that calendar quarter.
The 7 percent rate also applies to esti-
mated tax underpayments for the first cal-
endar quarter in 1999 and for the first 15
days in April 1999.
Interest factors for daily compound in-
December 21, 199881998–51 I.R.B.
IRB 1998-51 12/17/98 2:42 PM Page 8

terest for annual rates of 7 percent, 6 per-
cent, 4.5 percent, and 9 percent are pub-
lished in Tables 19, 17, 14, and 23 of Rev.
Proc. 95–7, 1995–1 C.B. 556, 573, 571,
568, and 577.
Annual interest rates to be compounded
daily pursuant to § 6622 that apply for
prior periods are set forth in the tables ac-
companying this revenue ruling.
DRAFTING INFORMATION
The principal author of this revenue
ruling is Raymond Bailey of the Office of
Assistant Chief Counsel (Income Tax and
Accounting). For further information re-
garding this revenue ruling, contact Mr.
Bailey on (202) 622-6226 (not a toll-free
call).
1998–51 I.R.B.9December 21, 1998
TABLE OF INTEREST RATES
PERIODS BEFORE JUL. 1, 1975 – PERIODS ENDING DEC. 31, 1986
OVERPAYMENTS AND UNDERPAYMENTS
In 1995–1 C.B.
PERIODRATEDAILY RATE TABLE
Before Jul. 1, 19756%Table 2, pg. 557
Jul. 1, 1975—Jan. 31, 19769%Table 4, pg. 559
Feb. 1, 1976—Jan. 31, 19787%Table 3, pg. 558
Feb. 1, 1978—Jan. 31, 19806%Table 2, pg. 557
Feb. 1, 1980—Jan. 31, 198212%Table 5, pg. 560
Feb. 1, 1982—Dec. 31, 198220%Table 6, pg. 560
Jan. 1, 1983—Jun. 30, 198316%Table 37, pg. 591
Jul. 1, 1983—Dec. 31, 198311%Table 27, pg. 581
Jan. 1, 1984—Jun. 30, 198411%Table 75, pg. 629
Jul. 1, 1984—Dec. 31, 198411%Table 75, pg. 629
Jan. 1, 1985—Jun. 30, 198513%Table 31, pg. 585
Jul. 1, 1985—Dec. 31, 198511%Table 27, pg. 581
Jan. 1, 1986—Jun. 30, 198610%Table 25 pg. 579
Jul. 1, 1986—Dec. 31, 19869%Table 23, pg. 577
TABLE OF INTEREST RATES
FROM JAN. 1, 1987 – Dec. 31, 1998
OVERPAYMENTSUNDERPAYMENTS
1995–1 C.B.1995–1 C.B.
RATE TABLE PGRATE TABLE PG
Jan. 1, 1987—Mar. 31, 19878%215759% 23577
Apr. 1, 1987—Jun. 30, 19878%215759% 23577
Jul. 1, 1987—Sep. 30, 19878%215759% 23577
Oct. 1, 1987—Dec. 31, 19879%2357710% 25579
Jan. 1, 1988—Mar. 31, 198810%7362711% 75629
Apr. 1, 1988—Jun. 30, 19889%7162510% 73627
Jul. 1, 1988—Sep. 30, 19889%7162510% 73627
Oct. 1, 1988—Dec. 31, 198810%7362711% 75629
Jan. 1, 1989—Mar. 31, 198910%2557911% 27581
Apr. 1, 1989—Jun. 30, 198911%27 58112% 29583
Jul. 1, 1989—Sep. 30, 198911%27 58112% 29583
Oct. 1, 1989—Dec. 31, 198910%2557911% 27581
Jan. 1, 1990—Mar. 31, 199010%2557911% 27581
Apr. 1, 1990—Jun. 30, 199010%2557911% 27581
Jul. 1, 1990—Sep. 30, 199010%2557911% 27581
Oct. 1, 1990—Dec. 31, 199010%2557911% 27581
Jan. 1, 1991—Mar. 31, 199110%2557911% 27581
IRB 1998-51 12/17/98 2:42 PM Page 9

TABLE OF INTEREST RATES (Continued)
FROM JAN. 1, 1987 – Dec. 31, 1998
OVERPAYMENTSUNDERPAYMENTS
1995–1 C.B.1995–1 C.B.
RATE TABLE PGRATE TABLE PG
Apr. 1, 1991—Jun. 30, 1991 9%2357710% 25579
Jul. 1, 1991—Sep. 30, 1991 9%2357710% 25579
Oct. 1, 1991—Dec. 31, 1991 9%2357710% 25579
Jan. 1, 1992—Mar. 31, 1992 8%69623 9% 71625
Apr. 1, 1992—Jun. 30, 1992 7%67621 8% 69623
Jul. 1, 1992—Sep. 30, 19927%67621 8%69623
Oct. 1, 1992—Dec. 31, 19926%65619 7%67621
Jan. 1, 1993—Mar. 31, 19936%17571 7%19573
Apr. 1, 1993—Jun. 30, 19936%17571 7%19573
Jul. 1, 1993—Sep. 30, 19936%17571 7%19573
Oct. 1, 1993—Dec. 31, 19936%17571 7%19573
Jan. 1, 1994—Mar. 31, 19946%17571 7%19573
Apr. 1, 1994—Jun. 30, 19946%17571 7%19573
Jul. 1, 1994—Sep. 30, 19947%19573 8%21575
Oct. 1, 1994—Dec. 31, 19948%21575 9%23577
Jan. 1, 1995—Mar. 31, 19958%21575 9%23577
Apr. 1, 1995—Jun. 30, 19959%2357710%25579
Jul. 1, 1995—Sep. 30, 19958%21575 9%23577
Oct. 1, 1995—Dec. 31, 19958%21575 9%23577
Jan. 1, 1996—Mar. 31, 19968%69623 9%71625
Apr. 1, 1996—Jun. 30, 19967%67621 8%69623
Jul. 1, 1996—Sep. 30, 19968%69623 9%71625
Oct. 1, 1996—Dec. 31, 19968%69623 9%71625
Jan. 1, 1997—Mar. 31, 19978%21575 9%23577
Apr. 1, 1997—Jun. 30, 19978%21575 9%23577
Jul. 1, 1997—Sep. 30, 19978%21575 9%23577
Oct. 1, 1997—Dec. 31, 19978%21575 9%23577
Jan. 1, 1998—Mar. 31, 19988%21575 9%23577
Apr. 1, 1998—Jun. 30, 19987%195738%21575
Jul. 1, 1998—Sep. 30, 19987%195738%21575
Oct. 1, 1998—Dec. 31, 19987%195738%21575
December 21, 1998101998–51 I.R.B.
TABLE OF INTEREST RATES
FROM JANUARY 1, 1999 – PRESENT
NONCORPORATE OVERPAYMENTS AND UNDERPAYMENTS
1995–1 C.B.
RATE TABLE PAGE
Jan. 1, 1999—Mar. 31, 1999 7% 19573
IRB 1998-51 12/17/98 2:42 PM Page 10

TABLE OF INTEREST RATES
FROM JANUARY. 1, 1999 – PRESENT
CORPORATE OVERPAYMENTS AND UNDERPAYMENTS
OVERPAYMENTSUNDERPAYMENTS
1995–1 C.B.1995–1 C.B.
RATE TABLE PGRATE TABLE PG
Jan. 1, 1999—Mar. 31, 1999 6%1757117%19573
1998–51 I.R.B.11December 21, 1998
TABLE OF INTEREST RATES FOR LARGE CORPORATE UNDERPAYMENTS
FROM JANUARY 1, 1991 – PRESENT
1995–1 C.B.
RATE TABLE PG
Jan. 1, 1991—Mar. 31, 1991 13%31 585
Apr. 1, 1991—Jun. 30, 1991 12%29 583
Jul. 1, 1991—Sep. 30, 1991 12%29 583
Oct. 1, 1991—Dec. 31, 1991 12%29 583
Jan. 1, 1992—Mar. 31, 1992 11%75 629
Apr. 1, 1992—Jun. 30, 1992 10%73 627
Jul. 1, 1992—Sep. 30, 1992 10%73 627
Oct. 1, 1992—Dec. 31, 19929%71 625
Jan. 1, 1993—Mar. 31, 19939%23 577
Apr. 1, 1993—Jun. 30, 19939%23 577
Jul. 1, 1993—Sep. 30, 19939%23 577
Oct. 1, 1993—Dec. 31, 19939%23 577
Jan. 1, 1994—Mar. 31, 19949%23 577
Apr. 1, 1994—Jun. 30, 19949%23 577
Jul. 1, 1994—Sep. 30, 1994 10%25 579
Oct. 1, 1994—Dec. 31, 1994 11%27 581
Jan. 1, 1995—Mar. 31, 1995 11%27 581
Apr. 1, 1995—Jun. 30, 1995 12%29 583
Jul. 1, 1995—Sep. 30, 1995 11%27 581
Oct. 1, 1995—Dec. 31, 1995 11%27 581
Jan. 1, 1996—Mar. 31, 1996 11%75 629
Apr. 1, 1996—Jun. 30, 1996 10%73 627
Jul. 1, 1996—Sep. 30, 1996 11%75 629
Oct. 1, 1996—Dec. 31, 1996 11%75 629
Jan. 1, 1997—Mar. 31, 1997 11%27 581
Apr. 1, 1997—Jun. 30, 1997 11%27 581
Jul. 1, 1997—Sep. 30, 1997 11%27 581
Oct. 1, 1997—Dec. 31, 1997 11%27 581
Jan. 1, 1998—Mar. 31, 1998 11%27 581
Apr. 1, 1998—Jun. 30, 199810%25 579
Jul. 1, 1998—Sep. 30, 199810%25 579
Oct. 1, 1998—Dec. 31, 199810%25 579
Jan. 1, 1999—Mar. 31, 19999%23 577
IRB 1998-51 12/17/98 2:42 PM Page 11

TABLE OF INTEREST RATES FOR CORPORATE
OVERPAYMENTS EXCEEDING $10,000
FROM JANUARY 1, 1995 – PRESENT
1995–1 C.B.
RATE TABLE PG
Jan. 1, 1995—Mar. 31, 1995 6.5% 18 572
Apr. 1, 1995—Jun. 30, 1995 7.5% 20 574
Jul. 1, 1995—Sep. 30, 1995 6.5% 18 572
Oct. 1, 1995—Dec. 31, 1995 6.5% 18 572
Jan. 1, 1996—Mar. 31, 1996 6.5% 66 620
Apr. 1, 1996—Jun. 30, 1996 5.5% 64 618
Jul. 1, 1996—Sep. 30, 1996 6.5% 66 620
Oct. 1, 1996—Dec. 31, 1996 6.5% 66 620
Jan. 1, 1997—Mar. 31, 1997 6.5% 18 572
Apr. 1, 1997—Jun. 30, 1997 6.5% 18 572
Jul. 1, 1997—Sep. 30, 1997 6.5% 18 572
Oct. 1, 1997—Dec. 31, 1997 6.5% 18 572
Jan. 1, 1998—Mar. 31, 1998 6.5% 18 572
Apr. 1, 1998—Jun. 30, 19985.5% 16 570
Jul. 1. 1998—Sep. 30, 19985.5% 16 570
Oct. 1, 1998—Dec. 31, 19985.5% 16 570
Jan. 1, 1999—Mar. 31, 19994.5% 14 568
December 21, 1998121998–51 I.R.B.
IRB 1998-51 12/17/98 2:42 PM Page 12

1998–51 I.R.B.13December 21, 1998
Interim Guidance for Equitable
Relief From Joint and Several
Liability
Notice 98–61
SECTION 1. PURPOSE
The Treasury Department and the Inter-
nal Revenue Service are in the process of
developing guidance for taxpayers seek-
ing equitable relief from federal tax liabil-
ity under § 6015(f) or 66(c) of the Internal
Revenue Code. This notice provides in-
terim guidance. The Treasury Depart-
ment and the Service also request com-
ments from the public to aid in the
development of final guidance.
SECTION 2. BACKGROUND
.01 Section 3201(a) of the Internal Rev-
enue Service Restructuring and Reform
Act of 1998, Pub. L. No. 105–206, 112
Stat.742 (RRA), enacted new § 6015,
which provides for relief in certain cir-
cumstances from joint and several liability
for tax, interest, penalties and other
amounts arising from a federal joint in-
come tax return. (Any reference here-
inafter to “tax” includes interest, penalties
and other amounts.) Sections 6015(b) and
6015(c) specify two sets of circumstances
under which relief is available. In addi-
tion, where relief is not available under §
6015(b) or 6015(c), § 6015(f) authorizes
the Secretary to grant relief if, taking into
account all the facts and circumstances, it
is inequitable to hold a taxpayer liable for
any unpaid tax or any deficiency. Section
3201(b) of RRA amended § 66(c) to add
an equitable relief provision similar to §
6015(f). Section 66(c) applies to married
individuals with community property in-
come, and provides certain conditions
under which an individual can be relieved
from separate return liability for items of
community income attributable to his or
her spouse. The enactment of § 6015 and
the amendment of § 66(c) are effective
with respect to any liability for tax arising
after July 22, 1998, and any liability for
tax arising on or before July 22, 1998, that
is unpaid on that date.
.02 Under § 6015(b), relief with re-
spect to a deficiency will be granted to an
individual if the following five conditions
are met: (1) a joint return was made; (2)
there was an understatement of tax attrib-
utable to erroneous items of the individ-
ual’s spouse; (3) in signing the return, the
individual did not know, and had no rea-
son to know, that there was an understate-
ment of tax; (4) taking into account all the
facts and circumstances, it is inequitable
to hold the individual liable for the defi-
ciency in tax; and (5) the individual elects
to apply for relief no later than two years
after the date of the Service’s first collec-
tion activity after July 22, 1998, with re-
spect to the individual. If all five condi-
tions would be met except for the fact that
the individual did not know and had no
reason to know of only a portion of the
deficiency, then the individual can be
granted relief to the extent that the liabil-
ity is attributable to such portion.
.03 Relief with respect to a deficiency
allocable to the other spouse will be
granted to an individual under § 6015(c)
if the following four conditions are met:
(1) a joint return was made; (2) at the time
relief is elected, the individual is no
longer married to, is legally separated
from, or has been living apart at all times
for at least 12 months from his or her
spouse or former spouse; (3) the individ-
ual elects to apply for relief no later than
two years after the date of the Service’s
first collection activity after July 22,
1998, with respect to the individual; and
(4) the liability remains unpaid at the time
relief is elected. Relief under § 6015(c) is
subject to several limitations. First, relief
under § 6015(c) is not available if assets
were transferred between the spouses as
part of a fraudulent scheme. Second, if an
individual has actual knowledge that an
item on a return is incorrect, relief is not
available to the extent any deficiency is
attributable to such item. Third, relief
will only be available to the extent that
the liability exceeds the value of any dis-
qualified assets transferred to the individ-
ual by the nonrequesting spouse. See
§ 6015(c)(4)(B).
.04 Section 6015 provides for relief
only from joint and several liabilities aris-
ing from a joint return. If an individual
signed a joint return involuntarily while
under duress, the signature is not valid
and a joint return was not made. The in-
dividual is not jointly and severally liable
for liabilities arising from such a return
and, therefore, § 6015 does not apply.
.05 Under both §§ 6015(b) and
6015(c), relief is limited to relief from lia-
bility for proposed or assessed deficien-
cies. Neither § 6015(b) nor § 6015(c) au-
thorizes relief from liabilities that were
properly reported on the return but not
paid. However, equitable relief under
§ 6015(f) may be available for such liabil-
ities. The legislative history of the RRA
indicates that Congress intended the Sec-
retary to exercise the equitable relief au-
thority under § 6015(f) when a spouse
“does not know, and had no reason to
know, that funds intended for the payment
of tax were instead taken by the other
spouse for such other spouse’s benefit.”
H.R. Conf. Rep. No. 599, 105th Cong., 2d
Sess. 254 (1998). Congress also intended
for the Secretary to exercise the equitable
relief authority under § 6015(f) in other
situations where, “taking into account all
the facts and circumstances, it is in-
equitable to hold an individual liable for
all or part of any unpaid tax or deficiency
arising from a joint return.” House Conf.
Rep. No. 599 at 254.
SECTION 3. INTERIM GUIDANCE
FOR EQUITABLE RELIEF UNDER
SECTION 6015(f)
This notice provides interim guidance
to taxpayers seeking equitable relief
under § 6015(f) in three areas. First, sec-
tion 3.01 of this notice provides threshold
conditions that must be satisfied in order
for an individual to be considered for re-
lief under § 6015(f). Second, section 3.02
of this notice sets forth the circumstances
in which relief under § 6015(f) will ordi-
narily be granted in the situation where an
individual did not know, and had no rea-
son to know, that funds intended for the
payment of tax were instead taken by the
spouse for the spouse’s benefit. Third, for
all other requests for relief under
§ 6015(f), and all requests for relief under
§ 66(c), section 3.03 of this notice pro-
vides a partial list of factors to be consid-
ered in determining whether it would be
inequitable to hold an individual liable for
a deficiency or unpaid liability.
.01 Eligibility to be considered for eq-
Part III. Administrative, Procedural, and Miscellaneous
IRB 1998-51 12/17/98 2:42 PM Page 13

December 21, 1998141998–51 I.R.B.
uitable relief.All the following threshold
conditions must be met for an individual
to be considered for relief under § 6015(f)
from liability for tax. These threshold
conditions apply to all requests for relief
under § 6015(f) (i.e.,those relating to lia-
bilities for deficiencies and those relating
to liabilities that were properly reported
on the return but not paid):
(1) The individual made a joint re-
turn for the taxable year for which relief is
sought;
(2) Relief is not available to the indi-
vidual under § 6015(b) or 6015(c);
(3) The individual applies for relief
no later than two years after the date of the
Service’s first collection activity after July
22, 1998, with respect to the individual;
(4) Except as provided in the next
sentence, the liability remains unpaid at
the time relief is requested. An individual
is eligible to be considered for relief in the
form of a refund of liabilities for: (a)
amounts paid on or after July 22, 1998,
and on or before April 15, 1999; and (b)
installment payments, made after July 22,
1998, pursuant to an installment agree-
ment entered into with the Service and
with respect to which an individual is not
in default, that are made after the claim
for relief is requested;
(5) No assets were transferred be-
tween the individuals filing the joint re-
turn as part of a fraudulent scheme by
such individuals;
(6) There were no disqualified assets
transferred to the individual by the nonre-
questing spouse. If there were disquali-
fied assets transferred to the individual by
the nonrequesting spouse, relief will be
available only to the extent that the liabil-
ity exceeds the value of such disqualified
assets. For this purpose, the term “dis-
qualified asset” has the meaning given
such term by § 6015(c)(4)(B); and
(7) The individual did not file the
joint return with fraudulent intent.
An individual satisfying all the above
threshold conditions may be relieved of
the liability under § 6015(f) if, taking into
account all the facts and circumstances, it
is inequitable to hold the individual liable
for all or part of a tax liability. See sec-
tion 3.02 of this notice for circumstances
under which relief will ordinarily be
granted, and section 3.03 of this notice for
factors used to determine whether to grant
equitable relief.
.02 Circumstances under which equi-
table relief will ordinarily be granted.
The following are the circumstances
under which equitable relief from tax lia-
bility for a taxable year will ordinarily be
granted to an individual requesting relief
under § 6015(f):
(1) The liability reported on a joint
return for such year was unpaid at the
time such return was filed;
(2) At the time relief is requested, the
individual is no longer married to, or is
legally separated from, the spouse with
whom such individual filed the joint re-
turn to which the request for relief relates,
or has at no time during the 12-month pe-
riod ending on the date relief is requested,
been a member of the same household as
the spouse with whom such joint return
was filed;
(3) At the time the return was filed,
the individual did not know, and had no
reason to know, that the tax would not be
paid. The individual must establish that it
was reasonable for such individual to be-
lieve that the nonrequesting spouse would
pay the reported liability. If an individual
would otherwise qualify for relief under
section 3.02 of this notice, except for the
fact that the individual did not know, and
had no reason to know, of only a portion
of the unpaid liability, then the individual
will be granted relief to the extent that the
liability is attributable to such portion;
and
(4) The individual would suffer
undue hardship if relief from the liability
were not granted. For this purpose, the
term “undue hardship” has the meaning
given to such term under § 1.6161–1(b)
of the Income Tax Regulations.
Relief under section 3.02 of this notice is
subject to the following limitations: (a) if
the return is or has been adjusted to reflect
an understatement of tax, relief will be
available only to the extent of the liability
shown on the return prior to any such ad-
justment; and (b) relief will only be avail-
able to the extent that the unpaid liability
is attributable to the nonrequesting
spouse.
.03 Factors for determining whether to
grant equitable relief.Section 3.03 of
this notice applies to married individuals
filing separate returns in community
property states who request relief under
§ 66(c), and individuals who meet the
threshold conditions of section 3.01 of
this notice but who do not qualify for re-
lief under section 3.02 of this notice.
Such individuals may qualify for relief
from tax liability for a taxable year under
§ 6015(f) or 66(c) if, taking into account
all the facts and circumstances, it is in-
equitable to hold the individual liable for
the unpaid liability or deficiency. The fol-
lowing are partial lists of the positive and
negative factors that will be taken into ac-
count in determining whether to grant eq-
uitable relief under § 6015(f) or 66(c).
The list is not intended to be exhaustive.
(1) Factors weighing in favor of re-
lief:
(a) Marital status.The individ-
ual requesting relief is separated (whether
legally separated or living apart) or di-
vorced from the nonrequesting spouse;
(b) Hardship.The individual re-
questing relief will suffer hardship if the
relief is not granted, even if such hardship
does not constitute undue hardship within
the meaning of § 1.6161-1(b);
(c) Abuse.The individual re-
questing relief was abused by his or her
spouse (but such abuse did not amount to
duress); and
(d) Spouse’s legal obligation.
The nonrequesting spouse has a legal
obligation pursuant to a divorce decree or
agreement to pay the liability.
(2) Factors weighing against relief:
(a) Attribution.If any unpaid li-
ability or item giving rise to a deficiency
is attributable to the individual requesting
relief, that is a factor weighing against re-
lief from such unpaid liability or defi-
ciency;
(b) Knowledge, or reason to
know.An individual’s knowledge or rea-
son to know of an unpaid liability or defi-
ciency is an extremely strong factor
weighing against relief. Nonetheless,
when the factors in favor of equitable re-
lief are unusually strong, it may be appro-
priate to grant relief under § 6015(f) in
limited situations where an individual
knew or had reason to know of an unpaid
liability, and in very limited situations
where an individual knew or had reason
to know of a deficiency; and
(c) Significant benefit.The indi-
vidual requesting relief has significantly
benefitted (beyond normal support) from
the unpaid liability or items giving rise to
the deficiency. See, for example,
§ 1.6013–5(b).
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(d) Individual’s legal obligation.
The individual requesting relief has a
legal obligation pursuant to a divorce de-
cree or agreement to pay the liability.
SECTION 4. REQUEST FOR
COMMENTS
The Treasury Department and the Ser-
vice invite public comment on the matters
addressed by this notice, particularly re-
garding the following specific topics: (1)
the circumstances set forth in section 3.02
of this notice under which § 6015(f) relief
will ordinarily be available; (2) the factors
set forth in section 3.03 of this notice to
be taken into account in determining
whether § 6015(f) equitable relief may be
available; (3) situations in which relief
under § 6015(f) or 66(c) should be avail-
able even though an individual knew, or
had reason to know of, a deficiency or un-
paid liability; and (4) situations in which
relief under § 6015(f) or 66(c) should be
available even though the unpaid liability
or item giving rise to the deficiency is at-
tributable to the individual requesting re-
lief. Written comments should be submit-
ted by April 30, 1999, either to:
Internal Revenue Service
P.O. Box 7604
Ben Franklin Station
Washington, DC 20044
Attn: CC:DOM:CORP:R, Room 5228
(IT&A:Br4)
or electronically via:
http://www.irs.ustreas.gov/prod/tax_re
gs/comments.html
(the Service’s Internet site).
SECTION 5. EFFECTIVE DATE
The interim guidance contained in this
notice is effective on December 7, 1998,
and may be relied upon until permanent
guidance is issued. No inference should
be made that the interim guidance con-
tained in this notice will, or will not, be
incorporated into the permanent guid-
ance.
DRAFTING INFORMATION
The principal author of this notice is
Bridget E. Finkenaur of the Office of As-
sistant Chief Counsel (Income Tax and
Accounting). For further information re-
garding this notice, contact Ms. Finkenaur
on (202) 622-4940 (not a toll-free call).
Notice 98–62
This Notice provides information about
Internal Revenue Service procedures
under section 6331(h) of the Internal Rev-
enue Code of 1986.
The Taxpayer Relief Act of 1997 added
section 6331(h) to the Code in order to
provide for a continuous levy of up to 15
percent of any “specified payment due to
or received by a taxpayer.” I.R.C.
§ 6331(h)(1). Section 6331(h)(2) defines
a specified payment as: any Federal pay-
ment other than a payment for which eli-
gibility is based on income or assets (or
both) of a payee; unemployment compen-
sation; workmen’s compensation; wages,
salary, or other income to the extent they
do not exceed minimum exemptions for
an I.R.S. levy; supplemental security in-
come for the aged, blind, and disabled
under Social Security; state or local pub-
lic welfare programs based on needs or
income; and any annuity or pension under
the Railroad Retirement Act or benefit
under the Railroad Unemployment Insur-
ance Act.
The Service has received questions as
to whether levies are currently being
served under section 6331(h). Section
6331(h) is effective for levies issued after
August 5, 1997. Section 6010(f) of the
Internal Revenue Service Restructuring
and Reform Act of 1998 clarifies that the
new continuous levy is an option for col-
lection that is exercised at the Service’s
discretion. As of this date, the Service has
no procedures for serving levies under
section 6331(h), and no such levies have
been issued. Procedures will be an-
nounced before any levies are issued
under section 6331(h).
Because section 6331(h) does not iden-
tify a format for serving a continuous
levy, there may be confusion as to
whether the levy is a continuous levy
under section 6331(h) or an ordinary form
of levy under sections 6331(a) or 6331(e).
When the continuous levy procedures are
issued, they will require that any levy in-
tended to be issued under section 6331(h)
must be clearly identified, on the face of
the levy, as a levy made pursuant to sec-
tion 6331(h). Any levy that is not clearly
identified, on the face of the levy, as a
section 6331(h) levy will be treated as an
ordinary levy under sections 6331(a) or
6331(e).
The principal author of this notice is
Walter Ryan of the Office of Assistant
Chief Counsel (General Litigation). For
further information regarding this notice
contact Mr. Ryan at 202-622-3610 (not a
toll-free call).
Alternative Identifying Numbers
for Income Tax Return
Preparers
Notice 98–63
PURPOSE
This notice informs income tax return
preparers of the Service’s intention to de-
velop a system of providing alternative
identifying numbers for preparers, as au-
thorized by § 3710 of the Internal Rev-
enue Service Restructuring and Reform
Act of 1998, Pub. L. No. 105–206, 112
Stat. 685 (the “Act”). Individual prepar-
ers are reminded of their continuing re-
sponsibility to furnish their social security
numbers (“SSNs”) on returns or claims
for refund prepared by them.
LAW PRIOR TO AMENDMENT BY
THE ACT
Section 6109(a)(4) of the Internal Rev-
enue Code provides that any return or
claim for refund prepared by an income
tax return preparer must bear the identify-
ing number of the preparer as required
under regulations prescribed by the Secre-
tary. Prior to its amendment by § 3710 of
the Act, § 6109(a) of the Code provided
that the identifying number of an individ-
ual preparer was that individual’s SSN.
Section 1.6109–2 of the Income Tax
Regulations provides that each return or
claim for refund prepared by an income
tax return preparer must bear the identify-
ing number of the preparer, which, for an
individual preparer, is that individual’s
SSN.
EFFECT OF THE ACT
Under § 6109(a), as amended by
§ 3710 of the Act, the identifying number
required for a return preparer need not be
the preparer’s SSN. Instead, the Secre-
tary may issue regulations providing al-
ternatives to the SSN for purposes of
identifying individual preparers. See
§ 6109(d).
1998–51 I.R.B.15December 21, 1998
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To implement this change, the Service
intends to develop a system for assigning
alternative identifying numbers to indi-
vidual preparers. These alternative identi-
fying numbers are scheduled to be avail-
able for the filing season beginning
January 1, 2000. The Secretary intends to
amend § 1.6109–2 to allow individual
preparers the option of electing alterna-
tive identifying numbers in lieu of their
SSNs.
Until the alternative identifying num-
bers are available, § 1.6109–2 requires
that individual preparers continue to fur-
nish their SSNs as their identifying num-
bers. However, as provided by Rev. Rul.
78–317, 1978–2 C.B. 335, preparers may
omit their SSNs from copies of returns
furnished to taxpayers under § 6107(a).
The Service will continue to monitor
returns and claims for refund for the pres-
ence of preparer SSNs. Income tax return
preparers failing to furnish their SSNs on
returns or claims for refund are subject to
a penalty of $50 for each such failure, as
provided by § 6695(c).
DRAFTING INFORMATION
The principal author of this notice is An-
drew J. Keyso of the Office of the Assis-
tant Chief Counsel (Income Tax and Ac-
counting). Preparers may obtain updates
on the status of the system for assigning al-
ternative identifying numbers by calling
(202) 622-4405 (not a toll-free call).
26 CFR 601.204: Changes in accounting periods
and in methods of accounting.
(Also Part I, §§ 162, 165, 166, 167, 168, 174, 197,
263, 263A, 446, 451, 454, 455, 461, 471, 472, 475,
481, 585, 1272, 1273, 1281, 1363; 1.165–2,
1.167(a)–11, 1.167(e)–1, 1.174–1, 1.174–3,
1.174–4, 1.263(a)–2, 1.263A–1, 1.263A–3, 1.446–1,
1.446–2, 1.454–1, 1.455–6, 1.461–4, 1.461–5,
1.471–1, 1.471–2, 1.471-3, 1.472–6, 1.472–8,
1.481–1, 1.481–4, 1.1272–1, 1.1273–1, 1.1273–2.)
Rev. Proc. 98-60
TABLE OF CONTENTS
PAGE
SECTION 1. PURPOSE . . . . . . . . . . . 17
SECTION 2. BACKGROUND
AND CHANGES . . . . . . . . . . . . . . . . 17
.01 Change in method of
accounting defined . . . . . . . . . 17
.02 Securing permission to make
a method change . . . . . . . . . . . 17
.03 Terms and conditions of a
method change . . . . . . . . . . . . 17
.04 No retroactive method
change . . . . . . . . . . . . . . . . . . . 18
.05 Method change with a
§ 481(a) adjustment . . . . . . . . 18
(1) Need for adjustment . . . . . . 18
(2) Adjustment period . . . . . . . . 18
.06 Method change using a
cut-off method . . . . . . . . . . . . . 18
.07 Consistency and clear
reflection of income . . . . . . . . 18
.08 Separate trades or
businesses . . . . . . . . . . . . . . . . 18
.09 Penalties . . . . . . . . . . . . . . . . . 18
.10 Change made as part of
an examination . . . . . . . . . . . . 18
.11 Significant changes . . . . . . . . . 18
SECTION 3. DEFINITIONS . . . . . . . 19
.01 Application . . . . . . . . . . . . . . . 19
.02 Taxpayer . . . . . . . . . . . . . . . . . 19
(1) In general . . . . . . . . . . . . . . 19
(2) Consolidated group . . . . . . . 19
.03 Filed . . . . . . . . . . . . . . . . . . . . 19
.04 Mailed . . . . . . . . . . . . . . . . . . . 19
.05 Timely performance of acts . . . 19
.06 Year of change . . . . . . . . . . . . 19
.07 Section 481(a) adjustment
period . . . . . . . . . . . . . . . . . . . 19
.08 Under examination . . . . . . . . . 19
(1) In general . . . . . . . . . . . . . . 19
(2) Partnerships and S
corporations subject to
TEFRA . . . . . . . . . . . . . . . . . 20
.09 Issue under consideration . . . . 20
(1) Under examination . . . . . . . 20
(2) Before an appeals office . . . 20
(3) Before a federal court . . . . . 20
.10 Change within the LIFO
inventory method . . . . . . . . . . 20
SECTION 4. SCOPE . . . . . . . . . . . . . 20
.01 Applicability . . . . . . . . . . . . . . 20
.02 Inapplicability . . . . . . . . . . . . . 20
(1) Under examination . . . . . . . 20
(2) Before an appeals office . . . 20
(3) Before a federal court . . . . . 20
(4) Consolidated group
member . . . . . . . . . . . . . . . . 20
(5) Partnerships and S
corporations . . . . . . . . . . . . 21
(6) Prior change . . . . . . . . . . . . 21
(7) Section 381(a) transaction .21
.03 Nonautomatic changes . . . . . . 21
SECTION 5. TERMS AND
CONDITIONS OF CHANGE . . . . . . 21
.01 In general . . . . . . . . . . . . . . . . . 21
.02 Year of change . . . . . . . . . . . . . 21
.03 Section 481(a) adjustment . . . . 21
.04 Section 481(a) adjustment
period . . . . . . . . . . . . . . . . . . . . 21
(1) In general . . . . . . . . . . . . . . 21
(2) Short period as a separate
taxable year . . . . . . . . . . . . . 21
(3) Shortened or accelerated
adjustment periods . . . . . . . 21
.05 NOL carryback limitation for
taxpayer subject to criminal
investigation . . . . . . . . . . . . . . . 22
.06 Change treated as initiated
by the taxpayer . . . . . . . . . . . . . 22
SECTION 6. GENERAL
APPLICATION PROCEDURES . . . . 22
.01 Consent . . . . . . . . . . . . . . . . . . 22
.02 Filing requirements . . . . . . . . . 22
(1) Waiver of taxable year
filing requirement . . . . . . . . 22
(2) Timely duplicate filing
requirement . . . . . . . . . . . . . 22
(3) Label . . . . . . . . . . . . . . . . . . 23
(4) Signature requirements . . . . 23
(5) Additional statement
required . . . . . . . . . . . . . . . . 23
(6) Where to file copy . . . . . . . . 23
(7) No user fee . . . . . . . . . . . . . . 23
(8) Single application for
certain consolidated
groups . . . . . . . . . . . . . . . . . 23
.03 Taxpayer under
examination . . . . . . . . . . . . . . 24
(1) In general . . . . . . . . . . . . . . 24
(2) 90-day window period . . . . . 24
(3) 120-day window period . . . . 24
(4) Consent of district
director . . . . . . . . . . . . . . . . 24
.04 Taxpayer before an appeals
office . . . . . . . . . . . . . . . . . . . . 24
.05 Taxpayer before a federal
court . . . . . . . . . . . . . . . . . . . . 24
.06 Compliance with
provisions . . . . . . . . . . . . . . . . 24
SECTION 7. AUDIT PROTECTION
FOR TAXABLE YEARS PRIOR TO
YEAR OF CHANGE . . . . . . . . . . . . . 25
.01 In general . . . . . . . . . . . . . . . . 25
.02 Exceptions . . . . . . . . . . . . . . . . 25
(1) Change not made or
made improperly . . . . . . . . . 25
December 21, 1998161998–51 I.R.B.
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(2) Change in sub-method . . . . . 25
(3) Prior year Service-initiated
change . . . . . . . . . . . . . . . . .25
(4) Criminal investigation . . . . .25
SECTION 8. EFFECT OF
CONSENT . . . . . . . . . . . . . . . . . . . . . 25
.01 In general . . . . . . . . . . . . . . . . 25
.02 Retroactive change or
modification . . . . . . . . . . . . . . 25
SECTION 9. REVIEW BY
DISTRICT DIRECTOR . . . . . . . . . . . 25
.01 In general . . . . . . . . . . . . . . . . 25
.02 National office
consideration . . . . . . . . . . . . . 25
SECTION 10. REVIEW BY
NATIONAL OFFICE . . . . . . . . . . . . . 26
.01 In general . . . . . . . . . . . . . . . . 26
.02 Incomplete application—
21 day rule . . . . . . . . . . . . . . . 26
.03 Conference in the national
office . . . . . . . . . . . . . . . . . . . 26
.04 National office
determination . . . . . . . . . . . . . 26
(1) Consent not granted . . . . . . 26
(2) Application changed . . . . . . 26
SECTION 11. APPLICABILITY OF
REV. PROCS. 98–1 AND 98–4 . . . . . 26
SECTION 12. INQUIRIES . . . . . . . . 26
SECTION 13. EFFECTIVE DATE . . 26
.01 In general . . . . . . . . . . . . . . . . 26
.02 Transition rules . . . . . . . . . . . . 26
.03 Special rules . . . . . . . . . . . . . . 26
(1) Change in method of
accounting for
depreciation . . . . . . . . . . . . . 26
(2) Change in method of
accounting to discontinue
the mark-to-market method
of accounting . . . . . . . . . . . . 26
(3) Change in method of
accounting for a pool of
debt instruments . . . . . . . . . 26
SECTION 14. EFFECT ON OTHER
DOCUMENTS . . . . . . . . . . . . . . . . . . 27
SECTION 15. PAPERWORK
REDUCTION ACT . . . . . . . . . . . . . . 27
DRAFTING INFORMATION . . . . . . 27
APPENDIX (TABLE OF
CONTENTS) . . . . . . . . . . . . . . . . . . . 27
SECTION 1. PURPOSE
This revenue procedure provides the
procedures by which a taxpayer may ob-
tain automatic consent to change the
methods of accounting described in the
APPENDIX of this revenue procedure.
This revenue procedure clarifies, modi-
fies, amplifies, and supersedes Rev. Proc.
97–37, 1997–2 C.B. 455. It also consoli-
dates automatic consent procedures for
changes in several methods of accounting
that were published subsequent to the
publication of Rev. Proc. 97–37, and pro-
vides new automatic consent procedures
for changes in several other methods of
accounting. A taxpayer complying with
all the applicable provisions of this rev-
enue procedure has obtained the consent
of the Commissioner of Internal Revenue
to change its method of accounting under
§ 446(e) of the Internal Revenue Code
and the Income Tax Regulations thereun-
der.
SECTION 2. BACKGROUND AND
CHANGES
.01 Change in method of accounting
defined.
(1) Section 1.446–1(e)(2)(ii)(a) of
the Income Tax Regulations provides that
a change in method of accounting in-
cludes a change in the overall plan of ac-
counting for gross income or deductions,
or a change in the treatment of any mater-
ial item. A material item is any item that
involves the proper time for the inclusion
of the item in income or the taking of the
item as a deduction. In determining
whether a taxpayer’s accounting practice
for an item involves timing, generally the
relevant question is whether the practice
permanently changes the amount of the
taxpayer’s lifetime income. If the prac-
tice does not permanently affect the tax-
payer’s lifetime income, but does or could
change the taxable year in which income
is reported, it involves timing and is
therefore a method of accounting. See
Rev. Proc. 91–31, 1991–1 C.B. 566.
(2) Although a method of accounting
may exist under this definition without a
pattern of consistent treatment of an item,
a method of accounting is not adopted in
most instances without consistent treat-
ment. The treatment of a material item in
the same way in determining the gross in-
come or deductions in two or more con-
secutively filed tax returns (without re-
gard to any change in status of the method
as permissible or impermissible) repre-
sents consistent treatment of that item for
purposes of § 1.446–1(e)(2)(ii)(a). If a
taxpayer treats an item properly in the
first return that reflects the item, however,
it is not necessary for the taxpayer to treat
the item consistently in two or more con-
secutive tax returns to have adopted a
method of accounting. If a taxpayer has
adopted a method of accounting under
these rules, the taxpayer may not change
the method by amending its prior income
tax return(s). See Rev. Rul. 90–38,
1990–1 C.B. 57.
(3) A change in the characterization
of an item may also constitute a change in
method of accounting if the change has
the effect of shifting income from one pe-
riod to another. For example, a change
from treating an item as income to treat-
ing the item as a deposit is a change in
method of accounting. SeeRev. Proc.
91–31.
(4) A change in method of account-
ing does not include correction of mathe-
matical or posting errors, or errors in the
computation of tax liability (such as er-
rors in computation of the foreign tax
credit, net operating loss, percentage de-
pletion, or investment credit). See
§ 1.446–1(e)(2)(ii)(b).
.02 Securing permission to make a
method change.Sections 446(e) and
1.446-1(e) state that, except as otherwise
provided, a taxpayer must secure the con-
sent of the Commissioner before chang-
ing a method of accounting for federal in-
come tax purposes. Section 1.446–
1(e)(3)(i) requires that, in order to obtain
the Commissioner’s consent to a method
change, a taxpayer must file a Form 3115,
Application for Change in Accounting
Method, during the taxable year in which
the taxpayer wants to make the proposed
change.
.03 Terms and conditions of a method
change.Section 1.446–1(e)(3)(ii) autho-
rizes the Commissioner to prescribe ad-
ministrative procedures setting forth the
limitations, terms, and conditions deemed
necessary to permit a taxpayer to obtain
consent to change a method of accounting
in accordance with § 446(e). The terms
and conditions the Commissioner may
prescribe include the year of change,
whether the change is to be made with a
1998–51 I.R.B.17December 21, 1998
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§ 481(a) adjustment or on a cut-off basis,
and the § 481(a) adjustment period.
.04 No retroactive method change.
Unless specifically authorized by the
Commissioner, a taxpayer may not re-
quest, or otherwise make, a retroactive
change in method of accounting, regard-
less of whether the change is from a per-
missible or an impermissible method. See
generallyRev. Rul. 90–38.
.05 Method change with a § 481(a) ad-
justment.
(1) Need for adjustment. Section
481(a) requires those adjustments neces-
sary to prevent amounts from being dupli-
cated or omitted to be taken into account
when the taxpayer’s taxable income is
computed under a method of accounting
different from the method used to com-
pute taxable income for the preceding tax-
able year. When there is a change in
method of accounting to which § 481(a) is
applied, income for the taxable year pre-
ceding the year of change must be deter-
mined under the method of accounting
that was then employed, and income for
the year of change and the following tax-
able years must be determined under the
new method of accounting as if the new
method had always been used.
Example.A taxpayer that is not required to
use inventories uses the overall cash receipts and
disbursements method and changes to an overall ac-
crual method. The taxpayer has $120,000 of income
earned but not yet received (accounts receivable)
and $100,000 of expenses incurred but not yet paid
(accounts payable) as of the end of the taxable year
preceding the year of change. A positive § 481(a)
adjustment of $20,000 ($120,000 accounts receiv-
able less $100,000 accounts payable) is required as a
result of the change.
(2)Adjustment period.Section
481(c) and §§ 1.446–1(e)(3)(ii) and
1.481–4 provide that the adjustment re-
quired by § 481(a) may be taken into ac-
count in determining taxable income in
the manner and subject to the conditions
agreed to by the Commissioner and the
taxpayer. Generally, in the absence of
such an agreement, the § 481(a) adjust-
ment is taken into account completely in
the year of change, subject to § 481(b)
which limits the amount of tax where the
§ 481(a) adjustment is substantial. How-
ever, under the Commissioner’s authority
in § 1.446–1(e)(3)(ii) to prescribe terms
and conditions for changes in methods of
accounting, this revenue procedure pro-
vides specific adjustment periods that are
intended to achieve an appropriate bal-
ance between the goals of mitigating dis-
tortions of income that result from ac-
counting method changes and providing
appropriate incentives for voluntary com-
pliance.
.06 Method change using a cut-off
method.The Commissioner may deter-
mine that certain changes in methods of
accounting will be made without a
§ 481(a) adjustment, using a “cut-off
method.” Under a cut-off method, only
the items arising on or after the beginning
of the year of change (or other operative
date) are accounted for under the new
method of accounting. Any items arising
before the year of change (or other opera-
tive date) continue to be accounted for
under the taxpayer’s former method of ac-
counting. See,for example, § 263A
(which generally applies to costs incurred
after December 31, 1986, for noninven-
tory property), § 461(h) (which generally
applies to amounts incurred on or after
July 18, 1984), and § 1.446–3 (which ap-
plies to notional principal contracts en-
tered into on or after December 13, 1993).
Because no items are duplicated or omit-
ted from income when a cut-off method is
used to effect a change in accounting
method, no § 481(a) adjustment is neces-
sary.
.07 Consistency and clear reflection of
income.Methods of accounting should
clearly reflect income on a continuing
basis, and the Internal Revenue Service
exercises its discretion under §§ 446(e)
and 481(c) in a manner that generally
minimizes distortions of income across
taxable years and on an annual basis.
.08 Separate trades or businesses.
(1) Sections 1.446–1(d)(1) and (2)
provide that when a taxpayer has two or
more separate and distinct trades or busi-
nesses, a different method of accounting
may be used for each trade or business
provided the method of accounting used
for each trade or business clearly reflects
the overall income of the taxpayer as well
as that of each particular trade or busi-
ness. No trade or business is separate and
distinct unless a complete and separable
set of books and records is kept for that
trade or business.
(2) Section 1.446–1(d)(3) provides
that if, by reason of maintaining different
methods of accounting, there is a creation
or shifting of profits or losses between the
trades or businesses of the taxpayer (for
example, through inventory adjustments,
sales, purchases, or expenses) so that in-
come of the taxpayer is not clearly re-
flected, the trades or businesses of the
taxpayer are not separate and distinct.
.09 Penalties.Any otherwise applica-
ble penalty for the failure of a taxpayer to
change its method of accounting (for ex-
ample, the accuracy-related penalty under
§ 6662 or the fraud penalty under § 6663)
may be imposed if the taxpayer does not
timely file a request to change a method
of accounting. See§ 446(f). Addition-
ally, the taxpayer’s return preparer may
also be subject to the preparer penalty
under § 6694. However, penalties will
not be imposed when a taxpayer changes
from an impermissible method of ac-
counting to a permissible one by comply-
ing with all applicable provisions of this
revenue procedure.
.10 Change made as part of an exami-
nation. Sections 446(b) and 1.446–
1(b)(1) provide that if a taxpayer does not
regularly employ a method of accounting
that clearly reflects its income, the com-
putation of taxable income must be made
in a manner that, in the opinion of the
Commissioner, does clearly reflect in-
come. If a taxpayer under examination is
not eligible to change a method of ac-
counting under this revenue procedure,
the change may be made by the district di-
rector. A change resulting in a positive
§ 481(a) adjustment will ordinarily be
made in the earliest taxable year under ex-
amination with a one-year § 481(a) ad-
justment period.
.11 Significant changes.Significant
changes to Rev. Proc. 97–37 include:
(1) Section 4.02(6) clarifies that the
year of change is included within the five-
year prohibition regarding prior changes;
(2) Section 6.02(2) clarifies that the
automatic extension of 6 months from the
due date of the return provided in
§ 301.9100-2 is applicable;
(3) Section 9.01 clarifies that the dis-
trict director is to ascertain if a change in
method of accounting was made in com-
pliance with all the applicable provisions
of this revenue procedure;
(4) Section 10.04 clarifies that an ap-
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plication reviewed and changed by the na-
tional office is subject to review by the
district director as provided in section 9 of
this revenue procedure;
(5) Section 13.03 provides that the
effective date of this revenue procedure is
December 21, 1998, for applications or
copies of applications filed with the na-
tional office under section 2.01 or 2.02 of
the APPENDIX;
(6) Section 2.01 of the APPENDIX
provides that this revenue procedure is the
exclusive procedure for making that
change, includes property for which ex-
cess depreciation was claimed, excludes
property for which depreciation is deter-
mined under § 1.167(a)–11, and requires
additional information for any public util-
ity property;
(7) Section 2.02 of the APPENDIX
requires additional information for any
public utility property;
(8) Section 3.01 of the APPENDIX
is modified to provide that the change
does not apply to a taxpayer that wants to
change to the capitalization method for
costs of developing (or modifying) any
package design that has an ascertainable
useful life;
(9) Section 10.01 of the APPENDIX
provides that a taxpayer is not required to
file a Form 3115 to re-elect the LIFO in-
ventory method after a period of five tax-
able years beginning with the year of
change;
(10) Section 10.04 of the APPEN-
DIX provides that a taxpayer wanting to
make an IPIC change where a bulk bar-
gain purchase previously occurred must
first comply with Hamilton Industries,
Inc. v. Commissioner,97 T.C. 120 (1991),
and compute a § 481(a) adjustment for the
bargain purchase part of the change;
(11) The following changes in meth-
ods of accounting have been added to the
APPENDIX of this revenue procedure:
(a) Section 1.02 of the APPEN-
DIX regarding Year 2000 costs;
(b) Section 2A.01 of the APPEN-
DIX regarding research and experimental
expenditures;
(c) Section 3.02 of the APPEN-
DIX regarding line pack gas and cushion
gas;
(d) Section 5.04 of the APPEN-
DIX regarding the Rule of 78s;
(e) Section 8.05 of the APPEN-
DIX regarding cooperative advertising;
(f) Section 9.02 of the APPEN-
DIX regarding estimating inventory
shrinkage;
(g) Section 10A.01 of the APPEN-
DIX regarding the mark-to-market
method of accounting for a taxpayer’s
first taxable year ending after July 22,
1998; and
(h) Section 12.02 of the APPEN-
DIX regarding pool of debt instruments
for the taxpayer’s first taxable year begin-
ning after August 5, 1997.
SECTION 3. DEFINITIONS
.01 Application.The term “applica-
tion” includes a Form 3115, or any state-
ment that is authorized under the APPEN-
DIX of this revenue procedure to be filed
in lieu of a Form 3115, and any attach-
ments.
.02 Taxpayer.
(1) In general. The term “taxpayer”
has the same meaning as the term “per-
son” defined in § 7701(a)(1) (rather than
the meaning of the term “taxpayer” de-
fined in § 7701(a)(14)).
(2) Consolidated group.For pur-
poses of (a) sections 3.08(1), 3.09(1), and
4.02(1) of this revenue procedure (tax-
payer under examination), (b) sections
3.09(2) and 4.02(2) of this revenue proce-
dure (taxpayer before an appeals office),
or (c) sections 3.09(3) and 4.02(3) of this
revenue procedure (taxpayer before a fed-
eral court), the term “taxpayer” includes a
consolidated group.
.03 Filed.Any form (including an ap-
plication), statement, or other document
required to be filed under this revenue
procedure is filed on the date it is mailed
to the proper address (or an address simi-
lar enough to complete delivery). If the
form, statement, or other document is not
mailed (or the date it is mailed cannot be
reasonably determined), it is filed on the
date it is delivered to the Service.
.04 Mailed.The date of mailing will
be determined under the rules of § 7502.
For example, the date of mailing is the
date of the U.S. postmark or the applica-
ble date recorded or marked by a desig-
nated private delivery service. SeeNotice
98–47, 1998–37 I.R.B. 8.
.05 Timely performance of acts.The
rules of § 7503 apply when the last day
for the taxpayer’s timely performance of
any act (for example, filing an application
or submitting additional information) falls
on a Saturday, Sunday, or legal holiday.
The performance of any act is timely if
the act is performed on the next succeed-
ing day that is not a Saturday, Sunday, or
legal holiday.
.06 Year of change.The year of
change is the taxable year for which a
change in method of accounting is effec-
tive, that is, the first taxable year the new
method is to be used, even if no affected
items are taken into account for that year.
.07 Section 481(a) adjustment period.
The § 481(a) adjustment period is the ap-
plicable number of taxable years for tak-
ing into account the § 481(a) adjustment
required as a result of the change in
method of accounting. The year of
change is the first taxable year in the ad-
justment period and the § 481(a) adjust-
ment is taken into account ratably over
the number of taxable years in the adjust-
ment period. The applicable adjustment
periods are set forth in section 5.04 of this
revenue procedure.
.08 Under examination.
(1) In general.
(a) Except as provided in section
3.08(2) of this revenue procedure, an ex-
amination of a taxpayer with respect to a
federal income tax return begins on the
date the taxpayer is contacted in any man-
ner by a representative of the Service for
the purpose of scheduling any type of ex-
amination of the return. An examination
ends:
(i) in a case in which the Ser-
vice accepts the return as filed, on the
date of the “no change” letter sent to the
taxpayer;
(ii) in a fully agreed case, on the
earliest of the date the taxpayer executes a
waiver of restrictions on assessment or
acceptance of overassessment (for exam-
ple, Form 870, 4549, or 4605), the date
the taxpayer makes a payment of tax that
equals or exceeds the proposed defi-
ciency, or the date of the “closing” letter
(for example, Letter 891 or 987) sent to
the taxpayer; or
(iii) in an unagreed or a par-
tially agreed case, on the earliest of the
date the taxpayer (or its representative) is
notified by Appeals that the case has been
referred to Appeals from Examination,
the date the taxpayer files a petition in the
Tax Court, the date on which the period
for filing a petition with the Tax Court ex-
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pires, or the date of the notice of claim
disallowance.
(b) An examination does not end
as a result of the early referral of an issue
to Appeals under the provisions of Rev.
Proc. 96–9, 1996–1 C.B. 575.
(c) An examination resumes on
the date the taxpayer (or its representa-
tive) is notified by Appeals (or otherwise)
that the case has been referred to Exami-
nation for reconsideration.
(2) Partnerships and S corporations
subject to TEFRA.For an entity (includ-
ing a limited liability company), treated
as a partnership or an S corporation for
federal income tax purposes, that is sub-
ject to the TEFRA unified audit and litiga-
tion provisions for partnerships and S cor-
porations, an examination begins on the
date of the notice of the beginning of an
administrative proceeding sent to the Tax
Matters Partner/Tax Matters Person
(TMP). An examination ends:
(a) in a case in which the Service
accepts the partnership or S corporation
return as filed, on the date of the “no ad-
justments” letter or the “no change” no-
tice of final administrative adjustment
sent to the TMP;
(b) in a fully agreed case, when all
the partners, members, or shareholders
execute a Form 870–P, 870–L, or 870–S;
or
(c) in an unagreed or a partially
agreed case, on the earliest of the date the
TMP (or its representative) is notified by
Appeals that the case has been referred to
Appeals from Examination, the date the
TMP (or a partner, member, or share-
holder) requests judicial review, or the
date on which the period for requesting
judicial review expires.
But see section 4.02(5) of this revenue
procedure for certain rules that preclude
an entity from requesting a change in ac-
counting method. Also note that S corpo-
rations are not subject to the TEFRA uni-
fied audit and litigation provisions for
taxable years beginning after December
31, 1996. See Small Business Job Protec-
tion Act of 1996, Pub. L. No. 104–188,
§ 1317(a), 110 Stat. 1755, 1787 (1996).
.09 Issue under consideration.
(1) Under examination.A taxpayer’s
method of accounting for an item is an
issue under consideration for the taxable
years under examination if the taxpayer
receives written notification (for example,
by examination plan, information docu-
ment request (IDR), or notification of
proposed adjustments or income tax ex-
amination changes) from the examining
agent(s) specifically citing the treatment
of the item as an issue under considera-
tion. For example, a taxpayer’s method
of pooling under the dollar-value, last-in,
first-out (LIFO) inventory method is an
issue under consideration as a result of an
examination plan that identifies LIFO
pooling as a matter to be examined, but it
is not an issue under consideration as a re-
sult of an examination plan that merely
identifies LIFO inventories as a matter to
be examined. Similarly, a taxpayer’s
method of determining inventoriable
costs under § 263A is an issue under con-
sideration as a result of an IDR that re-
quests documentation supporting the
costs included in inventoriable costs, but
it is not an issue under consideration as a
result of an IDR that requests documenta-
tion supporting the amount of cost of
goods sold reported on the return. The
question of whether a method of account-
ing is an issue under consideration may be
referred to the national office as a request
for technical advice under the provisions
of Rev. Proc. 98–2, 1998–1 I.R.B. 74 (or
any successor).
(2) Before an appeals office.A tax-
payer’s method of accounting for an item
is an issue under consideration for the tax-
able years before an appeals office if the
treatment of the item is included as an
item of adjustment in the examination re-
port referred to Appeals or is specifically
identified in writing to the taxpayer by
Appeals.
(3) Before a federal court.A tax-
payer’s method of accounting for an item
is an issue under consideration for the tax-
able years before a federal court if the
treatment of the item is included in the
statutory notice of deficiency, the notice
of claim disallowance, the notice of final
administrative adjustment, the pleadings
(for example, the petition, complaint, or
answer) or amendments thereto, or is
specifically identified in writing to the
taxpayer by the counsel for the govern-
ment.
.10 Change within the LIFO inventory
method.A change within the LIFO inven-
tory method is a change from one LIFO
inventory method or sub-method to an-
other LIFO inventory method or sub-
method. A change within the LIFO in-
ventory method does not include a change
in method of accounting that could be
made by a taxpayer that does not use the
LIFO inventory method (for example, a
method governed by § 471 or 263A).
SECTION 4. SCOPE
.01 Applicability. This revenue proce-
dure applies to a taxpayer requesting the
Commissioner’s consent to change to a
method of accounting described in the
APPENDIX of this revenue procedure.
This revenue procedure is the exclusive
procedure for a taxpayer within its scope
to obtain the Commissioner’s consent.
.02 Inapplicability.Except as other-
wise provided in the APPENDIX of this
revenue procedure (see, for example, sec-
tions 4.01, 5.04, 8.05, 9.02, 10A.01,
12.01, and 12.02 of the APPENDIX of
this revenue procedure), this revenue pro-
cedure does not apply in the following sit-
uations:
(1) Under examination.If, on the
date the taxpayer would otherwise file a
copy of the application with the national
office, the taxpayer is under examination
(as provided in section 3.08 of this rev-
enue procedure), except as provided in
sections 6.03(2) (90-day window),
6.03(3) (120-day window), and 6.03(4)
(district director consent) of this revenue
procedure;
(2) Before an appeals office.If, on
the date the taxpayer would otherwise file
a copy of the application with the national
office, the taxpayer is before an appeals
office with respect to any income tax
issue and the method of accounting to be
changed is an issue under consideration
by the appeals office (as provided in sec-
tion 3.09(2) of this revenue procedure);
(3) Before a federal court.If, on the
date the taxpayer would otherwise file a
copy of the application with the national
office, the taxpayer is before a federal
court with respect to any income tax issue
and the method of accounting to be
changed is an issue under consideration
by the federal court (as provided in sec-
tion 3.09(3) of this revenue procedure);
(4) Consolidated group member.A
corporation that is (or was formerly) a
member of a consolidated group is under
examination, before an appeals office, or
before a federal court (for purposes of
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sections 4.02(1), (2), and (3) of this rev-
enue procedure) if the consolidated group
is under examination, before an appeals
office, or before a federal court for a tax-
able year(s) that the corporation was a
member of the group;
(5) Partnerships and S corporations.
For an entity (including a limited liability
company) treated as a partnership or an S
corporation for federal income tax pur-
poses, if, on the date the entity would oth-
erwise file a copy of the application with
the national office, the entity’s accounting
method to be changed is an issue under
consideration in an examination of a part-
ner, member, or shareholder’s federal in-
come tax return or an issue under consid-
eration by an appeals office or by a
federal court with respect to a partner,
member, or shareholder’s federal income
tax return;
(6) Prior change.If the taxpayer,
within the last five taxable years (includ-
ing the year of change), (a) has made a
change in the same method of accounting
(with or without obtaining the Commis-
sioner’s consent), or (b) has applied to
change the same method of accounting
without effecting the change (whether, for
example, the application to change was
withdrawn, not perfected, not granted, or
denied); or
(7) Section 381(a) transaction.If
the taxpayer engages in a transaction to
which § 381(a) applies within the pro-
posed taxable year of change (determined
without regard to any potential closing of
the year under § 381(b)(1)).
.03 Nonautomatic changes.If a tax-
payer is precluded by other than sections
4.02(1) through 4.02(5) of this revenue
procedure from using this revenue proce-
dure to make a change in method of ac-
counting, the taxpayer requesting such a
change must file a Form 3115 with the
Commissioner in accordance with the re-
quirements of § 1.446–1(e)(3)(i) and Rev.
Proc. 97–27, 1997–1 C.B. 680 (or any
other applicable Code, regulation, or ad-
ministrative provision).
SECTION 5. TERMS AND
CONDITIONS OF CHANGE
.01 In general.An accounting method
change filed under this revenue procedure
must be made pursuant to the terms and
conditions provided in this revenue proce-
dure.
.02 Year of change.The year of change
is the taxable year designated on the ap-
plication and for which the application is
timely filed under section 6.02(2).
.03 Section 481(a) adjustment.Unless
otherwise provided in this revenue proce-
dure, a taxpayer making a change in
method of accounting under this revenue
procedure must take into account a
§ 481(a) adjustment in the manner pro-
vided in section 5.04 of this revenue pro-
cedure.
.04 Section 481(a) adjustment period.
(1) In general.Except as otherwise
provided in section 5.04(3) or the AP-
PENDIX of this revenue procedure, the
§ 481(a) adjustment period for positive
and negative § 481(a) adjustments is four
taxable years.
(2) Short period as a separate tax-
able year.If the year of change, or any
taxable year during the § 481(a) adjust-
ment period, is a short taxable year, the §
481(a) adjustment must be included in in-
come as if that short taxable year were a
full 12-month taxable year. See Rev. Rul.
78–165, 1978–1 C.B. 276.
Example 1.A calendar year taxpayer received
permission to change an accounting method begin-
ning with the 1998 calendar year. The § 481(a) ad-
justment is $30,000 and the adjustment period is
four taxable years. The taxpayer subsequently re-
ceives permission to change its annual accounting
period to September 30, effective for the taxable
year ending September 30, 1999. The taxpayer must
include $7,500 of the § 481(a) adjustment in gross
income for the short period from January 1, 1999,
through September 30, 1999.
Example 2.Corporation X, a calendar year tax-
payer, received permission to change an accounting
method beginning with the 1998 calendar year. The
§ 481(a) adjustment is $30,000 and the adjustment
period is four taxable years. On July 1, 2000, Cor-
poration Zacquires Corporation Xin a transaction to
which § 381(a) applies. Corporation Zis a calendar
year taxpayer that uses the same method of account-
ing to which Corporation Xchanged in 1998. Cor-
poration Xmust include $7,500 of the § 481(a) ad-
justment in gross income for its short period income
tax return for January 1, 2000, through June 30,
2000. In addition, Corporation Zmust include
$7,500 of the § 481(a) adjustment in gross income in
its income tax return for calendar year 2000.
(3) Shortened or accelerated adjust-
ment periods. The § 481(a) adjustment
period provided in section 5.04(1) or the
APPENDIX of this revenue procedure
will be shortened or accelerated in the fol-
lowing situations.
(a) De minimis rule.A taxpayer
may elect to use a one-year adjustment
period in lieu of the § 481(a) adjustment
period otherwise provided by this revenue
procedure if the entire § 481(a) adjust-
ment is less than $25,000 (either positive
or negative). A taxpayer makes an elec-
tion under this de minimisrule by so indi-
cating on the application. For example,
for a taxpayer filing a Form 3115, the tax-
payer must complete the appropriate line
on the Form 3115 to elect this de minimis
rule.
(b) Cooperatives. A cooperative
within the meaning of § 1381(a) generally
must take the entire amount of a § 481(a)
adjustment into account in computing tax-
able income for the year of change. See
Rev. Rul. 79–45, 1979–1 C.B. 284.
(c) Ceasing to engage in the trade
or business.
(i) In general.A taxpayer that
ceases to engage in a trade or business or
terminates its existence must take the re-
maining balance of any § 481(a) adjust-
ment relating to the trade or business into
account in computing taxable income in
the taxable year of the cessation or termi-
nation. Except as provided in sections
5.04(3)(c)(iv) and (v) of this revenue pro-
cedure, a taxpayer is treated as ceasing to
engage in a trade or business if the opera-
tions of the trade or business cease or sub-
stantially all the assets of the trade or
business are transferred to another tax-
payer. For this purpose, “substantially
all” has the same meaning as in section
3.01 of Rev. Proc. 77–37, 1977–2 C.B.
568.
(ii) Examples of transactions
that are treated as the cessation of a trade
or business. The following is a nonexclu-
sive list of transactions that are treated as
the cessation of a trade or business for
purposes of accelerating the § 481(a) ad-
justment under section 5.04(3)(c) of this
revenue procedure:
(A) the trade or business to
which the § 481(a) adjustment relates is
incorporated;
(B) the trade or business to
which the § 481(a) adjustment relates is
purchased by another taxpayer in a trans-
action to which § 1060 applies;
(C) the trade or business to
which the § 481(a) adjustment relates is
terminated or transferred pursuant to a
taxable liquidation;
(D) a division of a corpora-
tion ceases to operate the trade or busi-
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ness to which the § 481(a) adjustment re-
lates; or
(E) the assets of a trade or
business to which the § 481(a) adjustment
relates are contributed to a partnership.
(iii) Conversion to or from S
corporation status. Except as provided in
section 10.01 of the APPENDIX of this
revenue procedure, no acceleration of a
§ 481(a) adjustment is required under sec-
tion 5.04(3)(c) of this revenue procedure
when a C corporation elects to be treated
as an S corporation or an S corporation
terminates its S election and is then
treated as a C corporation.
(iv) Certain transfers to which
§ 381(a) applies.No acceleration of the
§ 481(a) adjustment is required under sec-
tion 5.04(3)(c) of this revenue procedure
when a taxpayer transfers substantially all
the assets of the trade or business that gave
rise to the § 481(a) adjustment to another
taxpayer in a transfer to which
§ 381(a) applies and the accounting
method (the change to which gave rise to
the § 481(a) adjustment) is a tax attribute
that is carried over and used by the acquir-
ing corporation immediately after the
transfer pursuant to § 381(c). The acquir-
ing corporation is subject to any terms and
conditions imposed on the transferor (or
any predecessor of the transferor) as a re-
sult of its change in method of accounting.
(v) Certain transfers pursuant to
§ 351 within a consolidated group.
(A) In general.No accelera-
tion of the § 481(a) adjustment is required
under section 5.04(3)(c) of this revenue
procedure when one member of an affili-
ated group filing a consolidated return
transfers substantially all the assets of the
trade or business that gave rise to the
§ 481(a) adjustment to another member of
the same consolidated group in an ex-
change qualifying under § 351 and the
transferee member adopts and uses the
same method of accounting (the change to
which gave rise to the § 481(a) adjust-
ment) used by the transferor member.
The transferor member must continue to
take the § 481(a) adjustment into account
pursuant to the terms and conditions set
forth in this revenue procedure. The
transferor member must take into account
activities of the transferee member (or
any successor) in determining whether ac-
celeration of the § 481(a) adjustment is
required. For example, except as pro-
vided in the following sentence, the trans-
feror member must take any remaining
§ 481(a) adjustment into account in com-
puting taxable income in the taxable year
in which the transferee member ceases to
engage in the trade or business to which
the § 481(a) adjustment relates. The
§ 481(a) adjustment is not accelerated
when the transferee member engages in a
transaction described in section 5.04(3)-
(c)(iv) or 5.04(3)(c)(v)(A) of this revenue
procedure.
(B) Exception.The provi-
sions of section 5.04(3)(c)(v)(A) of this
revenue procedure cease to apply and the
transferor member must take any remain-
ing balance of the § 481(a) adjustment
into account in the taxable year immedi-
ately preceding any of the following: (1)
the taxable year the transferor member
ceases to be a member of the group; (2)
the taxable year any transferee member
owning substantially all the assets of the
trade or business which gave rise to the
§ 481(a) adjustment ceases to be a mem-
ber of the group; or (3) a separate return
year of the common parent of the group.
In applying the preceding sentence, the
rules of paragraphs (j)(2), (j)(5), and (j)(6)
of § 1.1502–13 apply, but only if the
method of accounting to which the trans-
feror member changed and to which the §
481(a) adjustment relates is adopted, car-
ried over, or used by any transferee mem-
ber acquiring the assets of the trade or
business that gave rise to the § 481(a) ad-
justment immediately after acquisition of
such assets. For example, the transferor
member is not required to accelerate the
§ 481(a) adjustment if a transferee mem-
ber ceases to be a member of a consoli-
dated group by reason of an acquisition to
which § 381(a) applies and the acquiring
corporation (1) is a member of the same
group as the transferor member, and (2)
continues, under § 381(c)(4) and the regu-
lations thereunder, to use the same
method of accounting as that used by the
transferor member with respect to the as-
sets of the trade or business to which the
§ 481(a) adjustment relates.
.05 NOL carryback limitation for tax-
payer subject to criminal investigation.
Generally, no portion of any net operating
loss that is attributable to a negative
§ 481(a) adjustment may be carried back
to a taxable year prior to the year of
change that is the subject of any pending
or future criminal investigation or pro-
ceeding concerning (1) directly or indi-
rectly, any issue relating to the taxpayer’s
federal tax liability, or (2) the possibility
of false or fraudulent statements made by
the taxpayer with respect to any issue re-
lating to its federal tax liability.
.06 Change treated as initiated by the
taxpayer.For purposes of § 481, a change
in method of accounting made under this
revenue procedure is a change in method
of accounting initiated by the taxpayer.
SECTION 6. GENERAL APPLICATION
PROCEDURES
.01 Consent. Pursuant to § 1.446–
1(e)(2)(i), the consent of the Commis-
sioner is hereby granted to any taxpayer
within the scope of this revenue proce-
dure to change a method of accounting,
provided the taxpayer complies with all
the applicable provisions of this revenue
procedure.
.02 Filing requirements.
(1) Waiver of taxable year filing re-
quirement.The requirement under
§ 1.446–1(e)(3)(i) to file a Form 3115
within the taxable year for which the
change is requested is waived for any ap-
plication for a change in method of ac-
counting filed pursuant to this revenue
procedure. See § 1.446-1(e)(3)(ii).
(2) Timely duplicate filing require-
ment.
(a) In general.A taxpayer chang-
ing a method of accounting pursuant to
this revenue procedure must complete and
file an application in duplicate. Except as
otherwise provided in the APPENDIX of
this revenue procedure (see, for example,
section 12.02 of the APPENDIX of this
revenue procedure), the original must be
attached to the taxpayer’s timely filed (in-
cluding extensions) original federal in-
come tax return for the year of change,
and a copy of the application must be
filed with the national office (see section
6.02(6) of this revenue procedure for the
address) no earlier than the first day of the
year of change and no later than when the
original is filed with the federal income
tax return for the year of change.
(b) Limited relief for late applica-
tion.
(i) Automatic extension.An au-
tomatic extension of 6 months from the
due date of the return for the year of
change (excluding extensions) is granted
December 21, 1998221998–51 I.R.B.
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to file an application, provided the tax-
payer (A) timely filed (including exten-
sions) its federal income tax return for the
year of change, (B) files an amended re-
turn within the 6-month extension period
in a manner that is consistent with the
new method of accounting, (C) attaches
the original application to the amended
return, (D) files a copy of the application
with the national office no later than when
the original is filed with the amended re-
turn, and (E) writes at the top of the appli-
cation “FILED PURSUANT TO
§ 301.9100–2.”
(ii) Other extensions.A tax-
payer that fails to file the application for
the year of change as provided in section
6.02(2)(a) or 6.02(2)(b)(i) of this revenue
procedure will not be granted an exten-
sion of time to file under § 301.9100 of
the Procedure and Administration Regula-
tions, except in unusual and compelling
circumstances. See§ 301.9100–3(c)(2).
(3) Label.
(a) In order to assist in processing
an application under this revenue proce-
dure, the section of the APPENDIX of
this revenue procedure describing the spe-
cific change in method of accounting
should be included in the application. For
example, a phrase such as “Section 1.01
of the APPENDIX of Rev. Proc. 98-60”
should be included on the appropriate line
on the Form 3115.
(b) If a taxpayer is authorized
under the APPENDIX of this revenue
procedure to file a statement in lieu of a
Form 3115, the taxpayer must include the
taxpayer’s name and employer identifica-
tion number (or social security number in
the case of an individual) at the top of the
first page of the statement underneath any
other required label.
(4) Signature requirements.The ap-
plication must be signed by, or on behalf
of, the taxpayer requesting the change by
an individual with authority to bind the
taxpayer in such matters. For example, an
officer must sign on behalf of a corpora-
tion, a general partner on behalf of a state
law partnership, a member-manager on
behalf of a limited liability company, a
trustee on behalf of a trust, or an individ-
ual taxpayer on behalf of a sole propri-
etorship. If the taxpayer is a member of a
consolidated group, an application sub-
mitted on behalf of the taxpayer must be
signed by a duly authorized officer of the
common parent. See the signature re-
quirements set forth in the General In-
structions attached to a current Form 3115
regarding those who are to sign. If an
agent is authorized to represent the tax-
payer before the Service, receive the orig-
inal or a copy of the correspondence con-
cerning the application, or perform any
other act(s) regarding the application filed
on behalf of the taxpayer, a power of at-
torney reflecting such authorization(s)
must be attached to the application. A
taxpayer’s representative without a power
of attorney to represent the taxpayer as in-
dicated in this section will not be given
any information regarding the applica-
tion.
(5) Additional statement required.In
addition to providing all the information
that is required by the application, a tax-
payer must attach to the application a
written statement providing as follows:
(a) the taxpayer agrees to all of the
terms and conditions in this revenue pro-
cedure; and
(b) if a § 481(a) adjustment is re-
quired, the reason for claiming the
§ 481(a) adjustment period over which
the taxpayer agrees to take the applicable
§ 481(a) adjustment into account.
(6) Where to file copy.
(a) For a taxpayer other than an
exempt organization, the copy of the ap-
plication must be addressed to the Com-
missioner of Internal Revenue, Attention:
CC:DOM:IT&A (Automatic Rulings
Branch), P.O. Box 7604, Benjamin
Franklin Station, Washington, D.C. 20044
(or, in the case of a designated private de-
livery service: Commissioner of Internal
Revenue, Attention: CC:DOM:IT&A
(Automatic Rulings Branch), 1111 Con-
stitution Avenue, NW, Washington, D.C.
20224).
(b) For an exempt organization,
the copy of the application must be ad-
dressed to the Assistant Commissioner
(Employee Plans and Exempt Organiza-
tions), Attention: E:EO, P.O. Box 120,
Benjamin Franklin Station, Washington,
D.C. 20044 (or, in the case of a desig-
nated private delivery service: Assistant
Commissioner (Employee Plans and Ex-
empt Organizations), Attention: E:EO,
1111 Constitution Avenue, NW, Washing-
ton, D.C. 20224).
(c) The copy of the application
may also be hand delivered:
(i) To the drop box at the 12th
Street entrance of 1111 Constitution Av-
enue, NW, Washington, D.C. No receipt
will be given at the drop box. For a tax-
payer other than an exempt organization,
the copy of the application must be ad-
dressed to the Commissioner of Internal
Revenue, Attention: CC:DOM:IT&A
(Automatic Rulings Branch), 1111 Con-
stitution Avenue, NW, Washington, D.C.
20224. For an exempt organization, the
copy of the application must be addressed
to the Assistant Commissioner (Employee
Plans and Exempt Organizations), Atten-
tion: E:EO, 1111 Constitution Avenue,
NW, Washington, D.C. 20224; or
(ii) Between the hours of 8:15
a.m. and 5:00 p.m., to the courier’s desk
at the main entrance of 1111 Constitution
Avenue, NW, Washington, D.C. A receipt
will be given at the courier’s desk. For a
taxpayer other than an exempt organiza-
tion, the copy of the application must be
addressed to the Commissioner of Inter-
nal Revenue, Attention: CC:DOM:IT&A
(Automatic Rulings Branch), 1111 Con-
stitution Avenue, NW, Washington, D.C.
20224. For an exempt organization, the
copy of the application must be addressed
to the Assistant Commissioner (Employee
Plans and Exempt Organizations), Atten-
tion: E:EO, 1111 Constitution Avenue,
NW, Washington, D.C. 20224
(7) No user fee. A user fee is not re-
quired for an application filed under this
revenue procedure, and, except as pro-
vided in section 6.02(6)(c)(ii) of this rev-
enue procedure, the receipt of an applica-
tion filed under this revenue procedure
will not be acknowledged.
(8) Single application for certain
consolidated groups.A parent corpora-
tion may file a single application to
change an identical method of accounting
on behalf of more than one member of a
consolidated group. To qualify, the tax-
payers in the consolidated group must be
members of the same affiliated group
under § 1504(a) that join in the filing of a
consolidated tax return, and they must be
changing from the identical present
method of accounting to the identical pro-
posed method of accounting. All aspects
of the change in method of accounting,
including the present and proposed meth-
ods, the underlying facts, and the author-
ity for the change, must be identical, ex-
cept for the § 481(a) adjustment. See
1998–51 I.R.B.23December 21, 1998
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section 15.07(3) of Rev. Proc. 98–1,
1998–1 I.R.B. at 54 (or any successor),
for the information required to be submit-
ted with the application.
.03 Taxpayer under examination.
(1) In general.Except as otherwise
provided in the APPENDIX of this rev-
enue procedure (see, for example, sec-
tions 4.01, 5.04, 8.05, 9.02, 10A.01,
12.01, and 12.02 of the APPENDIX of
this revenue procedure), a taxpayer that is
under examination may file an application
to change a method of accounting under
section 6 of this revenue procedure only if
the taxpayer is within the provisions of
section 6.03(2) (90-day window), 6.03(3)
(120-day window), or 6.03(4) (district di-
rector consent) of this revenue procedure.
A taxpayer that files an application be-
yond the time periods provided in the 90-
day and 120-day windows is not eligible
for the automatic extension of time and
will not be granted an extension of time to
file under § 301.9100, except in unusual
and compelling circumstances.
(2) 90-day window period.
(a) A taxpayer may file a copy of
the application with the national office to
change a method of accounting under this
revenue procedure during the first 90-
days of any taxable year (the “90-day
window”) if the taxpayer has been under
examination for at least 12 consecutive
months as of the first day of the taxable
year. This 90-day window is not avail-
able if the method of accounting the tax-
payer is changing is an issue under con-
sideration at the time the copy of the
application is filed or an issue the examin-
ing agent(s) has placed in suspense at the
time the copy of the application is filed.
(b) A taxpayer changing a method
of accounting under this 90-day window
must provide a copy of the application to
the examining agent(s) at the same time it
files the copy of the application with the
national office. The application must
contain the name(s) and telephone num-
ber(s) of the examining agent(s). The tax-
payer must attach to the application a sep-
arate statement signed by the taxpayer
certifying that, to the best of the tax-
payer’s knowledge, the same method of
accounting is not an issue under consider-
ation or an issue placed in suspense by the
examining agent(s).
(3) 120-day window period.
(a) A taxpayer may file a copy of
the application with the national office to
change a method of accounting under this
revenue procedure during the 120-day pe-
riod following the date an examination
ends (the “120-day window”), regardless
of whether a subsequent examination has
commenced. This 120-day window is not
available if the method of accounting the
taxpayer is changing is an issue under
consideration at the time a copy of the ap-
plication is filed or an issue the examining
agent(s) has placed in suspense at the time
the copy of the application is filed.
(b) A taxpayer changing a method
of accounting under this 120-day window
must provide a copy of the application to
the examining agent(s) for any examina-
tion that is in process at the same time it
files the copy of the application with the
national office. The application must
contain the name(s) and telephone num-
ber(s) of the examining agent(s). The tax-
payer must attach to the application a sep-
arate statement signed by the taxpayer
certifying that, to the best of the tax-
payer’s knowledge, the same method of
accounting is not an issue under consider-
ation or an issue placed in suspense by the
examining agent(s).
(4) Consent of district director.
(a) A taxpayer under examination
may change its method of accounting
under this revenue procedure if the dis-
trict director consents to the change. The
district director will consent to the change
unless, in the opinion of the district direc-
tor, the method of accounting to be
changed would ordinarily be included as
an item of adjustment in the year(s) for
which the taxpayer is under examination.
For example, the district director will
consent to a change from a clearly per-
missible method of accounting. The dis-
trict director will also consent to a change
from an impermissible method of ac-
counting where the impermissible method
was adopted subsequent to the years
under examination. The question of
whether the method of accounting from
which the taxpayer is changing is permis-
sible or was adopted subsequent to the
years under examination may be referred
to the national office as a request for tech-
nical advice under the provisions of Rev.
Proc. 98–2 (or any successor).
(b) A taxpayer changing a method
of accounting under this revenue proce-
dure with the consent of the district direc-
tor must attach to the application a state-
ment from the district director consenting
to the change. The taxpayer must provide
a copy of the application to the district di-
rector at the same time it files a copy of
the application with the national office.
The application must contain the name(s)
and telephone number(s) of the examin-
ing agent(s).
.04 Taxpayer before an appeals office.
Except as otherwise provided in the AP-
PENDIX of this revenue procedure (see,
for example, sections 4.01, 5.04, 8.05,
9.02, 10A.01, 12.01, and 12.02 of the AP-
PENDIX of this revenue procedure), a
taxpayer that is before an appeals office
must attach to the application a separate
statement signed by the taxpayer certify-
ing that, to the best of the taxpayer’s
knowledge, the same method of account-
ing is not an issue under consideration by
the appeals office. The taxpayer must
provide a copy of the application to the
appeals officer at the same time it files a
copy of the application with the national
office. The application must contain the
name and telephone number of the ap-
peals officer.
.05 Taxpayer before a federal court.
Except as otherwise provided in the AP-
PENDIX of this revenue procedure (see,
for example, sections 4.01, 5.04, 8.05,
9.02, 10A.01, 12.01, and 12.02 of the AP-
PENDIX of this revenue procedure), a
taxpayer that is before a federal court
must attach to the application a separate
statement signed by the taxpayer certify-
ing that, to the best of the taxpayer’s
knowledge, the same method of account-
ing is not an issue under consideration by
the federal court. The taxpayer must pro-
vide a copy of the application to the coun-
sel for the government at the same time it
files a copy of the application with the na-
tional office. The application must con-
tain the name and telephone number of
the counsel for the government.
.06 Compliance with provisions.If a
taxpayer to which this revenue procedure
applies changes to a method of account-
ing without complying with all the applic-
able provisions of this revenue procedure
(for example, the taxpayer changes to a
method of accounting that varies from the
applicable accounting method described
in this revenue procedure or the taxpayer
is outside the scope of this revenue proce-
dure), the taxpayer has initiated a change
December 21, 1998241998–51 I.R.B.
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in method of accounting without obtain-
ing the consent of the Commissioner as
required by § 446(e). Upon examination,
a taxpayer that has initiated an unautho-
rized change in method of accounting
may be denied the change. Alternatively,
such a taxpayer may be required to effect
the change in an earlier or later taxable
year and may be denied the benefit of
spreading the § 481(a) adjustment over
the number of taxable years otherwise
prescribed by this revenue procedure.
SECTION 7. AUDIT PROTECTION
FOR TAXABLE YEARS PRIOR TO
YEAR OF CHANGE
.01 In general.Except as provided in
section 7.02 or the APPENDIX of this
revenue procedure, when a taxpayer
timely files a copy of the application with
the national office in compliance with all
the applicable provisions of this revenue
procedure, the Service will not require the
taxpayer to change its method of account-
ing for the same item for a taxable year
prior to the year of change.
.02 Exceptions.
(1) Change not made or made im-
properly. The Service may change a tax-
payer’s method of accounting for prior
taxable years if (a) the taxpayer fails to
implement the change, (b) the taxpayer
implements the change but does not com-
ply with all the applicable provisions of
this revenue procedure, or (c) the method
of accounting is changed or modified be-
cause there has been a misstatement or
omission of material facts (see section
8.02(2) of this revenue procedure).
(2) Change in sub-method.The Ser-
vice may change a taxpayer’s method of
accounting for prior taxable years if the
taxpayer is changing a sub-method of ac-
counting within the method. For exam-
ple, an examining agent may propose to
terminate the taxpayer’s use of the LIFO
inventory method during a prior taxable
year even though the taxpayer changes its
method of valuing increments in the cur-
rent year.
(3) Prior year Service-initiated
change. The Service may make adjust-
ments to the taxpayer’s returns for the
same item for taxable years prior to the
requested year of change to reflect a prior
year Service-initiated change.
(4) Criminal investigation.The Ser-
vice may change a taxpayer’s method of
accounting for the same item for taxable
years prior to the year of change if there is
any pending or future criminal investiga-
tion or proceeding concerning (a) directly
or indirectly, any issue relating to the tax-
payer’s federal tax liability for any tax-
able year prior to the year of change, or
(b) the possibility of false or fraudulent
statements made by the taxpayer with re-
spect to any issue relating to its federal
tax liability for any taxable year prior to
the year of change.
SECTION 8. EFFECT OF CONSENT
.01 In general.A taxpayer that
changes to a method of accounting pur-
suant to this revenue procedure may be
required to change or modify that method
of accounting for the following reasons:
(1) the enactment of legislation;
(2) a decision of the United States
Supreme Court;
(3) the issuance of temporary or final
regulations;
(4) the issuance of a revenue ruling,
revenue procedure, notice, or other state-
ment published in the Internal Revenue
Bulletin;
(5) the issuance of written notice to
the taxpayer that the change in method of
accounting was not in compliance with all
the applicable provisions of this revenue
procedure or is not in accord with the cur-
rent views of the Service; or
(6) a change in the material facts on
which the consent was based.
.02 Retroactive change or modifica-
tion.Except in rare or unusual circum-
stances, if a taxpayer that changes its
method of accounting under this revenue
procedure is subsequently required under
section 8.01 of this revenue procedure to
change or modify that method of account-
ing, the required change or modification
will not be applied retroactively, provided
that:
(1) the taxpayer complied with all
the applicable provisions of this revenue
procedure;
(2) there has been no misstatement
or omission of material facts;
(3) there has been no change in the
material facts on which the consent was
based;
(4) there has been no change in the
applicable law; and
(5) the taxpayer to whom consent
was granted acted in good faith in relying
on the consent, and applying the change
or modification retroactively would be to
the taxpayer’s detriment.
SECTION 9. REVIEW BY DISTRICT
DIRECTOR
.01 In general.The district director
must apply a change in method of ac-
counting made in compliance with all the
applicable provisions of this revenue pro-
cedure in determining the taxpayer’s lia-
bility, unless the district director recom-
mends that the change in method of
accounting should be modified or re-
voked. (See section 6.06 of this revenue
procedure if a change in method of ac-
counting is made without complying with
all the applicable provisions of this rev-
enue procedure.) The district director will
ascertain if the change in method of ac-
counting was made in compliance with all
the applicable provisions of this revenue
procedure, including whether:
(1) the representations on which the
change was based reflect an accurate
statement of the material facts;
(2) the amount of the § 481(a) ad-
justment was properly determined;
(3) the change in method of account-
ing was implemented in compliance with
all the applicable provisions of this rev-
enue procedure.
The district director will also ascertain
whether:
(4) there has been any change in the
material facts on which the change was
based during the period the method of ac-
counting was used; and
(5) there has been any change in the
applicable law during the period the
method of accounting was used.
.02 National office consideration.If
the district director recommends that a
change in method of accounting (other
than the § 481(a) adjustment) made in
compliance with all the applicable provi-
sions of this revenue procedure should be
modified or revoked, the district director
will forward the matter to the national of-
fice for consideration before any further
action is taken. Such a referral to the na-
tional office will be treated as a request for
technical advice, and the provisions of
Rev. Proc. 98–2 (or any successor) will be
followed.
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SECTION 10. REVIEW BY NATIONAL
OFFICE
.01 In general.Any application filed
under this revenue procedure may be re-
viewed by the national office. If the ap-
plication is reviewed by the national of-
fice, the procedures in sections 10.02
through 10.04 of this revenue procedure
apply.
.02 Incomplete application—21 day
rule.If the Service reviews an applica-
tion and determines that the application is
not properly completed in accordance
with the instructions of the Form 3115 or
the provisions of this revenue procedure,
or if supplemental information is needed,
the Service will notify the taxpayer. The
notification will specify the information
that needs to be provided, and the tax-
payer will be permitted 21 days from the
date of the notification to furnish the nec-
essary information. The Service reserves
the right to impose shorter reply periods if
subsequent requests for additional infor-
mation are made. An extension of the 21-
day period to furnish information, not to
exceed 15 days, may be granted to a tax-
payer. A request for an extension of the
21-day period must be made in writing
and submitted within the 21-day period.
If the extension request is denied, there is
no right of appeal.
.03 Conference in the national office.
If the national office tentatively deter-
mines that the taxpayer has changed its
method of accounting without complying
with all the applicable provisions of this
revenue procedure (for example, the tax-
payer changed to a method of accounting
that varies from the applicable accounting
method described in this revenue proce-
dure or the taxpayer is outside the scope
of this revenue procedure), the national
office will notify the taxpayer of its tenta-
tive adverse determination and will offer
the taxpayer a conference of right, if the
taxpayer has requested a conference. For
conference procedures for taxpayers other
than exempt organizations, see section 11
of Rev. Proc. 98–1 (or any successor).
For conference procedures for exempt or-
ganizations, see section 12 of Rev. Proc.
98–4, 1998–1 I.R.B. 113 (or any succes-
sor).
.04 National office determination.
(1) Consent not granted.Except as
provided in section 10.04(2) of this rev-
enue procedure, if the national office de-
termines that a taxpayer has changed its
method of accounting without complying
with all the applicable provisions of this
revenue procedure, the national office
will notify the taxpayer that consent to
make the change in method of accounting
is not granted. See section 6.06 of this
revenue procedure.
(2) Application changed.If the na-
tional office determines that a taxpayer
has changed its method of accounting
without complying with all the applicable
provisions of this revenue procedure, the
national office, in its discretion, may
allow the taxpayer (a) to make appropri-
ate adjustments to conform its change in
method of accounting to the applicable
provisions of this revenue procedure, and
(b) to make conforming amendments to
any federal income tax returns filed for
the year of change and subsequent taxable
years. Any application changed under
section 10.04(2) of this revenue proce-
dure is subject to review by the district di-
rector as provided in section 9 of this rev-
enue procedure.
SECTION 11. APPLICABILITY OF
REV. PROCS. 98–1 AND 98–4
Rev. Procs. 98–1 and 98–4 (or any suc-
cessors) are applicable to applications
filed under this revenue procedure, unless
specifically excluded or overridden by
other published guidance (including the
special procedures in this document).
SECTION 12. INQUIRIES
Inquiries regarding this revenue proce-
dure may be addressed to the Commis-
sioner of Internal Revenue, Attention:
CC:DOM:IT&A, 1111 Constitution Av-
enue, NW, Washington, D.C. 20224.
SECTION 13. EFFECTIVE DATE
.01 In general. Except as provided in
sections 13.02 and 13.03 of this revenue
procedure, this revenue procedure is ef-
fective for taxable years ending on or
after December 21, 1998. The Service
will return any application that is filed on
or after December 21, 1998, if the appli-
cation is filed with the national office pur-
suant to the Code, regulations, or admin-
istrative guidance other than this revenue
procedure and the change in method of
accounting is within the scope of this rev-
enue procedure.
.02 Transition rules. If a taxpayer filed
an application or ruling request with the
national office to make a change in
method of accounting authorized by this
revenue procedure, and the application or
ruling request is pending with the national
office on December 21, 1998, the tax-
payer may make the change under this
revenue procedure. However, the na-
tional office will process the application
or ruling request in accordance with the
authority under which it was filed, unless
prior to the later of February 1, 1999, or
the issuance of the letter ruling granting
or denying consent to the change, the tax-
payer notifies the national office that it
wants to make the change under this rev-
enue procedure. If the taxpayer timely
notifies the national office that it wants to
make the method change under this rev-
enue procedure, the national office will
require the taxpayer to make appropriate
modifications to the application or ruling
request to comply with the applicable pro-
visions of this revenue procedure. In ad-
dition, any user fee that was submitted
with the application or ruling request will
be returned to the taxpayer.
.03 Special rules.
(1) Change in method of accounting
for depreciation.For a change in method
of accounting described in section 2.01 or
2.02 of the APPENDIX of this revenue
procedure, this revenue procedure is ef-
fective for applications or copies of appli-
cations filed with the national office on or
after December 21, 1998.
(2) Change in method of accounting
to discontinue the mark-to-market method
of accounting.For a change in method of
accounting described in section 10A.01 of
the APPENDIX of this revenue proce-
dure, this revenue procedure is effective
for the taxpayer’s first taxable year end-
ing after July 22, 1998.
(3) Change in method of accounting
for a pool of debt instruments.For a
change in method of accounting described
in section 12.02 of the APPENDIX of this
revenue procedure, this revenue proce-
dure is effective for the taxpayer’s first
taxable year beginning after August 5,
1997.
December 21, 1998261998–51 I.R.B.
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SECTION 14. EFFECT ON OTHER
DOCUMENTS
.01 Rev. Proc. 97–37, is clarified,
modified, amplified, and superseded.
.02 Rev. Rul. 98–39, 1998–33 I.R.B. 4
(see section 8.05 of the APPENDIX of
this revenue procedure regarding cooper-
ative advertising), is modified.
SECTION 15. PAPERWORK
REDUCTION ACT
The collections of information con-
tained in this revenue procedure have
been reviewed and approved by the Of-
fice 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 unless the col-
lection of information displays a valid
OMB control number.
The collections of information in this
revenue procedure are in sections 6, 10,
and sections 2, 3, 5, 6, 7, 10, 10A, and 12
of the APPENDIX. 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 institu-
tions, nonprofit institutions, and small
businesses or organizations.
The estimated total annual reporting
and/or recordkeeping burden is 15,514
hours.
The estimated annual burden per re-
spondent/recordkeeper varies from
1
⁄
6
hour to 8
1
⁄
2
hours, depending on individual
circumstances, with an estimated average
of 1
1
⁄
2
hours. The estimated number of re-
spondents is 13,500.
The estimated annual frequency of re-
sponses is on occasion.
Books or records relating to a collec-
tion of information must be retained as
long as their contents may become mater-
ial in the administration of any internal
revenue law. Generally tax returns and
tax return information are confidential, as
required by 26 U.S.C. 6103.
DRAFTING INFORMATION
The principal author of this revenue
procedure is Dwight N. Mersereau of the
Office of Assistant Chief Counsel (In-
come Tax and Accounting). For further
information regarding this revenue proce-
dure, contact Mr. Mersereau on (202)
622-4970 (not a toll-free call). For fur-
ther information regarding the APPEN-
DIX of this revenue procedure contact the
following individuals: (1) for changes in
methods of accounting under sections
2.01 and 2.02 of the APPENDIX of this
revenue procedure, Peter Friedman of the
Office of Assistant Chief Counsel (Pass-
throughs and Special Industries) on (202)
622-3110 (not a toll-free call); (2) for
changes in methods of accounting under
section 2A.01 of the APPENDIX of this
revenue procedure, Leslie H. Finlow of
the Office of Assistant Chief Counsel
(Passthroughs and Special Industries) on
(202) 622-3120 (not a toll free call); (3)
for changes in methods of accounting
under sections 5.04, 6, 12, and 13 of the
APPENDIX of this revenue procedure,
William Blanchard of the Office of Assis-
tant Chief Counsel (Financial Institutions
and Products) on (202) 622-3950 (not a
toll-free call); (4) for changes in methods
of accounting under section 10A.01 of the
APPENDIX of this revenue procedure,
Pamela Lew of the Office of Assistant
Chief Counsel (Financial Institutions and
Products) on (202) 622-3950 (not a toll-
free call); (5) for changes in methods of
accounting under section 11 of the AP-
PENDIX of this revenue procedure, Craig
R. Wojay of the Office of Assistant Chief
Counsel (Financial Institutions and Prod-
ucts) on (202) 622-3920 (not a toll-free
call); and (6) for all other sections, Mr.
Mersereau on (202) 622-4970 (not a toll-
free call).
APPENDIX
CHANGES IN METHODS OF
ACCOUNTING TO WHICH
THIS REVENUE PROCEDURE
APPLIES
SECTION 1. TRADE OR
BUSINESS EXPENSES (§ 162) . . . . 29
.01 Advances made by a lawyer
on behalf of clients —
Description of change and
scope . . . . . . . . . . . . . . . . . . . . 29
.02 Year 2000 costs —
Description of change and
scope . . . . . . . . . . . . . . . . . . . . 29
SECTION 2. DEPRECIATION
OR AMORTIZATION (§ 167,
168 OR 197) . . . . . . . . . . . . . . . . . . . . 29
.01 Impermissible to permissible
method of accounting for
depreciation or
amortization . . . . . . . . . . . . . . . 29
(1) Description of change . . . . . 29
(2) Scope . . . . . . . . . . . . . . . . . .29
(3) Additional requirements . . . 30
(4) Section 481(a) adjustment . . 31
(5) Basis adjustment . . . . . . . . . 31
(6) Meaning of depreciation
allowable . . . . . . . . . . . . . . . 31
.02 Permissible to permissible
method of accounting for
depreciation . . . . . . . . . . . . . . . 31
(1) Description of change . . . . . 31
(2) Scope . . . . . . . . . . . . . . . . . . 32
(3) Changes covered . . . . . . . . . 32
(4) Additional requirements . . . 32
(5) Section 481(a) adjustment . . 33
.03 Sale or lease transactions . . . . 33
(1) Description of change and
scope . . . . . . . . . . . . . . . . . . 33
(2) Manner of making the
change . . . . . . . . . . . . . . . . . 33
(3) No audit protection . . . . . . . 33
SECTION 2A. RESEARCH
AND EXPERIMENTAL
EXPENDITURES (§ 174) . . . . . . . . . 33
.01 Changes to a different
method or different
amortization period . . . . . . . . . 33
(1) Description of change . . . . . 33
(2) Scope . . . . . . . . . . . . . . . . . . 33
(3) Manner of making the
change . . . . . . . . . . . . . . . . . 34
(4) Additional requirement . . . . 34
(5) No audit protection . . . . . . . 34
.02 Reserved . . . . . . . . . . . . . . . . . 34
SECTION 3. CAPITAL
EXPENDITURES (§ 263) . . . . . . . . . 34
.01 Package design costs . . . . . . . 34
(1) Description of change and
scope . . . . . . . . . . . . . . . . . . 34
(2) Additional requirements . . . 34
.02 Line pack gas; cushion gas . . 34
(1) Description of change
and scope . . . . . . . . . . . . . . . 34
(2) Additional requirements . . . 34
SECTION 4. UNIFORM
CAPITALIZATION (§ 263A) . . . . . . 34
.01 Certain uniform capitalization
(UNICAP) methods used by
1998–51 I.R.B.27December 21, 1998
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small resellers, formerly
small resellers, and reseller-
producers . . . . . . . . . . . . . . . . 34
(1) Description of change
and scope . . . . . . . . . . . . . . . 34
(2) Definitions . . . . . . . . . . . . . . 35
(3) Section 481(a) adjustment . . 35
(4) No audit protection . . . . . . . 35
(5) Example . . . . . . . . . . . . . . . . 35
.02 Reserved . . . . . . . . . . . . . . . . . 36
SECTION 5. METHODS OF
ACCOUNTING (§ 446) . . . . . . . . . . . 36
.01 Cash or hybrid method to
accrual method . . . . . . . . . . . . 36
(1) Description of change
and scope . . . . . . . . . . . . . . . 36
(2) Section 481(a) adjustment . . 37
(3) Change to a special method
of accounting . . . . . . . . . . . . 37
.02 Multi-year service warranty
contracts . . . . . . . . . . . . . . . . . 37
(1) Description of change
and scope . . . . . . . . . . . . . . . 37
(2) Manner of making the
change . . . . . . . . . . . . . . . . . 37
.03 Multi-year insurance policies
for multi-year service warranty
contracts — Description of
change and scope . . . . . . . . . . 37
(1) Applicability . . . . . . . . . . . . 37
(2) Inapplicability . . . . . . . . . . . 37
(3) Description of method . . . . . 37
.04 Interest accruals on short-term
consumer loans — Rule of 78s
method . . . . . . . . . . . . . . . . . . . 37
(1) Description of change and
scope . . . . . . . . . . . . . . . . . . 37
(2) Background . . . . . . . . . . . . . 37
(3) Manner of making the
change . . . . . . . . . . . . . . . . . 38
SECTION 6. OBLIGATIONS
ISSUED AT DISCOUNT (§ 454) . . . . 38
.01 Series E or EE U.S. savings
bonds . . . . . . . . . . . . . . . . . . . . 38
(1) Description of change and
scope . . . . . . . . . . . . . . . . . . 38
(2) Manner of making the
change . . . . . . . . . . . . . . . . . 38
.02 Reserved . . . . . . . . . . . . . . . . . 38
SECTION 7. PREPAID
SUBSCRIPTION INCOME(§ 455) . . 38
.01 Prepaid subscription income .38
(1) Description of change and
scope . . . . . . . . . . . . . . . . . . 38
(2) Manner of making the
change . . . . . . . . . . . . . . . . . 38
.02 Reserved . . . . . . . . . . . . . . . . . 38
SECTION 8. TAXABLE YEAR
OF DEDUCTION (§ 461) . . . . . . . . . 38
.01 Timing of incurring liabilities
for employee compensation . . . 38
(1) Description of change
and scope . . . . . . . . . . . . . . . 38
(2) Amounts taken into
account . . . . . . . . . . . . . . . . 39
.02 Timing of incurring liabilities
for real property taxes . . . . . . 39
(1) Description of change . . . . . 39
(2) Scope . . . . . . . . . . . . . . . . . . 39
(3) Amounts taken into
account . . . . . . . . . . . . . . . . 39
.03 Timing of incurring liabilities
under a workers’ compensation
act, tort, breach of contract, or
violation of law . . . . . . . . . . . . 39
(1) Description of change
and scope . . . . . . . . . . . . . . . 39
(2) Amounts taken into
account . . . . . . . . . . . . . . . . 39
.04 Timing of incurring liabilities
for payroll taxes . . . . . . . . . . . 39
(1) Description of change
and scope . . . . . . . . . . . . . . . 39
(2) Recurring item exception . . . 39
(3) Amounts taken into
account . . . . . . . . . . . . . . . . 39
.05 Cooperative advertising . . . . . . 39
(1) Description of change
and scope . . . . . . . . . . . . . . . 39
(2) Scope limitations
inapplicable . . . . . . . . . . . . . 40
SECTION 9. INVENTORIES
(§ 471) . . . . . . . . . . . . . . . . . . . . . . . . 40
.01 Cash discounts —
Description of change and
scope . . . . . . . . . . . . . . . . . . . . 40
.02 Estimating inventory
“shrinkage” . . . . . . . . . . . . . . 40
(1) Description of change
and scope . . . . . . . . . . . . . . . 40
(2) Scope limitations
inapplicable . . . . . . . . . . . . . 40
(3) Additional requirements . . . 40
(4) Audit protection . . . . . . . . . . 40
(5) Future change . . . . . . . . . . . 40
SECTION 10. LAST-IN, FIRST-OUT
(LIFO) INVENTORIES (§ 472) . . . . . 40
.01 Change from the LIFO
inventory method . . . . . . . . . . . 40
(1) Description of change
and scope . . . . . . . . . . . . . . . 40
(2) Limitation on LIFO
election . . . . . . . . . . . . . . . . 41
(3) Effect of subchapter S
election by corporation . . . . 41
(4) Additional requirements . . . 41
.02 Determining the cost of used
vehicles purchased or taken
as a trade-in . . . . . . . . . . . . . . 41
(1) Description of change
and scope . . . . . . . . . . . . . . . 41
(2) Manner of making the
change . . . . . . . . . . . . . . . . . 41
.03 Alternative LIFO inventory
method for retail automobile
dealers . . . . . . . . . . . . . . . . . . . 41
(1) Description of change
and scope . . . . . . . . . . . . . . . 41
(2) Manner of making the
change . . . . . . . . . . . . . . . . . 41
.04 Inventory price index
computation (IPIC) method
under the LIFO inventory
method . . . . . . . . . . . . . . . . . . . 42
(1) Description of change
and scope . . . . . . . . . . . . . . . 42
(2) Manner of making the
change . . . . . . . . . . . . . . . . . 42
(3) Bargain purchase . . . . . . . . . 42
.05 Determining current-year
cost under the LIFO inventory
method . . . . . . . . . . . . . . . . . . . 42
(1) Description of change
and scope . . . . . . . . . . . . . . . 42
(2) Manner of making the
change . . . . . . . . . . . . . . . . . 42
SECTION 10A. MARK-TO-
MARKET ACCOUNTING
METHOD FOR DEALERS IN
SECURITIES (§ 475) . . . . . . . . . . . . . 42
.01 Discontinuing the mark-to-
market method of accounting
for nonfinancial customer
paper . . . . . . . . . . . . . . . . . . . . 42
(1) Description of change
and scope . . . . . . . . . . . . . . . 42
(2) Additional Requirements . . . 43
(3) No audit protection . . . . . . . 43
.02 Reserved . . . . . . . . . . . . . . . . . 43
SECTION 11. BANK RESERVES
FOR BAD DEBTS (§ 585) . . . . . . . . . 43
.01 Changing from the § 585
reserve method to the § 166
specific charge-off method . . . 43
December 21, 1998281998–51 I.R.B.
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(1) Description of change
and scope . . . . . . . . . . . . . . . 43
(2) Section 481(a) adjustment . . 43
(3) Change from § 585 required
when electing S corporation
status . . . . . . . . . . . . . . . . . . 43
.02 Reserved . . . . . . . . . . . . . . . . . 43
SECTION 12. ORIGINAL ISSUE
DISCOUNT (§§ 1272; 1273) . . . . . . . 43
.01 De minimis original issue
discount (OID) . . . . . . . . . . . . 43
(1) Description of change
and scope . . . . . . . . . . . . . . . 43
(2) Manner of making the
change . . . . . . . . . . . . . . . . . 43
(3) Additional requirements . . . 44
(4) No audit protection . . . . . . . 44
.02 Pool of debt instruments . . . . . 44
(1) Description of change
and scope . . . . . . . . . . . . . . . 44
(2) Additional requirements . . . 44
SECTION 13. SHORT-TERM
OBLIGATIONS (§ 1281) . . . . . . . . . . 44
.01 Interest income on short-term
obligations . . . . . . . . . . . . . . . 44
(1) Description of change
and scope . . . . . . . . . . . . . . . 44
(2) Section 481(a) adjustment
period . . . . . . . . . . . . . . . . . . 45
.02 Stated interest on short-term
loans of cash method banks
in the Eighth Circuit . . . . . . . . 45
(1) Description of change
and scope . . . . . . . . . . . . . . . 45
(2) Section 481(a) adjustment
period . . . . . . . . . . . . . . . . . . 45
(3) No ruling protection . . . . . . 45
SECTION 1. TRADE OR BUSINESS
EXPENSES (§ 162)
.01 Advances made by a lawyer on be-
half of clients — Description of change
and scope.This change applies to a
lawyer handling cases on a contingent fee
basis that advances money to pay for
costs of litigation or for other expenses on
behalf of clients and that wants to change
the method of accounting for such ad-
vances from treating them as deductible
business expenses to treating them as
loans. See Boccardov. United States,12
Cl. Ct. 184 (1987); Canelov. Commis-
sioner,53 T.C. 217 (1969), aff ’d per cu-
riam,447 F.2d 484 (9th Cir. 1971).
.02 Year 2000 costs — Description of
change and scope.This change applies to
a taxpayer that wants to change its
method of accounting for Year 2000 costs
(as defined in Rev. Proc. 97–50, 1997–2
C.B. 525) to conform to the method de-
scribed in section 3 of Rev. Proc. 97–50.
Section 3 of Rev. Proc. 97–50 provides
that Year 2000 costs fall within the
purview of Rev. Proc. 69–21, 1969–2
C.B. 303, and that the Service will not
disturb a taxpayer’s treatment of its Year
2000 costs as deductible expenses or capi-
tal expenditures if the taxpayer treats
these costs in accordance with Rev. Proc.
69–21.
SECTION 2. DEPRECIATION OR
AMORTIZATION (§ 167, 168, OR 197)
.01Impermissible to permissible
method of accounting for depreciation or
amortization.
(1) Description of change.
(a) This change applies to a tax-
payer that wants to change from an imper-
missible method of accounting for depre-
ciation or amortization (depreciation)
under which the taxpayer did not claim
the depreciation allowable, to a permissi-
ble method of accounting for depreciation
under which the taxpayer will claim the
depreciation allowable.
(b) A change from a taxpayer’s
impermissible method of accounting for
depreciation under which the taxpayer did
not claim the depreciation allowable to a
permissible method of accounting for de-
preciation under which the taxpayer will
claim the depreciation allowable is a
change in method of accounting for which
the consent of the Commissioner is re-
quired. Sections 1.167(e)-1(a) and 1.446-
1(e)(2)(ii)(b). This method change, how-
ever, does not include any correction of
mathematical or posting errors. Section
1.446-1(e)(2)(ii)(b).
(2)Scope.
(a) Applicability.This change ap-
plies to any taxpayer that has used an im-
permissible method of accounting for de-
preciation in at least the two taxable years
immediately preceding the year of change,
and is changing that accounting method to
a permissible method of accounting for
depreciation, for any item of property:
(i) for which, under the tax-
payer’s impermissible method of account-
ing, the taxpayer has not taken into ac-
count any depreciation allowance or has
taken into account some depreciation but
less than or more than the depreciation al-
lowable (claimed less than or more than
the depreciation allowable);
(ii) for which depreciation is
determined under § 167, 168, 197, or 168
prior to its amendment in 1986 (former
§ 168); and
(iii) that is owned by the tax-
payer at the beginning of the year of
change.
(b) Inapplicability. This change
does not apply to:
(i) any property to which
§ 1016(a)(3) (regarding property held by
a tax-exempt organization) applies;
(ii) any taxpayer that is subject
to § 263A and that is required to capitalize
the costs with respect to which the tax-
payer wants to change its method of ac-
counting under section 2.01 of this AP-
PENDIX, if the taxpayer is not
capitalizing the costs as required;
(iii) any intangible property
subject to § 167, except for property sub-
ject to § 167(f) (regarding certain prop-
erty excluded from § 197);
(iv) any property subject to
§ 167(g) (regarding property depreciated
under the income forecast method);
(v) any § 1250 property that a
taxpayer is reclassifying to an asset class
of Rev. Proc. 87–56, 1987–2 C.B. 674, or
Rev. Proc. 83–35, 1983–1 C.B. 745, as
appropriate, that does not explicitly in-
clude § 1250 property (for example, asset
class 57.0, Distributive Trades and Ser-
vices);
(vi) any property for which a
taxpayer is revoking a timely valid elec-
tion, or making a late election, under
§ 167, 168, former § 168, or § 13261(g)-
(2) or (3) of the Revenue Reconciliation
Act of 1993 (1993 Act), 1993–3 C.B. 1,
128 (relating to amortizable § 197 intan-
gibles). A taxpayer may request consent
to revoke or make the election by submit-
ting a request for a letter ruling under
Rev. Proc. 98–1, 1998–1 I.R.B. 7 (or any
successor);
(vii) any property subject to §
167 (other than § 167(f), regarding certain
property excluded from § 197), for which
a taxpayer is changing only the estimated
useful life of the property. A change in
the estimated useful life of property for
1998–51 I.R.B.29December 21, 1998
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which depreciation is determined under
§ 167 (other than § 167(f)) must be made
prospectively (see, for example,
§ 1.167(b)–2(c)). (In contrast, section
2.01 of this APPENDIX generally applies
to a change in the recovery period of
property for which depreciation is deter-
mined under § 168 or former § 168);
(viii) any depreciable property
that changes use but continues to be
owned by the same taxpayer (see, for ex-
ample, § 168(i)(5));
(ix) any property for which de-
preciation is determined in accordance
with § 1.167(a)–11 (regarding the Class
Life Asset Depreciation Range System
(ADR));
(x) any change in method of ac-
counting involving a change from deduct-
ing the cost or other basis of any property
as an expense to capitalizing and depreci-
ating the cost or other basis;
(xi) any change in method of
accounting involving a change from one
permissible method of accounting for the
property to another permissible method of
accounting for the property. For example:
(A) a change from the
straight-line method of depreciation to the
income forecast method of depreciation
for videocassettes. SeeRev. Rul. 89–62,
1989-1 C.B. 78; or
(B) a change from charging
the depreciation reserve with costs of re-
moval and crediting the depreciation re-
serve with salvage proceeds to deducting
costs of removal as an expense (provided
the costs of removal are not required to be
capitalized under any provision of the
Code, such as § 263(a)) and including sal-
vage proceeds in taxable income (see sec-
tion 2.02 of this APPENDIX for making
this change for property for which depre-
ciation is determined under § 167);
(xii) any change in method of
accounting involving both a change from
treating the cost or other basis of the prop-
erty as nondepreciable property to treat-
ing the cost or other basis of the property
as depreciable property and the adoption
of a method of accounting for deprecia-
tion requiring an election under § 167,
168, former § 168, or § 13261(g)(2) or (3)
of the 1993 Act (for example, a change in
the treatment of the space consumed in
landfills placed in service in 1990 from
nondepreciable to depreciable property
(assuming section 2.01(2)(c)(xiii) of the
APPENDIX does not apply) and the mak-
ing of an election under § 168(f)(1) to de-
preciate this property under the unit-of-
production method of depreciation under
§ 167);
(xiii) any change in method of
accounting for an item of income or de-
duction other than depreciation, even if a
taxpayer’s present method of accounting
may have resulted in the taxpayer claim-
ing less than or more than the deprecia-
tion allowable. For example, a change in
method of accounting involving:
(A) a change in inventory
costs (for example, when property is re-
classified from inventory property to de-
preciable property, or vice versa) (but see
section 3.02 of this APPENDIX for mak-
ing a change from inventory property to
depreciable property for unrecoverable
line pack gas or unrecoverable cushion
gas); or
(B) a change in the character
of a transaction from sale to lease, or vice
versa (but see section 2.03 of this AP-
PENDIX for making this change); or
(xiv) a change from determin-
ing depreciation under § 168 to determin-
ing depreciation under former § 168 for
any property subject to the transition rules
in § 203(b) or 204(a) of the Tax Reform
Act of 1986, 1986–3 (Vol. 1) C.B. 1, 60–
80.
(3) Additional requirements.A tax-
payer also must comply with the follow-
ing:
(a) Permissible depreciation
method. A taxpayer must change to a per-
missible method of accounting for depre-
ciation for the item of property. This
method is the same method that deter-
mines the depreciation allowable for the
item of property (as provided in section
2.01(6) of this APPENDIX).
(b) Statements required. A tax-
payer must provide the following state-
ments, if applicable, and attach them to
the completed application:
(i) a detailed description of the
former and new methods of accounting.
A general description of these methods of
accounting is unacceptable (for example,
MACRS to MACRS or erroneous method
to proper method);
(ii) to the extent not provided
elsewhere on the application, a statement
describing the taxpayer’s business or in-
come-producing activities. Also, if the
taxpayer has more than one business or
income-producing activity, a statement
describing the taxpayer’s business or in-
come-producing activity in which the
item of property at issue is primarily used
by the taxpayer;
(iii) to the extent not provided
elsewhere on the application, a statement
of the facts and law supporting the new
method of accounting, new classification
of the item of property, and new asset
class in, as appropriate, Rev. Proc. 87-56
or Rev. Proc. 83-35. If the taxpayer is the
owner and lessor of the item of property
at issue, the statement of the facts and law
supporting the new asset class also must
describe the business or income-produc-
ing activity in which that item of property
is primarily used by the lessee;
(iv) to the extent not provided
elsewhere on the application, a statement
identifying the year in which the item of
property was placed in service;
(v) if the item of property is de-
preciated under former § 168, a statement
identifying the asset class in Rev. Proc.
83-35 that applies under the taxpayer’s
former and new methods of accounting (if
none, state and explain);
(vi) if any item of property is
public utility property within the meaning
of § 168(i)(10) or former § 167(l)(3)(A),
as applicable, a statement providing that
the taxpayer agrees to the following addi-
tional terms and conditions:
(A) a normalization method
of accounting (within the meaning of for-
mer § 167(l)(3)(G), former § 168(e)-
(3)(B), or § 168(i)(9), as applicable) will
be used for the public utility property sub-
ject to the application;
(B) as of the beginning of the
year of change, the taxpayer will adjust its
deferred tax reserve account or similar re-
serve account in the taxpayer’s regulatory
books of account by the amount of the de-
ferral of federal income tax liability asso-
ciated with the § 481(a) adjustment ap-
plicable to the public utility property
subject to the application; and
(C) within 30 calendar days
of filing the federal income tax return for
the year of change, the taxpayer will pro-
vide a copy of the completed application
to any regulatory body having jurisdiction
over the public utility property subject to
the application;
(vii) if the taxpayer is changing
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the classification of an item of § 1250
property placed in service after August
19, 1996, to a retail motor fuels outlet
under § 168(e)(3)(E)(iii), a statement con-
taining the following representation: “For
purposes of § 168(e)(3)(E)(iii) of the In-
ternal Revenue Code, the taxpayer repre-
sents that (A) 50 percent or more of the
gross revenue generated from the item of
§ 1250 property is from the sale of petro-
leum products (not including gross rev-
enue from related services, such as the
labor cost of oil changes and gross rev-
enue from the sale of nonpetroleum prod-
ucts such as tires and oil filters), (B) 50
percent or more of the floor space in the
item of property is devoted to the sale of
petroleum products (not including floor
space devoted to related services, such as
oil changes and floor space devoted to
nonpetroleum products such as tires and
oil filters), or (C) the item of § 1250 prop-
erty is 1,400 square feet or less.”; and
(viii) if the taxpayer is changing
the classification of an item of property
from § 1250 property to § 1245 property
under § 168 or former § 168, a statement
of the facts and law supporting the new §
1245 property classification, and a state-
ment containing the following representa-
tion: “Each item of property that is the
subject of the application filed under sec-
tion 2.01 of the APPENDIX of Rev. Proc.
98-60 for the year of change beginning
[Insert the date], and that is reclassified
from [Insert, as appropriate: nonresiden-
tial real property, residential rental prop-
erty, 19-year real property, 18-year real
property, or 15-year real property] to an
asset class of [Insert, as appropriate, ei-
ther: Rev. Proc. 87–56, 1987–2 C.B. 674,
or Rev. Proc. 83–35, 1983–1 C.B. 745]
that does not explicitly include § 1250
property, is § 1245 property for deprecia-
tion purposes.”
(4) Section 481(a) adjustment.Be-
cause the adjusted basis of the property is
changed as a result of a method change
made under section 2.01 of this APPEN-
DIX (see section 2.01(5) of this APPEN-
DIX), items are duplicated or omitted.
Accordingly, this change is made with a §
481(a) adjustment. This adjustment may
result in either a negative § 481(a) adjust-
ment (a decrease in taxable income) or a
positive § 481(a) adjustment (an increase
in taxable income). This § 481(a) adjust-
ment equals the difference between the
total amount of depreciation taken into
account in computing taxable income for
the property under the taxpayer’s former
method of accounting, and the total
amount of depreciation allowable for the
property under the taxpayer’s new
method of accounting (as determined
under section 2.01(6) of this APPEN-
DIX), for open and closed years prior to
the year of change. However, the amount
of the § 481(a) adjustment must be ad-
justed to account for the proper amount of
the depreciation allowable that is required
to be capitalized under any provision of
the Code (for example, § 263A) at the be-
ginning of the year of change.
(5) Basis adjustment.As of the be-
ginning of the year of change, the basis of
depreciable property to which section
2.01 of this APPENDIX applies must re-
flect the reductions required by §
1016(a)(2) for the depreciation allowable
for the property (as determined under sec-
tion 2.01(6) of this APPENDIX).
(6) Meaning of depreciation allow-
able.
(a) In general. Section 2.01(6) of
this APPENDIX provides the amount of
the depreciation allowable, determined
under § 167, 168, 197, or former § 168.
This amount, however, may be limited by
other provisions of the Code (for exam-
ple, § 280F).
(b) Section 167 property. Gener-
ally, for any taxable year, the depreciation
allowable for property for which depreci-
ation is determined under § 167, is deter-
mined either:
(i) under the depreciation
method adopted by a taxpayer for the
property; or
(ii) if that depreciation method
does not result in a reasonable allowance
for depreciation or a taxpayer has not
adopted a depreciation method for the
property, under the straight-line deprecia-
tion method.
For determining the estimated useful life
and salvage value of the property, see
§§ 1.167(a)–1(b) and (c), respectively.
The depreciation allowable for any tax-
able year for property subject to § 167(f)
(regarding certain property excluded from
§ 197) is determined by using the depreci-
ation method and useful life prescribed in
§ 167(f).
(c) Section 168 property. The de-
preciation allowable for any taxable year
for property for which depreciation is de-
termined under § 168, is determined by
using either:
(i) the general depreciation sys-
tem in § 168(a); or
(ii) the alternative depreciation
system in § 168(g) if the property is re-
quired to be depreciated under the alterna-
tive depreciation system pursuant to
§ 168(g)(1) or other provisions of the
Code (for example, property described in
§ 263A(e)(2)(A) or 280F(b)(1)). Property
required to be depreciated under the alter-
native depreciation system pursuant to
§ 168(g)(1) includes property in a class
(as set out in § 168(e)) for which the tax-
payer made a timely election under
§ 168(g)(7).
(d) Section 197 property.The de-
preciation allowable for any taxable year
for an amortizable § 197 intangible (in-
cluding any property for which a timely
election under § 13261(g)(2) of the 1993
Act was made) is determined by using the
straight-line method over a 15-year pe-
riod.
(e) Former § 168 property.The
depreciation allowable for any taxable
year for property subject to former § 168
is determined by using either:
(i) the accelerated method of
cost recovery applicable to the property
(for example, for 5-year property, the re-
covery method under former § 168(b)(1));
or
(ii) the straight-line method ap-
plicable to the property if the property is
required to be depreciated under the
straight-line method (for example, prop-
erty described in former § 168(f)(12) or
former § 280F(b)(2)) or if the taxpayer
elected to determine the depreciation al-
lowance under the optional straight-line
percentage (for example, the straight-line
method in former § 168(b)(3)).
.02 Permissible to permissible method
of accounting for depreciation.
(1) Description of change. This
change applies to a taxpayer that wants to
change from a permissible method of ac-
counting for depreciation under § 167 to
another permissible method of accounting
for depreciation under § 167. Pursuant to
§§ 1.167(a)–7(a) and (c), a taxpayer may
account for depreciable property either by
treating each individual asset as an ac-
count or by combining two or more assets
in a single account and, for each account,
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depreciation allowances are computed
separately.
(2) Scope.
(a) Applicability.This change ap-
plies to any taxpayer wanting to make a
change in method of accounting for de-
preciation specified in section 2.02(3) of
this APPENDIX for the property in an ac-
count:
(i) for which the present and
proposed methods of accounting for de-
preciation specified in section 2.02(3) of
this APPENDIX are permissible methods
for the property under § 167; and
(ii) that is owned by the tax-
payer at the beginning of the year of
change.
(b) Inapplicability. This change
does not apply to:
(i) any taxpayer that is subject
to § 263A and that is required to capitalize
the costs with respect to which the tax-
payer wants to change its method of
accounting under section 2.02 of this AP-
PENDIX, if the taxpayer is not capitaliz-
ing the costs as required;
(ii) any property to which
§ 1016(a)(3) (regarding property held by
a tax-exempt organization) applies;
(iii) any intangible property;
(iv) any property described in
§ 167(f) (regarding certain property ex-
cluded from § 197);
(v) any property subject to
§ 167(g) (regarding property depreciated
under the income forecast method);
(vi) any property for which de-
preciation is determined under § 168 or
§ 168 prior to its amendment in 1986 (for-
mer § 168);
(vii) any property that the tax-
payer elected under § 168(f)(1) or former
§ 168(e)(2) to exclude from the applica-
tion of, respectively, § 168 or former
§ 168;
(viii) any property for which
depreciation is determined in accordance
with § 1.167(a)-11 (regarding the Class
Life Asset Depreciation Range System
(ADR)); or
(ix) any depreciable property
for which the taxpayer is changing the de-
preciation method pursuant to § 1.167(e)–
1(b) (change from declining-balance
method to straight-line method),
§ 1.167(e)–1(c) (certain changes for
§ 1245 property), or § 1.167(e)–1(d) (cer-
tain changes for § 1250 property). These
changes must be made prospectively and
are not permitted under the cited regula-
tions for property for which the deprecia-
tion is determined under § 168 or former
§ 168.
(3) Changes covered.Section 2.02
of this APPENDIX only applies to the fol-
lowing changes in methods of accounting
for depreciation:
(a) a change from the straight-line
method to the sum-of-the-years-digits
method, the sinking fund method, the
unit-of-production method, or the declin-
ing-balance method using any proper per-
centage of the straight-line rate;
(b) a change from the declining-
balance method using any percentage of
the straight-line rate to the sum-of-the-
years-digits method, the sinking fund
method, or the declining-balance method
using a different proper percentage of the
straight-line rate;
(c) a change from the sum-of-the-
years-digits method to the sinking fund
method, the declining-balance method
using any proper percentage of the
straight-line rate, or the straight-line
method;
(d) a change from the unit-of-pro-
duction method to the straight-line
method;
(e) a change from the sinking fund
method to the straight-line method, the
unit-of-production method, the sum-of-
the-years-digits method, or the declining-
balance method using any proper percent-
age of the straight-line rate;
(f) a change in the interest factor
used in connection with a compound in-
terest method or sinking fund method;
(g) a change in averaging conven-
tion as set forth in § 1.167(a)–10(b).
However, as specifically provided in
§ 1.167(a)–10(b), in any taxable year in
which an averaging convention substan-
tially distorts the depreciation allowance
for the taxable year, it may not be used
(seeRev. Rul. 73–202, 1973–1 C.B. 81);
(h) a change from charging the de-
preciation reserve with costs of removal
and crediting the depreciation reserve
with salvage proceeds to deducting costs
of removal as an expense and including
salvage proceeds in taxable income as set
forth in § 1.167(a)–8(e)(2). SeeRev. Rul.
74–455, 1974–2 C.B. 63. This change,
however, may be made under this revenue
procedure only if:
(i) the change is applied to all
items in the account for which the change
is being made; and
(ii) the removal costs are not re-
quired to be capitalized under any provi-
sion of the Code (for example, § 263(a),
263A, or 280B);
(i) a change from crediting the de-
preciation reserve with the salvage pro-
ceeds realized on normal retirement sales
to computing and recognizing gains and
losses on such sales (seeRev. Rul. 70–
165, 1970–1 C.B. 43);
(j) a change from crediting ordi-
nary income (including the combination
method of crediting the lesser of esti-
mated salvage value or actual salvage
proceeds to the depreciation reserve, with
any excess of salvage proceeds over esti-
mated salvage value credited to ordinary
income) with the salvage proceeds real-
ized on normal retirement sales, to com-
puting and recognizing gains and losses
on such sales (seeRev. Rul. 70–166,
1970–1 C.B. 44); or
(k) a change from item accounting
for specific assets to multiple asset ac-
counting for the same assets, or vice versa.
(4) Additional requirements. A tax-
payer also must comply with the follow-
ing:
(a) Basis for depreciation.At the
beginning of the year of change, the basis
for depreciation of property to which this
change applies is the adjusted basis of the
property as provided in § 1011 at the end
of the taxable year immediately preceding
the year of change (determined under the
taxpayer’s present method of accounting
for depreciation). If applicable under the
taxpayer’s proposed method of account-
ing for depreciation, this adjusted basis is
reduced by the estimated salvage value of
the property (for example, a change to the
straight-line method).
(b) Rate of depreciation. The rate
of depreciation for property changed to:
(i) the straight-line or sum-of-
the-years-digits method of depreciation
must be based on the remaining useful life
of the property as of the beginning of the
year of change; or
(ii) the declining-balance
method of depreciation must be based on
the useful life of the property measured
from the placed-in-service date, and not
the expected remaining life from the date
the change becomes effective.
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(c) Regulatory requirements. For
changes in method of depreciation to the
sum-of-the-years-digits or declining-bal-
ance method, the property must meet the
requirements of § 1.167(b)–0 or 1.167(c)–
1, as appropriate.
(d) Public utility property. If any
item of property is public utility property
within the meaning of former
§ 167(l)(3)(A), the taxpayer must attach
to the application a statement providing
that the taxpayer agrees to the following
additional terms and conditions:
(i) a normalization method of
accounting within the meaning of former
§ 167(l)(3)(G) will be used for the public
utility property subject to the application;
and
(ii) within 30 calendar days of
filing the federal income tax return for the
year of change, the taxpayer will provide
a copy of the completed application to
any regulatory body having jurisdiction
over the public utility property subject to
the application.
(5) Section 481(a) adjustment. Be-
cause the adjusted basis of the property is
not changed as a result of a method
change made under section 2.02 of this
APPENDIX, no items are being dupli-
cated or omitted. Accordingly, the
§ 481(a) adjustment is zero.
.03 Sale or lease transactions.
(1) Description of change and scope.
(a)Applicability. This change ap-
plies to a taxpayer that wants to change its
method of accounting from:
(i) improperly treating property
as sold by the taxpayer to properly treat-
ing property as leased by the taxpayer;
(ii) improperly treating property
as leased by the taxpayer to properly
treating property as sold by the taxpayer;
(iii) improperly treating prop-
erty as purchased by the taxpayer to prop-
erly treating property as leased by the tax-
payer; and
(iv) improperly treating prop-
erty as leased by the taxpayer to properly
treating property as purchased by the tax-
payer.
(b) Inapplicability.This change
does not apply to:
(i) a rent-to-own dealer that
wants to change its method of accounting
for rent-to-own contracts described in
section 3 of Rev. Proc. 95–38, 1995–2
C.B. 397; or
(ii) a taxpayer that holds assets
for sale or lease, if any asset so held is not
the subject of a sale or lease transaction as
of the beginning of the year of change.
(2) Manner of making the change.
(a) The change in method of ac-
counting under section 2.03 of this AP-
PENDIX is made using a cut-off method
and applies to transactions entered into on
or after the beginning of the year of
change. Seesection 2.06 of this revenue
procedure.
(b) If a taxpayer wants to change
its method of accounting for existing sale
or lease transactions, the taxpayer must
file an application with the Commissioner
in accordance with the requirements of
1.446–1(e)(3)(i) and Rev. Proc. 97–27. A
change involving existing sale or lease
transactions will require a § 481(a) adjust-
ment. Consent to change a method of ac-
counting for an existing sale or lease
transaction is granted only in unusual and
compelling circumstances.
(3) No audit protection.A taxpayer
does not receive audit protection under
section 7 of this revenue procedure in
connection with this change.
SECTION 2A. RESEARCH AND
EXPERIMENTAL EXPENDITURES
(§ 174)
.01 Changes to a different method or
different amortization period.
(1) Description of change.
(a) This change applies to a tax-
payer that wants to change the treatment
of expenditures that qualify as research
and experimental expenditures under
§ 174.
(b) Section 174 and the regula-
tions thereunder provide the specific rules
for changing a method of accounting
under § 174 for research and experimental
expenditures. Under § 174, a taxpayer
may treat research and experimental ex-
penditures that are paid or incurred by the
taxpayer during the taxable year in con-
nection with the taxpayer’s trade or busi-
ness as expenses under § 174(a) or as de-
ferred expenses amortizable ratably over
a period of not less than 60 months under
§ 174(b). Pursuant to § 1.174–1, research
and experimental expenditures that are
not treated as expenses or deferred ex-
penses under § 174 must be treated as
capital expenditures. Further, § 1.174–1
provides that the expenditures to which §
174 applies may relate either to a general
research program or to a particular pro-
ject.
(c) If a taxpayer has not treated re-
search and experimental expenditures as
expenses under § 174(a), §§ 174(a)(2)(B)
and 1.174–3(b)(2) provide that the tax-
payer may, with consent, adopt the ex-
pense method at any time.
(d) If a taxpayer has treated re-
search and experimental expenditures as
expenses under § 174(a), §§ 174(a)(3)
and 1.174–3(b)(3) provide that the tax-
payer may, with consent, change to a dif-
ferent method of treating research and ex-
perimental expenditures.
(e) If a taxpayer has treated re-
search and experimental expenditures as
deferred expenses under § 174(b),
§§ 174(b)(2) and 1.174–4(b)(2) provide
that the taxpayer may, with consent,
change to a different method of treating
research or experimental expenditures or
to a different period of amortization for
deferred expenses.
(2) Scope.
(a) Applicability. This change ap-
plies to any taxpayer that is changing:
(i) from treating research and
experimental expenditures for a particular
project or projects as expenses under
§ 174(a) to treating such expenditures as
deferred expenses under § 174(b), or vice
versa;
(ii) to a different period of
amortization for research and experimen-
tal expenditures for a particular project or
projects that are being treated as deferred
expenses under § 174(b); or
(iii) from treating research and
experimental expenditures for a particular
project or projects as expenses under
§ 174(a) or deferred expenses under
§ 174(b) to treating such expenditures as a
capital expenditure under § 263(a), or
vice versa.
(b) Scope limitations clarified.
The scope limitation under section
4.02(6) of this revenue procedure is ap-
plied on a project by project basis.
(c) Inapplicability.This change
does not apply to:
(i) a portion of the research and
experimental expenditures paid or in-
curred for a particular project during the
year of change or in subsequent taxable
years (that is, the change must apply to all
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of such expenditures; see §§ 1.174–3(a)
and 1.174–4(a)(5));
(ii) a change in the treatment of
computer software costs under Rev. Proc.
69–21, 1969-–2 C.B. 303; or
(iii) a change in the treatment of
Year 2000 costs under Rev. Proc. 97–50,
1997–2 C.B. 525 (but see section 1.02 of
this APPENDIX for making this change).
(3) Manner of making the change.
(a) This change is made using a
cut-off method and applies to all research
and experimental expenditures paid or in-
curred for a particular project or projects
during the year of change and in subse-
quent taxable years. See section 2.06 of
this revenue procedure and §§ 174(b)(2),
1.174–3(a), 1.174–3(b)(2), and 1.174–
4(a)(5).
(b) The requirement under
§§ 1.174–3(b)(2), 1.174–3(b)(3), and
1.174–4(b)(2) to file an application no
later than the end of the first taxable year
in which the different method or different
amortization period is to be used is
waived for this change. However, see
section 6 of this revenue procedure for fil-
ing requirements applicable under this
revenue procedure.
(c) The consent granted under this
revenue procedure satisfies the consent
required under §§ 174(a)(2)(B),
174(a)(3), 174(b)(2), 1.174–3(b)(2),
1.174–3(b)(3), and 1.174–4(b)(2).
(4) Additional requirement. A taxpayer
must attach to the application a written
statement providing:
(a) the information required in
§ 1.174–3(b)(2) if the taxpayer is chang-
ing to treating research and experimental
expenditures as expenses under § 174(a);
(b) the information required in
§ 1.174–3(b)(3) if the taxpayer is chang-
ing from treating research and experimen-
tal expenditures as expenses under
§ 174(a); or
(c) the information required in
§ 1.174–4(b)(2) if the taxpayer is chang-
ing from treating research and experimen-
tal expenditures as deferred expenses
method under § 174(b) or is changing to a
different period of amortization for re-
search and experimental expenditures
being treated as deferred expenses under
§ 174(b).
(5) No audit protection.A taxpayer
does not receive audit protection under
section 7 of this revenue procedure in
connection with this change.
.02 Reserved.
SECTION 3. CAPITAL
EXPENDITURES (§ 263)
.01 Package design costs.
(1) Description of change and scope.
(a)Applicability.This change ap-
plies to a taxpayer that wants to change its
method of accounting for package design
costs that are within the scope of Rev.
Proc. 97–35, 1997–2 C.B. 448, to one of
the three alternative methods of account-
ing for package design costs described in
section 5 of Rev. Proc. 97–35. The three
alternative methods of accounting for
package design costs described are: (1)
the capitalization method, (2) the design-
by-design capitalization and 60-month
amortization method, and (3) the pool-of-
cost capitalization and 48-month amorti-
zation method.
(b) Inapplicability. This change
does not apply to a taxpayer that wants to
change to the capitalization method for
costs of developing (or modifying) any
package design that has an ascertainable
useful life.
(2) Additional requirements.If a
taxpayer is changing its method of ac-
counting for package design costs to the
capitalization method or the design-by-
design capitalization and 60-month amor-
tization method, the taxpayer must attach
a statement to its timely filed application.
The statement must provide a description
of each package design, the date on which
each was placed in service, and the cost
basis of each (as determined under sec-
tions 5.01(2) or 5.02(2) of Rev. Proc.
97–35).
.02 Line pack gas; cushion gas.
(1) Description of change and scope.
This change applies to a taxpayer that
wants to change its method of accounting
for line pack gas or cushion gas to a
method consistent with the holding in
Rev. Rul. 97–54, 1997–2 C.B. 23. Rev.
Rul. 97–54 holds that the cost of line pack
gas or cushion gas is a capital expenditure
under § 263, the cost of recoverable line
pack gas or recoverable cushion gas is not
depreciable, and the cost of unrecoverable
line pack gas or unrecoverable cushion
gas is depreciable under §§ 167 and 168.
(2) Additional requirements. A tax-
payer that changes its method of account-
ing for unrecoverable line pack gas or un-
recoverable cushion gas under section
3.02 of this APPENDIX must change to a
permissible method of accounting for de-
preciation for the cost of that gas.
SECTION 4. UNIFORM
CAPITALIZATION (§ 263A)
.01 Certain uniform capitalization
(UNICAP) methods used by small re-
sellers, formerly small resellers, and re-
seller-producers.
(1) Description of change and scope.
(a) Applicability.This change ap-
plies to:
(i) a small reseller of personal
property changing from a permissible
UNICAP method to a permissible non-
UNICAP inventory capitalization method
in any taxable year that it qualifies as a
small reseller;
(ii) a formerly small reseller
changing from a permissible non-UNI-
CAP inventory capitalization method to a
permissible UNICAP method in the first
taxable year that it does not qualify as a
small reseller;
(iii) a reseller-producer chang-
ing from a permissible UNICAP method
for both its production and resale activi-
ties to a permissible simplified resale
method described in § 1.263A–3(d)(3) in
any taxable year that it qualifies to use a
simplified resale method for both its pro-
duction and resale activities under
§ 1.263A–3(a)(4) (resellers with de min-
imis production activities); or
(iv) a reseller-producer chang-
ing from a permissible simplified resale
method described in § 1.263A–3(d)(3) for
both its production and resale activities to
a permissible UNICAP method for both
its production and resale activities in the
first taxable year that it does not qualify to
use a simplified resale method for both its
production and resale activities under
§ 1.263A–3(a)(4).
(b) Scope limitations inapplicable.
A taxpayer that wants to make this change
is not subject to the scope limitations in
section 4.02 of this revenue procedure.
However, if the taxpayer is under exami-
nation, before an appeals office, or before
a federal court, the taxpayer must provide
a copy of the application to the examining
agent(s), appeals officer, or counsel for
the government, as appropriate, at the
same time that it files the copy of the ap-
plication with the national office. The ap-
plication must contain the name(s) and
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telephone number(s) of the examining
agent(s), appeals officer, or counsel for
the government, as appropriate.
(c) Inapplicability.This change
does not apply to a taxpayer making a his-
toric absorption ratio election under
§ 1.263A–2(b)(4) or 1.263A–3(d)(4).
(2)Definitions.
(a) “Reseller” means a taxpayer
that acquires real or personal property de-
scribed in § 1221(1) for resale.
(b) “Small reseller” means a re-
seller whose average annual gross re-
ceipts for the three immediately preceding
taxable years (or fewer, if the taxpayer
has not been in existence during the three
preceding taxable years) do not exceed
$10,000,000. See§ 263A(b)(2)(B).
(c) “Formerly small reseller”
means a reseller that no longer qualifies
as a small reseller.
(d) “Producer” means a taxpayer
that produces real or tangible personal
property.
(e) “Reseller-producer” means a
taxpayer that is both a producer and a re-
seller.
(f) “Permissible UNICAP
method” means a method of capitalizing
costs that is permissible under § 263A.
(g) “Permissible non-UNICAP in-
ventory capitalization method” means a
method of capitalizing inventory costs
that is permissible under § 471.
(3)Section 481(a) adjustment. Be-
ginning with the year of change, a tax-
payer changing its method of accounting
for costs pursuant to section 4.01 of this
APPENDIX generally must take any ap-
plicable § 481(a) adjustment into account
ratably over the same number of taxable
years, not to exceed four, that the taxpayer
used its former method of accounting. See
section 5.04(3) of this revenue procedure
for exceptions to this general rule.
(4) No audit protection. A taxpayer
does not receive audit protection under
section 7 of this revenue procedure in
connection with this change.
(5) Example.The following exam-
ple illustrates the principles of section
4.01 of this APPENDIX for small re-
sellers and formerly small resellers.
Assume X, a corporate reseller of personal prop-
erty, incorporated January 2, 1991, adopted a taxable
year ending December 31. X determines that its av-
erage annual gross receipts for the three taxable
years (or fewer, if applicable) immediately preced-
ing taxable years 1991 through 2000 are as shown in
the table below:
AVERAGE Annual Gross
CurrentReceipts for the Three Taxable
TaxableYears Immediately Preceding the
YearCurrent Taxable Year
1991$ 0
19925,000,000
19936,000,000
19947,000,000
199511,000,000
199611,000,000
19979,000,000
19988,000,000
199911000,000
200012,000,000
Furthermore, X, which adopted the dollar-value
LIFO inventory method, has the following LIFO in-
ventory balances determined without considering
the effects of the UNICAP method:
BeginningEnding
1995$1,000,000$1,100,000
19961,100,0001,200,000
19971,200,0001,300,000
19981,300,0001,400,000
19991,400,0001,500,000
20001,500,0001,600,000
X was required by § 263A to change to the UNI-
CAP method for 1995 because its average annual
gross receipts for the three taxable years immediately
preceding 1995 were $11,000,000, which exceeded
the $10,000,000 ceiling permitted by the small re-
seller exception. Assume that X was required to cap-
italize $80,000 of “additional § 263A costs” to the
cost of its 1995 beginning inventory because of this
change in inventory method. In addition, X was re-
quired to include one-fourth of the § 481(a) adjust-
ment when computing taxable income for each of the
four taxable years beginning with 1995. Thus, X was
required to include a $20,000 positive § 481(a) ad-
justment in its 1995 taxable income. X elected to use
the simplified resale method without a historic ab-
sorption ratio election under § 1.263A-3(d)(3) for de-
termining the amount of additional § 263A costs to
be capitalized to each LIFO layer. Assume that X
was required to add $10,000 of additional § 263A
costs to the cost of its 1995 ending inventory because
of the $100,000 increment for 1995.
X’s 1995 Ending Inventory:
Beginning Inventory (Without
UNICAP costs)$1,000,000
1995 Increment100,000
Additional § 263A Costs in
Beginning Inventory80,000
Additional § 263A Costs in 1995
Increment 10,000
Total 1995 Ending Inventory$1,190,000
X’s Unamortized 1995 § 481(a)
Adjustment:
1995 § 481(a) Adjustment$80,000
Amount Included in 1995 Taxable
Income<20,000
>
Unamortized 1995 § 481(a)
Adjustment—12/31/95$60,000
Because X failed to satisfy the small reseller ex-
ception for 1996, X was required to continue using
the UNICAP method for its inventory costs. Fur-
thermore, X was required to include $20,000 of the
unamortized 1995 positive § 481(a) adjustment in
1996 taxable income. Assume that X was required
to add $10,000 of additional § 263A costs to the cost
of its 1996 ending inventory because of the
$100,000 increment for 1996.
X’s 1996 Ending Inventory:
Beginning Inventory
(With UNICAP costs)$1,190,000
1996 Increment100,000
Additional § 263A Costs in 1996
Increment10,000
Total 1996 Ending Inventory$1,300,000
X’s Unamortized 1995 § 481(a) Adjustment:
Unamortized 1995 § 481(a)
Adjustment—12/31/95$60,000
Amount Included in 1996 Taxable
Income<20,000
>
Unamortized 1995 § 481(a)
Adjustment—12/31/96$40 000
Because X satisfies the small reseller exception
for 1997, X may change voluntarily from the UNI-
CAP method to a permissible non-UNICAP inven-
tory capitalization method under section 4.01 of this
APPENDIX. To reflect the removal of the addi-
tional § 263A costs from the cost of its 1997 begin-
ning inventory, X must compute a corresponding
§ 481(a) adjustment, which is a negative $100,000
($1,200,000 – $1,300,000). Because X used the UN-
ICAP method for only two years (that is, 1995 and
1996), X must include one-half of the § 481(a) ad-
justment when computing taxable income for each
of the two taxable years beginning with 1997. Thus,
X must include a $50,000 negative § 481(a) adjust-
ment in 1997 taxable income. In addition, X must
include $20,000 of the unamortized 1995 § 481(a)
adjustment in 1997 taxable income.
X’s 1997 Ending Inventory:
Beginning Inventory (With
UNICAP costs$1,300,000
1997 Increment100,000
1997 § 481(a) Adjustment
<Negative><100,000>
Total 1997 Ending Inventory$1,300,000
X’s Unamortized 1997 § 481(a) Adjustment:
Unamortized 1995 § 481(a)
Adjustment—12/31/96$40,000
Amount Included in 1997
Taxable Income<20,000
>
Unamortized 1995 481(a)
Adjustment—12/31/97$20 000
X’s Unamortized 1997 § 481(a) Adjustment:
1997 § 481(a) Adjustment
<Negative>$<100,000>
Amount Included in 1997 Taxable
Income50,000
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Unamortized 1997 § 481(a)
Adjustment—12/31/97$< 50,000>
X also satisfies the small reseller exception for
1998 and, therefore, is not required to return to the
UNICAP method for 1998. X, however, must in-
clude $20,000 of the unamortized 1995 positive §
481(a) adjustment and $50,000 of the unamortized
1997 negative § 481(a) adjustment in 1998 taxable
income.
X’s 1998 Ending Inventory:
Beginning Inventory (Without
UNICAP costs)$1,300,000
1998 Increment100,000
Total 1998 Ending Inventory$1,400,000
X’s Unamortized 1995 § 48(a)
Adjustment:
Unamortized 1995 § 481(a)
Adjustment—12/31/97$ 20,000
Amount Included in 1998
Taxable Income<20,000>
Unamortized 1995 § 481(a)
Adjustment—12/31/98$ 0
X’s Unamortized 1997 § 481(a)
Adjustment:
Unamortized 1997 § 481(a)
Adjustment—12/31/97$<50,000>
Amount Included in 1998 Taxable
Income50,000
Unamortized 1997 § 481(a)
Adjustment—12/31/98$ 0
In 1999, X fails to satisfy the small reseller ex-
ception and, therefore, must return to the UNICAP
method as provided under section 4.01 of this AP-
PENDIX. X changes to the simplified resale
method without a historic absorption ratio election
under § 1.263A-3(d)(3). Assume that X must capi-
talize $120,000 of additional § 263A costs to the
cost of its 1999 beginning inventory because of this
change in inventory method. In addition, X must
determine the appropriate adjustment period for the
corresponding positive § 481(a) adjustment. Be-
cause X used its former inventory method for two
taxable years before 1999 (that is, 1997 and 1998),
X must include one-half of the § 481(a) adjustment
when computing taxable income for each of the two
taxable years beginning with 1999. Thus, X must
include a $60,000 positive § 481(a) adjustment in its
1999 taxable income. Assume that X must add
$10,000 of additional § 263A costs to the cost of its
1999 ending inventory because of the $100,000 in-
crement for 1999.
X’s 1999 Ending Inventory:
Beginning Inventory
(Without UNICAP
costs)$1,400,000
1999 Increment100,000
Additional § 263A costs in
Beginning Inventory120,000
Additional § 263A costs in 1999
Increment 10,000
Total 1999 Ending Inventory$1,630,000
X’s Unamortized 1999 § 481
1999 § 481(a) Adjustment$120,000
Amount Included in 1999 Taxable
Income < 60,000>
Unamortized 1999 § 481(a)
Adjustment—12/31/99$ 60,000
Because X fails to satisfy the small reseller ex-
ception for 2000, X must continue using the UNI-
CAP method for its inventory costs. Furthermore, X
is required to include $60,000 of the unamortized
1999 positive § 481(a) adjustment in 2000 taxable
income. Assume that X is required to add $10,000
of additional § 263A costs to the cost of its 2000
ending inventory because of the $100,000 increment
for 2000.
X’s 2000 Ending Inventory:
Beginning Inventory (With
UNICAP costs)$1,630,000
2000 Increment100,000
Additional § 263A Costs in 2000
Increment 10,000
Total 2000 ending inventory$1,740,000
X’s Unamortized 1999 § 481(a) Adjustment:
Unamortized 1999 § 481(a)
Adjustment—12/31/99$60,000
Amount Included in 2000 Taxable
Income<60,000
>
Unamortized 1999 § 481(a)
Adjustment—12/31/00$ 0
.02 Reserved.
SECTION 5. METHODS OF
ACCOUNTING (§ 446)
.01 Cash or hybrid method to accrual
method.
(1) Description of change and scope.
(a) Applicability.This change ap-
plies to:
(i) a taxpayer that wants to
change to an overall accrual method, or to
an overall accrual method in conjunction
with the recurring item exception under
§ 461(h)(3), from the cash receipts and
disbursements method (cash method), or
from a hybrid method (the use of a combi-
nation of accounting methods under
which an item or items of income or ex-
pense are reported on the cash method
and another item or other items of income
or expense are reported on an accrual
method); or
(ii) a taxpayer that is required to
change to an overall accrual method
under § 448, but is ineligible to make the
change under § 1.448–1(h)(2) (relating to
the “first § 448 year”).
(b) Inapplicability.This change
does not apply to:
(i) a financial institution de-
scribed in § 581 or 591;
(ii) a farmer;
(iii) a cooperative organization
described in § 501(c)(12), 521, or 1381;
(iv) an individual taxpayer, ex-
cept for activities conducted as a sole pro-
prietorship;
(v) a taxpayer required to use an
inventory method of accounting, unless:
(A) the taxpayer adopts a
proper inventory method under § 471 and
the regulations thereunder, the taxpayer is
a small reseller within the meaning of
§ 1.263A–3(a), and, if the taxpayer has
production activities, the taxpayer’s pro-
duction activities qualify under the de
minimis presumption of § 1.263A–3(a)-
(2)(iii); or
(B) the taxpayer adopts a
proper inventory method under § 471 and
the regulations thereunder, the taxpayer is
a reseller eligible to use the simplified re-
sale method under § 1.263A–3(d), and the
taxpayer adopts a proper method under
that section for the year of change;
(vi) a taxpayer required to use a
long-term contract method in accordance
with § 460, if the taxpayer is not in com-
pliance with that section and any related
administrative guidance;
(vii) a taxpayer required or
wanting to use a special method of ac-
counting, unless the taxpayer is permitted
to change automatically to the special
method under this revenue procedure. A
special method of accounting is a method
that deviates from the normal tax account-
ing rules, such as the method of account-
ing for advance payments pursuant to ei-
ther Rev. Proc. 71–21, 1971–2 C.B. 549,
or § 1.451–5, the installment method of
accounting under § 453, or a long-term
contract method under § 460; or
(viii) a taxpayer required to
change to an overall accrual method
under § 448 and eligible to make the
change under § 1.448–1(h)(2). See
§ 1.448–1(h)(2), which provides an auto-
matic consent procedure for a taxpayer
changing for the first taxable year that it is
subject to § 448. See also§ 1.448–
1(h)(1), which provides that § 1.448–1(h)
does not apply to a change required under
any Code section (or regulations thereun-
der) other than § 448 (for example, a tax-
payer with inventories).
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(2) Section 481(a) adjustment.
(a) In general.The § 481(a) ad-
justment takes into account the accounts
receivable, accounts payable, inventory,
and any other item determined to be nec-
essary in order to prevent items from
being duplicated or omitted. The § 481(a)
adjustment does not include any item of
income accrued but not received that was
worthless or partially worthless (within
the meaning of § 166(a)) on the last day
of the year preceding the year of change.
(b) Recurring item exception.As
part of the change to an overall accrual
method, a taxpayer may adopt the recur-
ring item exception for the year of change
if the taxpayer is eligible and follows the
procedures of § 1.461–5(d). If the tax-
payer is eligible and wants to adopt this
method as specified in § 461(h)(3), the
amount of the § 481(a) adjustment must
be modified to account for the amount of
any additional deduction.
(3) Change to a special method of
accounting. If a taxpayer that wants to
change to an accrual method in conjunc-
tion with a change to a special method of
accounting is not permitted to make the
change under this revenue procedure, the
taxpayer may request to make both
changes only by filing one application
under the provisions of Rev. Proc. 97–27,
1997–1 C.B. 680. Only one user fee will
be required for these changes.
.02 Multi-year service warranty con-
tracts.
(1) Description of change and scope.
(a) Applicability.This change ap-
plies to an eligible accrual method manu-
facturer, wholesaler, or retailer of motor
vehicles or other durable consumer goods
that wants to change to the service war-
ranty income method described in section
5 of Rev. Proc. 97–38, 1997–2 C.B. 479.
Under the service warranty income
method, a qualifying taxpayer may, in
certain specified and limited circum-
stances, include a portion of an advance
payment related to the sale of a multi-year
service warranty contract in gross income
generally over the life of the service war-
ranty obligation.
(b) Inapplicability. This change
does not apply to a taxpayer outside the
scope of Rev. Proc. 97-38.
(2) Manner of making the change.
(a) This change is made using a
cut-off method, under which the taxpayer
begins the use of the service warranty in-
come method for all qualified advance
payment amounts received in the year of
change and thereafter. See section 2.06 of
this revenue procedure.
(b) In accordance with § 1.446–
1(e)(3)(ii), the requirement of § 1.446–
1(e)(3)(i) to file an application on Form
3115 is waived and a statement in lieu of
the Form 3115 is authorized for this
change. The statement must be identified
at the top as follows: “CHANGE TO
THE SERVICE WARRANTY IN-
COME METHOD UNDER SECTION
5.02 OF THE APPENDIX OF REV.
PROC. 98–60.” The statement must set
forth the information required under sec-
tion 6.03 of Rev. Proc. 97–38, except that
the statement under section 6.03(2) (that
the taxpayer agrees to all of the terms and
conditions of the revenue procedure) also
should refer to Rev. Proc. 98–60.
(c) A taxpayer changing to the ser-
vice warranty income method of account-
ing under section 5.02 of this APPENDIX
must satisfy the annual reporting require-
ment set forth in section 6.04 of Rev.
Proc. 97–38.
.03 Multi-year insurance policies for
multi-year service warranty contracts —
Description of change and scope.
(1) Applicability.This change ap-
plies to a manufacturer, wholesaler, or re-
tailer of motor vehicles or other durable
consumer goods that wants to change its
method of accounting for insurance costs
paid or incurred to insure its risks under
multi-year service warranty contracts to
the method described in section 5.03(3) of
this APPENDIX. Multi-year service war-
ranty contracts to which this change ap-
plies include only those separately priced
contracts sold by a manufacturer, whole-
saler, or retailer also selling the motor ve-
hicles or other durable consumer goods
(to the ultimate customer or to an interme-
diary) underlying the contracts. The clas-
sification of goods as “durable consumer
goods” for purposes of this change de-
pends on the common usage of the goods,
rather than the purchaser’s actual in-
tended use of the goods.
(2) Inapplicability. This change does
not apply to a taxpayer that covers its
risks under its multi-year service warranty
contracts through arrangements not con-
stituting insurance.
(3) Description of method.If a tax-
payer purchases a multi-year service war-
ranty insurance policy (in connection with
its sale of multi-year service warranty
contracts to customers) by paying a lump-
sum premium in advance, the taxpayer
must capitalize the amount paid or in-
curred and may only obtain deductions
for that amount by prorating (or amortiz-
ing) it over the life of the insurance policy
(whether the cash method or an accrual
method of accounting is used to account
for service warranty transactions).
.04 Interest accruals on short-term
consumer loans — Rule of 78s method.
(1) Description of change and scope.
(a) Applicability.This change ap-
plies to a taxpayer that wants to change its
method of accounting from the Rule of
78s method to the constant yield method
for stated interest (including stated inter-
est that is original issue discount) on
short-term consumer loans described in
Rev. Proc. 83–40, 1983–1 C.B. 774,
which was obsoleted by Rev. Proc.
97–37, 1997–2 C.B. 455.
(b) Scope limitations inapplicable.
A taxpayer that wants to make this change
for its first or second taxable year begin-
ning on or after January 1, 1998, is not
subject to the scope limitations in section
4.02 of this revenue procedure. However,
if the taxpayer is under examination, be-
fore an appeals office, or before a federal
court, the taxpayer must provide a copy of
the application to the examining agent(s),
appeals officer, or counsel for the govern-
ment, as appropriate, at the same time that
it files the copy of the application with the
national office. The application must
contain the name(s) and telephone num-
ber(s) of the examining agent(s), appeals
officer, or counsel for the government, as
appropriate.
(2) Background.
(a) A short-term consumer loan is
described in Rev. Proc. 83-40, provided:
(i) the loan is a self-amortizing
loan that requires level payments, at regu-
lar intervals at least annually, over a pe-
riod not in excess of five years (with no
balloon payment at the end of the loan
term); and
(ii) the loan agreement between
the borrower and the lender provides that
interest is earned, or upon the prepayment
of the loan interest is treated as earned, in
accordance with the Rule of 78s method.
(b)In general,the Rule of 78s
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method allocates interest over the term of
a loan based, in part, on the sum of the pe-
riods’ digits for the term of the loan. See
Rev. Rul. 83–84, 1983–1 C.B. 97, for a
description of the Rule of 78s method.
(c) In general, the constant yield
method allocates interest and original
issue discount over the term of a loan
based on a constant yield. See § 1.1272–
1(c) for a description of the constant yield
method. The Rule of 78s method gener-
ally front-loads interest as compared to
the constant yield method.
(d) Rev. Proc. 83–40 was obso-
leted because, under §§ 1.446–2 and
1.1272–1 (which were effective for debt
instruments issued on or after April 4,
1994), taxpayers generally must account
for stated interest and original issue dis-
count on a debt instrument (loan) by using
a constant yield method. As a result, the
Rule of 78s method is no longer an ac-
ceptable method of accounting for federal
income tax purposes.
(e) Notwithstanding §§ 1.446–2
and 1.1272–1, as a matter of administra-
tive convenience, the Service will allow a
taxpayer to use the Rule of 78s method
for stated interest on short-term consumer
loans described in Rev. Proc. 83-40 if the
loans were issued prior to the first day of
the taxpayer’s first taxable year that be-
gins on or after January 1, 1999.
(3) Manner of making the change.
(a) This change is made using a
cut-off method and applies only to loans
issued on or after the first day of the year
of change. Seesection 2.06 of this rev-
enue procedure.
(b) The taxpayer must maintain
books and records sufficient to satisfy the
district director that loans issued before
the year of change and loans issued on or
after the first day of the year of change
have been adequately accounted for sepa-
rately.
SECTION 6. OBLIGATIONS ISSUED
AT DISCOUNT (§ 454)
.01 Series E or EE U.S. savings bonds.
(1) Description of change and scope.
This change applies to a cash method tax-
payer that wants to change its method of
accounting for interest income on Series
E or EE U.S. savings bonds. However,
this change only applies to a taxpayer that
has previously made an election under
§ 454 to report as interest income the in-
crease in redemption price on a bond oc-
curring in a taxable year, and that now
wants to report this income in the taxable
year in which the bond is redeemed, dis-
posed of, or finally matures, whichever is
earliest.
(2) Manner of making the change.
(a) This change is made using a
cut-off method and is effective for any in-
crease in redemption price occurring after
the beginning of the year of change for all
Series E and EE U.S. savings bonds held
by the taxpayer on or after the beginning
of the year of change. Seesection 2.06 of
this revenue procedure.
(b) In accordance with § 1.446–
1(e)(3)(ii), the requirement of § 1.446–
1(e)(3)(i) to file an application on Form
3115 is waived and a statement in lieu of
the Form 3115 is authorized for this
change. The statement must be identified
at the top as follows: “CHANGE IN
METHOD OFACCOUNTING
UNDER SECTION 6.01 OF THE AP-
PENDIX OF REV. PROC. 98–60.”The
statement must set forth:
(i) the Series E or EE U.S. sav-
ings bonds for which this change in ac-
counting method is requested;
(ii) an agreement to report all
interest on any bonds acquired during or
after the year of change when the interest
is realized upon disposition, redemption,
or final maturity, whichever is earliest;
and
(iii) an agreement to report all
interest on the bonds acquired before the
year of change when the interest is real-
ized upon disposition, redemption, or
final maturity, whichever is earliest, with
the exception of any interest income pre-
viously reported in prior taxable years.
.02 Reserved.
SECTION 7. PREPAID
SUBSCRIPTION INCOME (§ 455)
.01 Prepaid subscription income.
(1) Description of change and scope.
This change applies to an accrual method
taxpayer that wants to change its method
of accounting for prepaid subscription in-
come to the method described in § 455
and the regulations thereunder, including
an eligible taxpayer that wants to make
the “within 12 months” election under
§ 1.455–2.
(2) Manner of making the change.
(a) This change is made using a
cut-off method and does not apply to any
prepaid subscription income received be-
fore the first taxable year to which the
change applies. Any prepaid subscription
income arising prior to the year of change
is accounted for under the taxpayer’s for-
mer method of accounting. Seesection
2.06 of this revenue procedure.
(b) In accordance with § 1.446–
1(e)(3)(ii), the requirement of § 1.446–
1(e)(3)(i) to file an application on Form
3115 is waived and a statement in lieu of
the Form 3115 is authorized for this
change. The statement must be identified
at the top as follows: “CHANGE IN
METHOD OF ACCOUNTING FOR
PREPAID SUBSCRIPTION INCOME
UNDER SECTION 7.01 OF THE AP-
PENDIX OF REV. PROC. 98–60.” The
statement must set forth the information
required under § 1.455–(b).
(c) The consent granted under this
revenue procedure satisfies the consent
required under §§ 455(c)(3) and 1.455–
6(b).
.02 Reserved.
SECTION 8. TAXABLE YEAR OF
DEDUCTION (§ 461)
.01 Timing of incurring liabilities for
employee compensation.
(1) Description of change and scope.
(a) Applicability. This change ap-
plies to an accrual method taxpayer that
wants to change its method of accounting
to treat bonuses or self-insured medical
benefits as follows:
(i) Bonuses.If the obligation to
pay a bonus becomes fixed and certain by
the end of the taxable year (seeRev. Rul.
61–127, 1961–2 C.B. 36), and the bonus
is otherwise deductible, but the bonus is
paid after the 15th day of the third calen-
dar month after the end of that taxable
year, to treat the bonus as deductible in
the taxable year of the employer in which
or with which ends the taxable year of the
employee in which the bonus is includible
in the gross income of the employee; or
(ii) Self-insured medical bene-
fits. If the obligation to pay an em-
ployee’s medical expenses is neither in-
sured nor paid from a welfare benefit fund
within the meaning of § 419(e), to treat
the liability as incurred in the taxable year
in which the employee files the claim
with the employer. See United States v.
General Dynamics Corp., 481 U.S. 239
December 21, 1998381998–51 I.R.B.
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(1987), 1987-2 C.B. 134.
(b) Inapplicability.This change
does not apply to a taxpayer that is subject
to § 263A and that is required to capitalize
the costs with respect to which the
taxpayer wants to change its method of
accounting under section 8.01 of this AP-
PENDIX, if the taxpayer is not capitaliz-
ing the costs as required.
(2) Amounts taken into account. Ap-
plicable provisions of the Code, regula-
tions, and other published guidance pre-
scribe the manner in which a liability that
has been incurred is taken into account.
For example, for a taxpayer with invento-
ries, direct labor costs must be included in
inventory costs and may be recovered
through cost of goods sold. See
§ 1.263A–1(e)(2)(i)(B). A taxpayer may
not rely on the provisions of section 8.01
of this APPENDIX to take a current year
deduction.
.02 Timing of incurring liabilities for
real property taxes.
(1) Description of change.An ac-
crual method taxpayer generally incurs a
liability in the taxable year that all the
events have occurred that establish the
fact of the liability, the amount of the lia-
bility can be determined with reasonable
accuracy, and economic performance has
occurred with respect to the liability. See
§ 1.446–1(c)(1)(ii). Under § 1.461–
4(g)(6), if the liability of the taxpayer is to
pay a tax, economic performance occurs
as the tax is paid to the government au-
thority that imposed the tax.
(2) Scope.
(a) Applicability.This change ap-
plies to an accrual method taxpayer that
wants to change its method of accounting
to:
(i) treat a liability for real prop-
erty taxes (for which the all events test of
§ 461(h)(4) is otherwise met) as incurred
in the taxable year in which the taxes are
paid, under §§ 461 and 1.461–4(g)(6);
(ii) account for real property
taxes under the recurring item exception
to the economic performance rules under
§§ 461(h)(3) and 1.461–5(b)(1); or
(iii) revoke an election under
§ 461(c) (ratable accrual election).
(b) Inapplicability.This change
does not apply to a taxpayer that is subject
to § 263A and that is required to capitalize
the costs with respect to which the tax-
payer wants to change its method of ac-
counting under section 8.02 of this AP-
PENDIX, if the taxpayer is not capitaliz-
ing the costs as required.
(3) Amounts taken into account. Ap-
plicable provisions of the Code, regula-
tions, and other published guidance pre-
scribe the manner in which a liability that
has been incurred is taken into account.
For example, for a taxpayer with invento-
ries, certain real property taxes must be
included in inventory costs and may be
recovered through cost of goods sold. See
§ 1.263A–1(e)(3)(ii)(L). A taxpayer may
not rely on the provisions of section 8.02
of this APPENDIX to take a current year
deduction.
.03 Timing of incurring liabilities
under a workers’ compensation act, tort,
breach of contract, or violation of law.
(1) Description of change and scope.
(a) Applicability. This change ap-
plies to an accrual method taxpayer that
wants to change its method of accounting
for self-insured liabilities (including any
amounts not covered by insurance, such
as a “deductible” amount under an insur-
ance policy) arising under any workers’
compensation act or out of any tort,
breach of contract, or violation of law, to
treating the liability for the workers’ com-
pensation, tort, breach of contract, or vio-
lation of law as being incurred in the tax-
able year in which all the events have
occurred which establish the fact of the li-
ability, the amount of the liability can be
determined with reasonable accuracy, and
payment is made to the person to which
the liability is owed. See§§ 461 and
1.461–4(g)(2).
(b) Inapplicability.This change
does not apply:
(i) to a taxpayer that is subject
to § 263A and that is required to capitalize
the costs with respect to which the tax-
payer wants to change its method of ac-
counting under section 8.03 of this AP-
PENDIX, if the taxpayer is not
capitalizing the costs as required;
(ii) if payment is made to a third
party rather than to the person to which
the liability is owed. See§ 1.461–4(g)(1);
or
(iii) if payment is made by a
third party.
(2) Amounts taken into account. Ap-
plicable provisions of the Code, regula-
tions, and other published guidance pre-
scribe the manner in which a liability that
has been incurred is taken into account.
For example, for a taxpayer with invento-
ries, certain employee benefit costs (in-
cluding workers’ compensation) must be
included in inventory costs and may be
recovered through costs of goods sold.
See§ 1.263A–1(e)(3)(ii)(D). A taxpayer
may not rely on the provisions of section
8.03 of this APPENDIX to take a current
year deduction.
.04 Timing of incurring liabilities for
payroll taxes.
(1) Description of change and scope.
(a) Applicability. This change ap-
plies to an accrual method employer that
wants to change its method of accounting
for FICA and FUTA taxes to a method
consistent with the holding in Rev. Rul.
96–51, 1996–2 C.B. 36. Rev. Rul. 96–51
holds that, under the all events test of
§ 461, an accrual method employer may
deduct in Year 1 its otherwise deductible
FICA and FUTA taxes imposed with re-
spect to year-end wages properly accrued
in Year 1, but paid in Year 2, if the re-
quirements of the recurring item excep-
tion are met.
(b) Inapplicability. This change
does not apply to a taxpayer that is subject
to § 263A and that is required to capitalize
the costs with respect to which the
taxpayer wants to change its method of
accounting under section 8.04 of this AP-
PENDIX, if the taxpayer is not capitaliz-
ing the costs as required.
(2) Recurring item exception. A tax-
payer that previously has not changed to
or adopted the recurring item exception
for FICA and FUTA taxes must change to
the recurring item exception method for
FICA and FUTA taxes as specified in
§ 461(h)(3) as part of this change.
(3) Amounts taken into account. Ap-
plicable provisions of the Code, regula-
tions, and other published guidance pre-
scribe the manner in which a liability that
has been incurred is taken into account.
For example, for a taxpayer with in-
ventories, certain taxes must be in-
cluded in inventory costs and may be re-
covered through cost of goods sold. See
§ 1.263A–1(e)(3)(ii)(L). A taxpayer may
not rely on the provisions of section 8.04
of this APPENDIX to take a current year
deduction.
.05 Cooperative advertising.
(1) Description of change and scope.
This change applies to a taxpayer that
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wants to change its method of accounting
for cooperative advertising costs to a
method consistent with the holding in
Rev. Rul. 98–39, 1998–33 I.R.B. 4. Rev.
Rul. 98-–39 generally provides that,
under the all events test of § 461, an ac-
crual method manufacturer’s liability to
pay a retailer for cooperative advertising
services is incurred in the year in which
the services are performed, provided the
manufacturer is able to reasonably esti-
mate this liability, and even though the re-
tailer does not submit the required claim
form until the following year.
(2) Scope limitations inapplicable.
A taxpayer that wants to make this change
for its first or second taxable year ending
on or after August 17, 1998, is not subject
to the scope limitations in section 4.02 of
this revenue procedure. However, if the
taxpayer is under examination, before an
appeals office, or before a federal court,
the taxpayer must provide a copy of the
application to the examining agent(s), ap-
peals officer, or counsel for the govern-
ment, as appropriate, at the same time that
it files the copy of the application with the
national office. The application must
contain the name(s) and telephone num-
ber(s) of the examining agent(s), appeals
officer, or counsel for the government, as
appropriate.
SECTION 9. INVENTORIES (§ 471)
.01 Cash discounts — Description of
change and scope.This change applies to
a taxpayer that wants to change its
method of accounting for cash discounts
(discounts granted for timely payment)
when they approximate a fair interest rate,
from a method of consistently including
the price of the goods before discount in
the cost of the goods and including in
gross income any discounts taken (the
“gross invoice method”), to a method of
reducing the cost of the goods by the cash
discounts and deducting as an expense
any discounts not taken (the “net invoice
method”), or vice versa. SeeRev. Rul.
73–65, 1973–1 C.B. 216.
.02 Estimating inventory “shrinkage”.
(1) Description of change and scope.
This change applies to a taxpayer that
wants to change to a method of account-
ing for estimating inventory shrinkage in
computing ending inventory, using:
(a) the “retail safe harbor method”
described in section 4 of Rev. Proc. 98–
29, 1998–15 I.R.B. 22; or
(b) a method other than the retail
safe harbor method, provided (i) the tax-
payer’s present method of accounting
does not estimate inventory shrinkage,
and (ii) the taxpayer’s new method of ac-
counting (that estimates inventory shrink-
age) clearly reflects income under
§ 446(b).
(2) Scope limitations inapplicable.
A taxpayer that wants to make this change
is not subject to the scope limitations in
section 4.02 of this revenue procedure.
However, if the taxpayer is under exami-
nation, before an appeals office, or before
a federal court, the taxpayer must provide
a copy of the application to the examining
agent(s), appeals officer, or counsel for
the government, as appropriate, at the
same time that it files the copy of the ap-
plication with the national office. The ap-
plication must contain the name(s) and
telephone number(s) of the examining
agent(s), appeals officer, or counsel for
the government, as appropriate.
(3) Additional requirements.If the
taxpayer wants to change to a method of
accounting for inventory shrinkage other
than the retail safe harbor method, the
taxpayer must attach to the application a
statement setting forth a detailed descrip-
tion of all aspects of the new method of
estimating inventory shrinkage (includ-
ing, for LIFO taxpayers, the method of
determining inventory shrinkage for, or
allocating inventory shrinkage to, each
LIFO pool).
(4) Audit protection. A taxpayer,
whose present method of accounting esti-
mates inventory shrinkage, does not re-
ceive audit protection under section 7 of
this revenue procedure in connection with
a change to the retail safe harbor method
if, on the date the taxpayer files a copy of
the Form 3115 with the national office,
the taxpayer’s present method of estimat-
ing inventory shrinkage is an issue under
consideration within the meaning of sec-
tion 3.09 of this revenue procedure.
(5) Future change. A taxpayer that
changes to the retail safe harbor method
described in this revenue procedure will
not be precluded, solely by reason of such
change, from changing to another safe
harbor method for estimating inventory
shrinkage in computing ending inventory
in the first year that such other safe harbor
method is available.
SECTION 10. LAST-IN, FIRST-OUT
(LIFO) INVENTORIES (§ 472)
.01 Change from the LIFO inventory
method.
(1) Description of change and scope.
(a) In general.This change ap-
plies to any taxpayer that wants to:
(i) change from the LIFO in-
ventory method for all its LIFO inven-
tory; and
(ii) change to the permitted
method as determined in section
10.01(1)(b) of this APPENDIX.
(b) Method to be used.
(i) Determining method to be
used. The inventory method to be used
by a taxpayer is determined as follows:
(A) If the taxpayer has inven-
toriable goods not included in its LIFO in-
ventory computations (non-LIFO inven-
tory) and, for all the taxpayer’s non-LIFO
inventory, the taxpayer uses an inventory
method that is a permitted method, then
the taxpayer must use that same inventory
method for its entire inventory.
(B) If the LIFO inventory
method is used by the taxpayer with re-
spect to all its inventoriable goods, then
the taxpayer must use the same inventory
method it used prior to the adoption of the
LIFO inventory method, if that prior
method is a permitted method.
(C) If the taxpayer has only
LIFO inventory and the method used by
the taxpayer prior to the adoption of the
LIFO inventory method is not a permitted
method, then the taxpayer must use a per-
mitted method.
(D) If the taxpayer did not
use an inventory method prior to the
adoption of the LIFO inventory method
and has no inventoriable goods other than
its LIFO inventory, then the taxpayer
must use a permitted method.
(ii) Permitted method defined.
For purposes of section 10.01 of this AP-
PENDIX, a permitted method is a method
under which:
(A) the identification method
is either the first-in, first-out (FIFO) in-
ventory method or the specific identifica-
tion inventory method; and
(B) the valuation method is
cost; cost or market, whichever is lower;
market (but only if the taxpayer is a dealer
in securities, as defined in § 1.471–5); the
“farm price method” or the “unit-live-
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stock-price method” (but only if the tax-
payer is a farmer permitted to use such
methods); or the retail method, reduced to
either approximate cost or approximate
cost or market, whichever is lower (but
only if the taxpayer is a retail merchant).
(iii) Method not to be used. The
average cost method (sometimes also re-
ferred to as “the rolling average method”)
described in Rev. Rul. 71–234, 1971–1
C.B. 148, is not a permitted method.
(iv) Determining permitted
method.Whether an inventory method is
a permitted method is determined by the
taxpayer’s method of inventory identifi-
cation and valuation, and not by which
types and amounts of costs are capitalized
under the taxpayer’s method of comput-
ing inventory cost. See§ 263A and the
regulations thereunder, which govern the
types and amounts of costs required to be
included in inventory cost for taxpayers
subject to those provisions.
(2) Limitation on LIFO election.
The taxpayer may not re-elect the LIFO
inventory method for a period of at least
five taxable years beginning with the year
of change, unless based on a showing of
unusual and compelling circumstances,
consent is specifically granted by the
Commissioner to change the method of
accounting at an earlier time. A taxpayer
that wants to re-elect the LIFO inventory
method within a period of five taxable
years (beginning with the year of change)
must file a Form 3115 in accordance with
Rev. Proc. 97–27, 1997–1 C.B. 680. A
taxpayer that wants to re-elect the LIFO
inventory method after a period of five
taxable years (beginning with the year of
change) is not required to file a Form
3115 in accordance with Rev. Proc.
97–27, but must file a Form 970, Applica-
tion to Use LIFO Inventory Method, in
accordance with § 1.472–3.
(3) Effect of subchapter S election by
corporation.
(a) S election effective for year of
LIFO discontinuance.If a C corporation
elects to be treated as an S corporation for
the taxable year in which it discontinues
use of the LIFO inventory method,
§ 1363(d) requires an increase in the tax-
payer’s gross income for the LIFO recap-
ture amount (as defined in § 1363(d)(3))
for the taxable year preceding the year of
change (the taxpayer’s last taxable year as
a C corporation), and a corresponding ad-
justment to the basis of the taxpayer’s in-
ventory as of the end of the taxable year
preceding the year of change. Any in-
crease in income tax as a result of the in-
clusion of the LIFO recapture amount is
payable in four equal installments, begin-
ning with the taxpayer’s last taxable year
as a C corporation as provided in
§ 1363(d)(2). Any corresponding basis
adjustment is taken into account in com-
puting the § 481(a) adjustment (if any)
that results upon the discontinuance of the
LIFO method by the corporation.
(b)S election effective for a year
after LIFO discontinuance. If a C corpo-
ration elects to be treated as an S corpora-
tion for a taxable year after the taxable
year in which it discontinued use of the
LIFO inventory method, the remaining
balance of any positive § 481(a) adjust-
ment must be included in its gross income
in its last taxable year as a C corporation.
If this inclusion results in an increase in
tax for its last taxable year as a C corpora-
tion, this increase in tax is payable in four
equal installments, beginning with the
taxpayer’s last taxable year as a C corpo-
ration as provided in § 1363(d)(2), unless
the taxpayer is required to take the re-
maining balance of the § 481(a) adjust-
ment into account in the last taxable year
as a C corporation under another accelera-
tion provision in section 5.02(3)(c) of this
revenue procedure.
(4) Additional requirements. The
taxpayer must complete the following
statements and attach them to the applica-
tion:
(a) “The new method of identify-
ing inventory goods is the [insert method;
that is, specific identification; FIFO; re-
tail; etc.] method.”
(b) “The new method of valuing
inventory goods is [insert method; that is,
cost; cost or market, whichever is lower;
etc.].”
(c) “The new method conforms to
the requirements of section 10.01(1)(b)(i)
[insert either (A), (B), (C), or (D)] of the
APPENDIX of Rev. Proc. 98-60 because
[explain in detail how the new method
conforms to the specific subdivision].”
.02 Determining the cost of used vehi-
cles purchased or taken as a trade-in.
(1) Description of change and scope.
This change applies to a LIFO taxpayer
that wants to:
(a) determine the cost of used ve-
hicles acquired by trade-in using the aver-
age wholesale price listed by an official
used car guide on the date of the trade-in.
SeeRev. Rul. 67–107, 1967–1 C.B. 115.
The official used car guide selected must
be consistently used;
(b) determine the cost of used ve-
hicles purchased for cash using the actual
purchase price of the vehicle; or
(c) reconstruct the beginning-of-
the-year cost of used vehicles purchased
for cash using values computed by na-
tional auto auction companies based on
vehicles purchased for cash. The national
auto auction company selected must be
consistently used.
(2) Manner of making the change.
This change is made using a cut-off
method and applies to used vehicles ac-
quired during the year of change and all
subsequent years. Seesection 2.06 of this
revenue procedure.
.03 Alternative LIFO inventory method
for retail automobile dealers.
(1) Description of change and scope.
(a) Applicability. This change ap-
plies to a taxpayer engaged in the trade or
business of retail sales of new automo-
biles or new light-duty trucks (“automo-
bile dealer”) that wants to change to the
“Alternative LIFO Method” described in
section 4 of Rev. Proc. 97–36, 1997–2
C.B. 450, for its LIFO inventories of new
automobiles and new light-duty trucks.
Light-duty trucks are trucks with a gross
vehicle weight of 14,000 pounds or less,
which also are referred to as class 1, 2, or
3 trucks.
(b) Inapplicability.This change
does not apply to an automobile dealer
that uses the inventory price index com-
putation (IPIC) method for goods other
than new automobiles, new light-duty
trucks, parts and accessories, used auto-
mobiles, and used trucks.
(2) Manner of making the change.
(a) Cut-off method. This change is
made using a cut- off method. Seesection
2.06 of this revenue procedure and sec-
tion 5.03(6) of Rev. Proc. 97–36.
(b) IPIC method changes. An au-
tomobile dealer that uses the IPIC method
also must change from the IPIC method
under section 10.03 of this APPENDIX to
another acceptable method for its goods
other than new automobiles and new
light-duty trucks. For parts and acces-
sories, the automobile dealer must change
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to the dollar-value, index method, with all
parts and accessories within each separate
trade or business in a separate LIFO pool.
For used vehicles, the automobile dealer
must change to the dollar-value, link-
chain method, with all used automobiles
within each separate trade or business in
one LIFO pool and all used trucks within
each separate trade or business in another
separate LIFO pool.
(c) Additional requirements.An
automobile dealer also must comply with
the following:
(i) the conditions in section
5.03 of Rev. Proc. 97–36; and
(ii) for an automobile dealer
changing from the IPIC method, the auto-
mobile dealer also must attach to the ap-
plication a schedule setting forth the
classes of goods for which the automobile
dealer has elected to use the LIFO method
and the accounting method changes being
made under section 10.03 of this APPEN-
DIX for each class of goods.
.04 Inventory price index computation
(IPIC) method under the LIFO inventory
method.
(1) Description of change and scope.
(a) This change applies to an eligi-
ble taxpayer that wants to change its
LIFO inventory method to use the IPIC
method for its entire LIFO inventory in
accordance with all the provisions of
§ 1.472–8(e)(3) and Rev. Proc. 84–57,
1984–2 C. B. 496. The taxpayer must:
(i) in the case of the CPI De-
tailed Report, select an index from Table
3 (Consumer Price Index for All Urban
Consumers (CPI-U): U.S. city average,
detailed expenditure categories); and
(ii) in the case of the Producer
Price Indexes, select an index from Table
6 (Producer price indexes and percent
changes for commodity groupings and in-
dividual items).
(b) A taxpayer using the IPIC
method must apply the inventory price
index to its ending inventory valued at cur-
rent-year cost, under the taxpayer’s
method of determining current-year cost.
See§ 1.472–8(e)(2)(ii). Furthermore,
there must be a nexus between the tax-
payer’s method of determining current-
year costs and the month to be used in
selecting indexes. See§ 1.472–
8(e)(3)(iii)(C) and Rev. Rul. 89–29,
1989–1 C.B. 168. For example, if a tax-
payer determines current-year cost by ref-
erence to the actual cost of goods pur-
chased or produced during the taxable year
in the order of acquisition (earliest acquisi-
tions cost), then the inventory price index
must be applied to the earliest acquisitions
cost of ending inventory. In computing the
inventory price index, such a taxpayer
must select indexes from a month toward
the beginning of its taxable year.
(c) A taxpayer may not change its
method of pooling as part of a change
made under section 10.04 of this APPEN-
DIX, except to a method specifically au-
thorized by § 1.472–8(e)(3)(iv) or section
3.04(1)(b) of Rev. Proc. 84-57. These
special pooling rules do not apply to
goods manufactured by the taxpayer. See
§ 1.472–8(b) for principles for establish-
ing pools of manufacturers and proces-
sors.
(d) A taxpayer may change its
method of determining current-year cost
as part of a change made under section
10.04 of this APPENDIX by also follow-
ing the provisions of section 10.05 of this
APPENDIX. These changes may be
made using a single application, provided
the application is labeled as being filed
under both sections 10.04 and 10.05 of
this APPENDIX. Seesection 6.02(3) of
this revenue procedure.
(2) Manner of making the change.
This change is made using a cut-off
method. Seesection 2.06 of this revenue
procedure.
(3) Bargain purchase. If the tax-
payer has previously improperly ac-
counted for a bulk bargain purchase, the
taxpayer must, as part of this change, first
change its method of accounting to com-
ply with Hamilton Industries, Inc. v. Com-
missioner,97 T.C. 120 (1991), and com-
pute a § 481(a) adjustment for that part of
the change. See Announcement 91–173,
1991–47 I.R.B. 29. Upon examination, if
a taxpayer has properly changed under
section 10.04 of this APPENDIX except
for complying with section 10.04(3) of
this APPENDIX, an examining agent may
not deny the taxpayer the change. How-
ever, the taxpayer does not receive audit
protection under section 7 of this revenue
procedure with respect to the improper
method of accounting for the bargain pur-
chase. Accordingly, the examining agent
may make any necessary adjustments in
any open year to effect compliance with
Hamilton Industries, Inc.
.05 Determining current-year cost
under the LIFO inventory method.
(1) Description of change and scope.
This change applies to a LIFO taxpayer
that wants to change to a method of deter-
mining current year cost:
(a) by reference to the actual cost
of the goods most recently purchased or
produced;
(b) by reference to the actual cost
of the goods purchased or produced dur-
ing the taxable year in the order of acqui-
sition; or
(c) by application of an average
unit cost equal to the aggregate actual cost
of all the goods purchased or produced
throughout the taxable year divided by the
total number of units so purchased or pro-
duced. See§ 1.472–8(e)(2)(ii).
(2) Manner of making the change.
This change is made using a cut-off
method. Seesection 2.06 of this revenue
procedure.
SECTION 10A. MARK-TO-MARKET
ACCOUNTING METHOD FOR
DEALERS IN SECURITIES (§ 475)
.01 Discontinuing the mark-to-market
method of accounting for nonfinancial
customer paper.
(1) Description of change and scope.
(a) Applicability.This change ap-
plies to:
(i) a taxpayer that must discon-
tinue the use of the mark-to-market
method of accounting for nonfinancial
customer paper to comply with
§ 475(c)(4), enacted by § 7003 of the IRS
Restructuring and Reform Act of 1998,
Pub. L. No. 105–206, 112 Stat. 833 (July
22, 1998), provided the change is made
for the taxpayer’s first taxable year end-
ing after July 22, 1998. The taxpayer
must change to a method other than the
lower of cost or market method; and
(ii) a taxpayer that was a dealer
in securities solely because of its dealings
in nonfinancial customer paper, that, in
conjunction with the change under section
10A.01(1)(a)(i) of this APPENDIX,
wants to discontinue the use of the mark-
to-market method of accounting for all se-
curities (including nonfinancial customer
paper).
(b) Scope limitations inapplicable.
A taxpayer that wants to make this change
is not subject to the scope limitations in
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section 4.02 of this revenue procedure.
However, if the taxpayer is under exami-
nation, before an appeals office, or before
a federal court, the taxpayer must provide
a copy of the application to the examining
agent(s), appeals officer, or counsel for
the government, as appropriate, at the
same time that it files the copy of the ap-
plication with the national office. The ap-
plication must contain the name(s) and
telephone number(s) of the examining
agent(s), appeals officer, or counsel for
the government, as appropriate.
(2) Additional Requirements.
(a) On a statement attached to the
application, the taxpayer must describe all
items that were marked to market and that
will no longer be marked to market.
(b) When complying with section
6.02(3) of this revenue procedure, the tax-
payer should indicate whether the tax-
payer is changing under section
10A.01(1)(a)(i) or sections 10A.01(1)a)(i)
and (ii) of this APPENDIX.
(3) No audit protection. A taxpayer
does not receive audit protection under
section 7 of this revenue procedure in
connection with this change.
.02 Reserved.
SECTION 11. BANK RESERVES FOR
BAD DEBTS (§ 585)
.01 Changing from the § 585 reserve
method to the § 166 specific charge-off
method.
(1) Description of change and scope.
(a) Applicability.This change ap-
plies to a bank (as defined in § 581, in-
cluding a bank for which a qualified sub-
chapter S subsidiary (QSSS) election is
filed) that wants to change its method of
accounting for bad debts from the § 585
reserve method to the § 166 specific
charge-off method.
(b) Certain scope limitations inap-
plicable.A bank that changed from the
§ 593 reserve method under § 593(g) to
the § 585 reserve method will not be pro-
hibited under section 4.02(6) of this rev-
enue procedure from changing its method
of accounting for bad debts under section
11.01 of this APPENDIX solely because
of the § 593(g) change. A bank for which
a QSSS election is filed will not be pro-
hibited under section 4.02(7) of this rev-
enue procedure from changing its method
of accounting for bad debts under section
11.01 of this APPENDIX solely because
of the deemed liquidation of the bank
arising from a QSSS election.
(c) Inapplicability.This change
does not apply to:
(i) a large bank as defined in
§ 585(c)(2); or
(ii) any bank within the scope
of Rev. Proc. 97–18, 1997–1 C.B. 642,
which applies to banks making this
change in method of accounting in 1997
to become eligible to elect S corporation
status for 1997. A bank is not outside the
scope of Rev. Proc. 97–18 solely because
it is a qualified subchapter S subsidiary.
In that event, the S corporation (the par-
ent) should follow the application proce-
dures required by Rev. Proc. 97–18 on be-
half of the bank.
(2) Section 481(a) adjustment.Gen-
erally, the amount of the § 481(a) adjust-
ment for a change in method of account-
ing under section 11.01 of this
APPENDIX is the amount of the bank’s
reserve for bad debts as of the close of the
taxable year immediately before the year
of change. However, the amount of the §
481(a) adjustment does not include the
amount of a bank’s pre-1988 reserves (as
described in § 593(g)(2)(A)(ii), without
taking into account § 593(g)(2)(B)) if the
bank changed in a prior year from the
§ 593 reserve method to the § 585 reserve
method and § 593(g) applied to that
change. The deemed liquidation of a
bank occurring solely because its parent
makes a QSSS election does not acceler-
ate the § 481(a) adjustment. In accor-
dance with section 5.04(3)(c) of this rev-
enue procedure, a bank that ceases to be a
bank under § 581 must accelerate its
481(a) adjustment.
(3) Change from § 585 required
when electing S corporation status.A
bank electing S corporation status (or a
bank for which a QSSS election is filed)
cannot use the § 585 reserve method. The
filing by a bank of a Form 2553 (Election
by a Small Business Corporation) or the
filing by a bank’s parent of a QSSS elec-
tion with respect to the bank will consti-
tute an agreement by the bank to change
its method of accounting for bad debts
from the § 585 reserve method to the
§ 166 specific charge-off method effec-
tive as of the taxable year for which the S
corporation election or QSSS election is
effective (year of change) in accordance
with all of the applicable provisions of
this revenue procedure. The § 481(a) ad-
justment is recognized built-in gain under
§ 1374. See§ 1.1374–4(d).
.02 Reserved.
SECTION 12. ORIGINAL ISSUE
DISCOUNT (§§ 1272; 1273)
.01 De minimis original issue discount
(OID).
(1) Description of change and scope.
(a) Applicability. This change ap-
plies to a taxpayer that wants to change to
the principal-reduction method of ac-
counting described in section 5 of Rev.
Proc. 97–39, 1997–2 C.B. 485. The prin-
cipal-reduction method of accounting is
an aggregate method of accounting for de
minimis OID (discount) on certain loans
originated by the taxpayer.
(b) Scope limitations inapplicable.
A taxpayer that wants to make this change
is not subject to the scope limitations in
section 4.02 of this revenue procedure.
However, if the taxpayer is under exami-
nation, before an appeals office, or before
a federal court, the taxpayer must provide
a copy of the application to the examining
agent(s), appeals officer, or counsel for
the government, as appropriate, at the
same time that it files the copy of the ap-
plication with the national office. The ap-
plication must contain the name(s) and
telephone number(s) of the examining
agent(s), appeals officer, or counsel for
the government, as appropriate.
(c) Description. The principal-re-
duction method of accounting is a permis-
sible method for use by taxpayers to ac-
count for discount on one or more
categories of loans described in section
4.02 or 4.03 of Rev. Proc. 97–39. If the
principal-reduction method is used to ac-
count for any loans in a category of loans,
the method must be used for the entire
category of loans. The principal-reduc-
tion method applies only to loans de-
scribed in section 3 of Rev. Proc. 97–39.
(2) Manner of making the change.
(a) This change is made using a
cut-off method and applies only to loans
described in section 3 of Rev. Proc. 97–39
that were acquired on or after the first day
of the year of change. Seesection 2.06 of
this revenue procedure.
(b) The taxpayer must maintain
1998–51 I.R.B.43December 21, 1998
IRB 1998-51 12/17/98 2:42 PM Page 43

books and records sufficient to satisfy the
district director that old and new loans
have been adequately segregated.
(3) Additional requirements.On a
statement attached to the application, the
taxpayer must:
(a) identify the categories of loans
to which the new method will apply; and
(b) describe any “additional cate-
gories” permitted under section 4.03 of
Rev. Proc. 97-39.
(4) No audit protection.A taxpayer
does not receive audit protection under
section 7 of this revenue procedure in
connection with this change.
.02 Pool of debt instruments.
(1) Description of change and scope.
(a) Applicability.This change ap-
plies to a taxpayer that must change its
method of accounting for a pool of debt
instruments to comply with § 1272(a)(6)
(as required by § 1004 of the Taxpayer
Relief Act of 1997, Pub. L. No. 105–34,
111 Stat. 788, 911), provided the change
is for the taxpayer’s first taxable year be-
ginning after August 5, 1997.
(b) Scope limitations inapplicable.
A taxpayer that must make this change is
not subject to the scope limitations in sec-
tion 4.02 of this revenue procedure.
However, if the taxpayer is under exami-
nation, before an appeals office, or before
a federal court, the taxpayer must provide
a copy of the application to the examining
agent(s), appeals officer, or counsel for
the government, as appropriate, at the
same time that it files the copy of the ap-
plication with the national office. The ap-
plication must contain the name(s) and
telephone number(s) of the examining
agent(s), appeals officer, or counsel for
the government, as appropriate.
(c) Description.
(i) Under § 1272, the holder of
a debt instrument with original issue dis-
count (OID) must include in income the
sum of the daily portions of the OID for
each day during the taxable year on which
the holder held the instrument. Section
1272(a)(6) provides special rules to deter-
mine the daily portions of OID for certain
debt instruments subject to prepayments.
Under these rules, the daily portions of
OID are determined, in part, by taking
into account an assumption regarding the
prepayment of principal on the debt in-
struments.
(ii) Section 1004 of the Tax-
payer Relief Act of 1997, which is effec-
tive for taxable years beginning after Au-
gust 5, 1997, extended the rules in §
1272(a)(6) to any pool of debt instru-
ments the yield on which may be affected
by reason of prepayments. In particular, §
1272(a)(6) now applies to a pool of credit
card receivables subject to a grace period
provision (under which, for example, a
credit card issuer does not charge interest
for a billing cycle if the credit card
obligor pays off its account balance by a
specified date, even though the balance is
not due on that date). SeeH.R. Conf.
Rep. No. 220, 105th Cong., 1st Sess. 522
(1997). (A credit card receivable subject
to a grace period provision has OID be-
cause none of the stated interest on the re-
ceivable is qualified stated interest under
§ 1.1273–1(c)).
(iii) The holder of a pool of
credit card receivables subject to a grace
period provision must accrue OID on the
pool based on a reasonable assumption re-
garding the timing of the payments by the
obligors of the receivables in the pool.
Under §1272(a)(6), it is not reasonable
for a holder to assume that all of the
obligors will pay their balances by the
specified grace period date and, based on
this assumption, defer the inclusion of
OID until the end of the grace period. If
the payments in the pool occur soon after
year end and before the holder files its tax
return for the taxable year that includes
such year end, the holder may accrue OID
based on its actual experience rather than
based upon a reasonable assumption. If
the holder does not accrue OID based on
its actual experience, the holder must
make an adjustment to its income for the
following taxable year to account for any
difference between its accrual based on a
reasonable assumption and its actual ex-
perience.
(2) Additional requirements.
(a) On a statement attached to the
application, the taxpayer must provide a
detailed description of the pool(s) of debt
instruments and the proposed method (in-
cluding the prepayment assumption used
for each pool).
(b) A taxpayer that, on or before
March 1, 1999, files its original federal
income tax return for its first taxable year
beginning after August 5, 1997, may com-
ply with the filing requirement in section
6.02(2)(a) of this revenue procedure or
with the following filing requirement.
The taxpayer must complete and file an
application in duplicate. The original ap-
plication must be attached to the tax-
payer’s timely filed amended federal in-
come tax return for the taxpayer’s first
taxable year beginning after August 5,
1997. This amended return must be filed
no later than April 30, 1999. A copy of
the application must be filed with the na-
tional office (see section 6.02(6) of this
revenue procedure for the address) no
later than when the taxpayer’s amended
return is filed.
SECTION 13. SHORT-TERM
OBLIGATIONS (§ 1281)
.01 Interest income on short-term
obligations.
(1) Description of change and scope.
(a) This change applies to a tax-
payer that wants to change its method of
accounting to comply with § 1281 for in-
terest income on short-term obligations.
(b) Under § 1281, a holder of cer-
tain short-term obligations, including a
bank as defined in § 581, must include in
gross income any accrued interest income
on such obligations, regardless of the
holder’s overall method of accounting.
Section 1281 applies to all types of inter-
est income, including acquisition dis-
count, original issue discount (OID), and
stated interest. SeeS. Rep. No. 99–313,
99th Cong., 2d Sess. 903 (1986), 1986–3
(Vol. 3) C.B. 903.
(c) Section 1283(a)(1) generally
defines a short-term obligation as any
bond, debenture, note, certificate, or other
evidence of indebtedness that matures in
one year or less from its issue date. A
short-term loan, including a short-term
loan made in the ordinary course of the
taxpayer’s business, is a short-term oblig-
ation.
(d) Under §§ 1281(a) and 1283(c),
a holder of a short-term obligation subject
to § 1281 must include in gross income an
amount equal to the sum of the daily por-
tions of the acquisition discount or OID,
whichever is applicable, on the obligation
for each day during the taxable year that
the obligation is held by the holder. See
§ 1283(b), as modified by § 1283(c), to
determine the daily portions of acquisi-
December 21, 1998441998–51 I.R.B.
IRB 1998-51 12/17/98 2:42 PM Page 44

tion discount or OID. In addition,
§ 1281(a) requires the holder to include in
gross income any stated interest that is
payable on the short-term obligation
(other than stated interest taken into ac-
count to determine the amount of the ac-
quisition discount or OID) as it accrues.
(2) Section 481(a) adjustment pe-
riod. A taxpayer must take the entire
§ 481(a) adjustment into account in com-
puting taxable income for the year of
change.
.02 Stated interest on short-term loans
of cash method banks in the Eighth Cir-
cuit.
(1) Description of change and scope.
(a) This change applies to a cash
method bank in the Eighth Circuit that
wants to change its method of accounting
from accruing stated interest on short-
term loans made in the ordinary course of
business to using the cash method for that
interest.
(b) In Security Bank Minnesota v.
Commissioner,994 F.2d 432 (8th Cir.
1993), aff ’g98 T.C. 33 (1992), the U.S.
Circuit Court of Appeals for the Eighth
Circuit held that § 1281 does not require a
cash method bank to include in gross in-
come stated interest on short-term loans
made in the ordinary course of business as
that interest accrues. The Service dis-
agrees with the interpretation of § 1281 in
Security Bank Minnesotaand intends to
pursue this issue in other circuits. In light
of Security Bank Minnesota,however,
cash method banks in the Eighth Circuit
will be granted permission to change to
the cash method of accounting for stated
interest on short-term loans made in the
ordinary course of business. If this
change was made on or before November
6, 1995, the Service will not seek to deny
cash method banks in the Eighth Circuit
the use of the cash method on the ground
that there was an unauthorized change in
method of accounting.
(2) Section 481(a) adjustment pe-
riod. A taxpayer must take the entire
§ 481(a) adjustment into account in com-
puting taxable income for the year of
change.
(3) No ruling protection. If the Ser-
vice is later successful in further litigation
on this issue in other circuits, or there is a
change in law, then cash method banks in
the Eighth Circuit may be required to use
an accrual method of accounting for any
taxable year not barred by the statute of
limitations.
1998–51 I.R.B.45December 21, 1998
IRB 1998-51 12/17/98 2:42 PM Page 45

December 21, 1998461998–51 I.R.B.
Foundations Status of Certain
Organizations
Announcement 98–112
The following organizations have
failed to establish or have been unable to
maintain their status as public charities or
as operating foundations. Accordingly,
grantors and contributors may not, after
this date, rely on previous rulings or des-
ignations in the Cumulative List of Orga-
nizations (Publication 78), or on the pre-
sumption arising from the filing of notices
under section 508(b) of the Code. This
listing does notindicate that the organiza-
tions have lost their status as organiza-
tions described in section 501(c)(3), eligi-
ble to receive deductible contributions.
Former Public Charities.The following
organizations (which have been treated as
organizations that are not private founda-
tions described in section 509(a) of the
Code) are now classified as private foun-
dations:
H C I T, Uniontown, PA
H E L P Center Inc., Monroe, NC
HOSEAInc., West Allis, WI
H T D Vet Inc., Cedar Hill, MO
H-Town Pony Express, Huntsville, AL
Habitat for Humanities of Palestine
Chapter Inc., Palestine, TX
Habitat for Humanity of Greater Garland
Inc., Garland, TX
Haitian Agricultural Renaissance Fund,
Abington, PA
Haitian American Alliance for Progress
Inc., Laurelton, NY
Hajjco Inc., East Orange, NJ
Halcyone Production, Chicago, IL
Halifax County-South Boston Sports Hall
of Fame, South Boston, VA
Hallelujah Voices Inc., Brockton, MA
Hamilton County Economic
Development Foundation, Harrison,
TN
Hamlins Horizon Ministries Inc.,
Phoenix, AZ
Hampton Roads Aids Walk Foundation,
Norfolk, VA
Hancock County Corporation for
Independent Living, Findlay, OH
Hand Foundation of San Antonio, San
Antonio, TX
Handicapped Employee and Learning
Program of New Mexico, Taos, NM
Hands Across Greene County
Incorporated, Jasonville, IN
Hands and Hearts for Needy Children
Inc., Garner, NC
Hands Inc., Great Falls, MT
Hands of Christ a Duluth Cooperative
Ministry Inc., Duluth, GA
Hands on Child Development Inc.,
Minneapolis, MN
Hands on Memphis Inc., Memphis, TN
Hanover Youth Athletic Association,
Hanover, MA
Happe Programs for Personal, Rochester,
NY
Harbour House Ministries Incorporated,
Clanton, AL
Harlem Community Inc., New York, NY
Harlem Volunteer Ambulance Corp., New
York, NY
Harmon House, Detroit, MI
Harmony House Inc., Madison, WI
Harmony Ministries Inc., Tulsa, OK
Harpazo Inc., Chicago, IL
Harpeth Foundation Inc., Brentwood, TN
Harpo Inc., Hunger and Relief Program
of Oklahoma Inc., Crowder, OK
Hartline Hospice Memorial Fund Inc.,
Springfield, MO
Hathaway Ministries Inc., Wooster, OH
Hatznei Leches Charitable Foundation
Charity Through Anonymi, Brooklyn,
NY
Haven House Inc., Colorado Springs, CO
Hazelnut Project, Seattle, WA
HBHCI Home Corporation, New Port
Richey, FL
Healing Musical Ministries Inc., Fairfax,
VA
Healing Resources, Cleveland Heights,
OH
Health Awareness Inc., Cockeysville, MD
Health Through Communications
Foundation, La Mesa, CA
Health Van, Fort Collins, CO
Healthcare Education Inc., Melbourne,
FL
Heart to Heart Ministries Inc., Carmel,
IN
Heartfire, Sioux Falls, SD
Heartflight, Albuquerque, NM
Heartland Youth Ministries, Burlington,
IA
Hearts of Peace Inc., Ivorytown, CT
Heavenly High Ministry Fellowship Inc.,
Rockville, MD
Hegman Family Foundation, Edina, MN
Helen and Stuart Over MD Center for
Holistic Living, Santa Barbara, CA
Help & Learn Inc., Jacksonville, TX
Help Feed the Kids Inc., Houston, TX
Help Our Playground Inc., Manasquan,
NJ
Help the Children Inc., Chicago, IL
Helping Electra Local People, Electra,
TX
Helping Hand Projects for the Blind,
Joplin, MO
Helping Hands-Hospice of Ionia County
Inc., Ionia, MI
Helping Hands Ministries, Charles Town,
WV
Helping Hands of Cleveland Inc.,
Cleveland, OH
Helping Other People Evolve
Successfully Inc., Chicago, IL
Helping Others Pursue Excellence,
Houston, TX
Helping Russian Hospitals Heal,
Annville, PA
Helpline Inc., Jonesboro, AR
Hendersonville Youth Football &
Cheerleader Organization Inc.,
Hendersonville, NC
Henry County Child Abuse Prevention
Council Inc., New Castle, IN
Heron Courtney Waddy Memorial
Scholarship Fund, Missouri City, TX
Heureka Center for Disease Prevention
and Health Promotion, Willingboro, NJ
Hibernian Foundation Inc., Milwaukee,
WI
High Point Alcohol & Drug Action
Coalition Inc., High Point, NC
Higher Authority Productions Inc., Bal
Harbour, FL
Highland Area Recreation Project Robert
Siegel Treasurer, St. Paul, MN
Highland Park Community Outreach,
Highland Park, MI
Highlands Ranch Touchdown Club,
Highlands Ranch, CO
Highways & Hedges Outreach, San
Antonio, TX
Hillcat Athletic Booster Club Inc.,
Hillsboro, NH
Hill-Grainger Neighborhood
Revitalization Corporation, Kinston,
NC
Hillsborough Moving Company, Tampa,
FL
Hillsdale Playground Association Inc.,
Hillsdale, NJ
Part IV. Items of General Interest
IRB 1998-51 12/17/98 2:42 PM Page 46

1998–51 I.R.B.47December 21, 1998
Hillside Early Childhood Learning
Center Inc., Jackson, MS
Hilton Head Community Foundation,
Hilton Head Island, SC
Hindi Punjabi Samaj of North America
Inc., Wilson, NC
His Majestys Messengers Inc., Laramie,
WY
Hispanic Community of Great Neck Inc.,
Great Neck, NY
Hispanic Leaders Group of Greater
St. Louis, St. Louis, MO
Hispanic Research League Inc., New
York, NY
Historic Concord Preservation TR,
Concord, NC
Historic Roger Mills Preservation and
Development Foundation Inc.,
Cheyenne, OK
Historic Sites & Shipwrecks Restoration
& Preservation SCY Inc., Fort
Lauderdale, FL
Historical Chatham Roseland Englewood
Westside CDC, Chicago, IL
Historical Society of the Pound, Pound,
VA
HMI Inc., New Orleans, LA
HNC Corporation, Fredericksburg, VA
Hockessin Area Heritage Association,
Hockessin, DE
Holcombe Superstars of Tomorrow,
Houston, TX
Holiness Unto God Ministries-H U G,
Hammond, IN
Holly Annette Davila, Thornton, CO
Holly Coast Retirement Community Inc.,
Holly Ridge, NC
Hollywood for Children Inc., New York,
NY
Hollywood Golf Institute Inc., Detroit,
MI
Holmes County Quality of Life
Association, Lexington, MS
Home Resource Corporation, Los Osos,
CA
Homefields, Lancaster, PA
Holy Bible Mission Church, Baltimore,
MD
Holy Cross Community Development
Corporation, New Orleans, LA
Holy Cross Lutheran Church Foundation
Inc., Sarasota, FL
Holy Ghost Ministries, Markham, IL
Home Builders Foundation of Western
Mass Inc., Springfield, MA
Homeless Cat Project International,
Yarmouth, ME
Homeless Critters Humane Society in
Pine County Inc., Pine City, MN
Homeless Education & Resource
Organization, Columbia, SC
Homeless Empowerment Relationship
Organization Inc., Flint, MI
Homeless Enrichment Liaison Program,
Philadelphia, PA
Homeless Helpers Inc., Scottsdale, AZ
Homes for Independent Disabled HID
Inc., Phoenix, AZ
Homesmart, Auburn, ME
Hoot Owl Servants Corporation,
Spokane, WA
Hope for the World Foundation Inc.,
Orlando, FL
Homosexual Education for Latter Day
Saints Parents, Pleasanton, CA
Hoosier Gospel Jubilee Inc., Indianapolis,
IN
Hoosier Hurricanes, Hobart, IN
Hoot N Holler Cloggers Inc., Huntsville,
AL
Hope Orlando Inc., Orlando, FL
Hope Outreach Inc., Dallas, TX
Hope Inc., Ormond Beach, FL
Hope Ministries International, Castle
Rock, CO
Hope Outreach Inc., Macon, GA
Hopeful Expectations Inc., Rolla, MO
Hopkins Park-Pembroke Community
Development Corporation, Hopkins
Park, IL
Hot Steamed Music Festival Inc., Old
Lyme, CT
House of Joseph, N. Kingstown, RI
House of Myrrh, Tualatin, OR
House of Nia Purpose, Bellwood, IL
House of Sparrow Outreach Inc.,
Evansville, IN
House of the Morning Star, Austin, TX
Housing Enterprises and Local Programs-
Help-Inc., Mars, PA
Housing for the Homeless Inc., Gary, IN
Housing Solutions Inc., New Orleans, LA
Housing Starts Inc., Atlanta, GA
Houston Area Outreach Coalition Inc.,
Houston, TX
Houston Chinese Culture & Art
Foundation Incorporated, Houston, TX
Houston County Visitors Center-Museum
Inc., Crockett, TX
Houston Educational Excellence
Foundation, Houston, TX
Houston Shoes for Needy Children Inc.,
Houston, TX
Howland Team Sports H T S, Warren,
OH
Hudson Community Food Pantry Inc.,
Boston, MA
Hudson River Defense League Inc.,
Nyack, NY
Hugh J. White Chapter Tuskegee Airman
Inc., Clayton, MO
Hugo Community Foundation Inc.,
Hugo, OK
Hulett Community Housing Authority,
Gillette, WY
Human Outreach Inc., Freeport, NY
Human Resources 2100, Casper, WY
Humanaserv, Midvale, UT
Humble Area Veterans Memorial
Association Inc., Humble, TX
Hunger is Curable Inc., Rockville, MD
Huron Housing Corporation, Sandusky,
OH
If an organization listed above submits
information that warrants the renewal of
its classification as a public charity or as a
private operating foundation, the Internal
Revenue Service will issue a ruling or de-
termination letter with the revised classi-
fication as to foundation status. Grantors
and contributors may thereafter rely upon
such ruling or determination letter as pro-
vided in section 1.509(a)–7 of the Income
Tax Regulations. It is not the practice of
the Service to announce such revised clas-
sification of foundation status in the Inter-
nal Revenue Bulletin.
IRB 1998-51 12/17/98 2:42 PM Page 47

December 21, 1998481998–51 I.R.B.
Changes to Codes for Roth IRAs on Form 1099–R (Announcement 98–106 Corrected)
Announcement 98–113
PurposeThe purpose of this announcement is to advise payers making distributions from Roth IRAs of
changes to the distributions codes on Form 1099–R, Distributions From Pensions, Annuities, Retire-
ment or Profit-Sharing Plans, IRAs, Insurance Contracts, etc.
BackgroundThe Internal Revenue Service Restructuring and Reform Act of 1998 (Public Law 105–206)
amended Internal Revenue Code section 408A, dealing with Roth IRAs. Because of these amend-
ments, the Service has concluded that code K, “Distribution from a 1998 Roth conversion IRA in the
first 5 years,” on the 1998 Form 1099–R may no longer serve its intended purpose. In addition, a
new code for recharacterizations is needed.
1998 Form 1099–RCode K, to be used in box 7 on the 1998 Form 1099–R, is now optional. Payers may choose to use
Code J in box 7 for all distributions from a Roth IRA or Roth conversion IRA. They will meet the re-
quirements of Q/A-B–2 of Notice 98–49, 1998–38 I.R.B. 5, if they use Code J instead of Code K.
1999 Form 1099–RCode K will be eliminated on the 1999 Form 1099–R. Code J will be changed to “Distribution from
a Roth IRA.” Use Code J when reporting any distribution from a Roth IRA or Roth conversion IRA.
New Code R, “Recharacterized IRA contribution,” will be added to identify a recharacterization of
an IRA contribution.
IRB 1998-51 12/17/98 2:42 PM Page 48

1998–51 I.R.B.49December 21, 1998
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
applied 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
being made clear because the language
has caused, or may cause, some confu-
sion. It is not used where a position in a
prior ruling is being changed.
Distinguisheddescribes a situation
where a ruling mentions a previously
published ruling and points out an essen-
tial 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 ap-
plies 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 transac-
tions. This term is most commonly used
in a ruling that lists previously published
rulings that are obsoleted because of
changes in law or regulations. A ruling
may also be obsoleted because the sub-
stance has been included in regulations
subsequently adopted.
Revoked describes situations where the
position in the previously published rul-
ing is not correct and the correct position
is being stated in the 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 pe-
riod of time in separate rulings. If the
new ruling does more than restate the
substance of a prior ruling, a combination
of terms is used. For example, modified
and superseded describes a situation
where the substance of a previously pub-
lished ruling is being changed in part and
is continued without change in part and it
is desired to restate the valid portion of
the previously 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 super-
seded.
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 pub-
lished that includes the list in the original
ruling and the additions, and supersedes
all prior rulings 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
cases in litigation, or the outcome of a
Service study.
Abbreviations
The following abbreviations in current use and for-
merly 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 Contribution 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.—Statements of Procedral 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.
Definition of Terms
IRB 1998-51 12/17/98 2:42 PM Page 49

December 21, 1998501998–51 I.R.B.
Numerical Finding List
1
Bulletins 1998–29 through 50
Announcements:
98–62, 1998–29 I.R.B. 13
98–68, 1998–29 I.R.B. 14
98–69, 1998–30 I.R.B. 16
98–70, 1998–30 I.R.B. 17
98–71, 1998–30 I.R.B. 17
98–72, 1998–31 I.R.B.14
98–73, 1998–31 I.R.B.14
98–74, 1998–31 I.R.B.15
98–75, 1998–31 I.R.B.15
98–76, 1998–32 I.R.B.64
98–77, 1998–34 I.R.B.30
98–78, 1998–34 I.R.B.30
98–79, 1998–34 I.R.B.31
98–80, 1998–34 I.R.B.32
98–81, 1998–36 I.R.B.35
98–82, 1998–35 I.R.B. 17
98–83, 1998–36 I.R.B. 36
98–84, 1998–38 I.R.B.30
98–85, 1998–38 I.R.B.30
98–86, 1998–38 I.R.B.31
98–87, 1998–40 I.R.B.11
98–88, 1998–41 I.R.B. 14
98–89, 1998–40 I.R.B.11
98–90, 1998–42 I.R.B.22
98–91, 1998–40 I.R.B.12
98–92, 1998–41 I.R.B.15
98–93, 1998–43 I.R.B.10
98–94, 1998–43 I.R.B.32
98–95, 1998–44 I.R.B.13
98–96, 1998–44 I.R.B.18
98–97, 1998–44 I.R.B.18
98–98, 1998–44 I.R.B.18
98–99, 1998–46 I.R.B.34
98–100, 1998–46 I.R.B.42
98–101, 1998–45 I.R.B.27
98–102, 1998–45 I.R.B.28
98–103, 1998–47 I.R.B.12
98–104, 1998–47 I.R.B. 13
98–105, 1998–49 I.R.B.21
98–106, 1998–48 I.R.B.10
98–107, 1998–48 I.R.B.10
98–108, 1998–48 I.R.B.12
98–109, 1998–50 I.R.B.20
98–110, 1998–50 I.R.B.21
98–111, 1998–50 I.R.B.21
Court Decisions:
2063, 1998–49 I.R.B. 6
2064, 1998–37 I.R.B. 4
2065, 1998–39 I.R.B.7
Notices:
98–36, 1998–29 I.R.B. 8
98–37, 1998–30 I.R.B.13
98–38, 1998–34 I.R.B.7
98–39, 1998–33 I.R.B.11
98–40, 1998–35 I.R.B. 7
98–41, 1998–33 I.R.B.12
98–42, 1998–33 I.R.B.12
98–43, 1998–33 I.R.B.13
98–44, 1998–34 I.R.B.7
98–45, 1998–35 I.R.B.7
98–46, 1998–36 I.R.B. 21
98–47, 1998–37 I.R.B. 8
98–48, 1998–39 I.R.B.17
Notices—Continued
98–49, 1998–38 I.R.B.5
98–50, 1998–44 I.R.B.10
98–51, 1998–44 I.R.B. 11
98–52, 1998–46 I.R.B. 16
98–53, 1998–46 I.R.B. 24
98–54, 1998–46 I.R.B. 25
98–55, 1998–46 I.R.B. 26
98–56, 1998–47 I.R.B.9
98–57, 1998–47 I.R.B.9
98–58, 1998–49 I.R.B. 13
98–59, 1998–49 I.R.B.16
98–60, 1998–49 I.R.B.16
Railroad Retirement Quarterly Rate:
1998–31 I.R.B. 7
1998–50 I.R.B. 4
Proposed Regulations:
REG–209446–82, 1998–36 I.R.B. 24
REG–209060–86, 1998–39 I.R.B. 18
REG–209769–95, 1998–41 I.R.B.8
REG–209813–96, 1998–35 I.R.B. 9
REG–246256–96, 1998–34 I.R.B.9
REG–104641–97, 1998–29 I.R.B. 9
REG–104565–97, 1998–39 I.R.B.21
REG–105170–97, 1998–50 I.R.B. 10
REG–106177–97, 1998–37 I.R.B.33
REG–109708–97, 1998–45 I.R.B.29
REG–115446–97, 1998–36 I.R.B. 23
REG–116608–97, 1998–29 I.R.B. 12
REG–118926–97, 1998–39 I.R.B.23
REG–118966–97, 1998–39 I.R.B.29
REG–119227–97, 1998–30 I.R.B. 13
REG–122488–97, 1998–42 I.R.B. 19
REG–101363–98, 1998–40 I.R.B.10
REG–102023–98, 1998–48 I.R.B. 6
REG–106221–98, 1998–41 I.R.B.10
REG–110332–98, 1998–33 I.R.B.18
REG–110403–98, 1998–29 I.R.B.11
REG–115393–98, 1998–39 I.R.B.34
Revenue Procedures:
98–40, 1998–32 I.R.B. 6
98–41, 1998–32 I.R.B. 7
98–42, 1998–28 I.R.B. 9
98–43, 1998–29 I.R.B. 8
98–44, 1998–32 I.R.B. 11
98–45, 1998–34 I.R.B.8
98–46, 1998–36 I.R.B. 21
98–47, 1998–37 I.R.B. 8
98–48, 1998–38 I.R.B.7
98–49, 1998–37 I.R.B. 9
98–50, 1998–38 I.R.B.8
98–51, 1998–38 I.R.B.20
98–52, 1998–37 I.R.B. 12
98–53, 1998–40 I.R.B.9
98–54, 1998–43 I.R.B.7
98–55, 1998–46 I.R.B.27
98–56, 1998–46 I.R.B.33
98–57, 1998–48 I.R.B.5
98–58, 1998–49 I.R.B.19
98–59, 1998–50 I.R.B.8
Revenue Rulings:
98–34, 1998–31 I.R.B. 12
98–35, 1998–30 I.R.B. 4
98–36, 1998–31 I.R.B.6
Revenue Rulings—Continued
98–37, 1998–32 I.R.B.5
98–38, 1998–32 I.R.B.4
98–39, 1998–33 I.R.B.4
98–40, 1998–33 I.R.B.4
98–41, 1998–35 I.R.B.6
98–42, 1998–35 I.R.B. 5
98–43, 1998–36 I.R.B. 9
98–44, 1998–37 I.R.B.4
98–45, 1998–38 I.R.B.4
98–46, 1998–39 I.R.B. 10
98–47, 1998–39 I.R.B. 4
98–48, 1998–39 I.R.B. 6
98–49, 1998–40 I.R.B.4
98–50, 1998–40 I.R.B.7
98–51, 1998–43 I.R.B.4
98–52, 1998–45 I.R.B.4
98–53, 1998–46 I.R.B.12
98–54, 1998–46 I.R.B.14
98–55, 1998–47 I.R.B. 5
98–56, 1998–47 I.R.B.5
98–57, 1998–49 I.R.B.4
Tax Conventions:
1998–43 I.R.B. 6
Treasury Decisions:
8771, 1998–29 I.R.B. 6
8772, 1998–31 I.R.B. 8
8773, 1998–29 I.R.B. 4
8774, 1998–30 I.R.B. 5
8775, 1998–31 I.R.B.4
8776, 1998–33 I.R.B.6
8777, 1998–34 I.R.B.4
8778, 1998–36 I.R.B. 4
8779, 1998–36 I.R.B. 11
8780, 1998–39 I.R.B.14
8781, 1998–40 I.R.B. 4
8782, 1998–41 I.R.B.5
8783, 1998–41 I.R.B.4
8784, 1998–42 I.R.B.4
8785, 1998–42 I.R.B.5
8786, 1998–44 I.R.B. 4
8787, 1998–46 I.R.B. 5
8788, 1998–45 I.R.B.6
8790, 1998–50 I.R.B.4
1
A cumulative list of all revenue rulings, revenue
procedures, Treasury decisions, etc., published in
Internal Revenue Bulletins 1998–1 through 1998–28
will be found in Internal Revenue Bulletin 1998–29,
dated July 20, 1998.
IRB 1998-51 12/17/98 2:42 PM Page 50

1998–51 I.R.B.51December 21, 1998
Finding List of Current Action on
Previously Published Items
1
Bulletins 1998–29 through 50
*Denotes entry since last publication
Notices:
87–13
Modified by
98–49, 1998–38 I.R.B. 5
87–16
Modified by
98–49, 1998–38 I.R.B. 5
Revenue Procedures:
83–58
Obsoleted by
98–37, 1998–32 I.R.B. 5
88–17
Clarified, modified, and superseded by
98–54, 1998–43 I.R.B. 7
94–23
Amplified and superseded by
98–55, 1998–46 I.R.B. 27
97–40
Amplified and superseded by
98–55, 1998–46 I.R.B. 27
97–60
Superseded by
98–50, 1998–38 I.R.B. 8
97–61
Superseded by
98–51, 1998–38 I.R.B. 20
98–14
Modified by
98–53, 1998–40 I.R.B. 9
Revenue Rulings:
57–271
Obsoleted by
98–37, 1998–32 I.R.B. 5
67–301
Modified by
98–41, 1998–35 I.R.B. 6
70–225
Obsoleted by
98–44, 1998–37 I.R.B. 4
71–277
Obsoleted by
98–37, 1998–32 I.R.B. 5
71–434
Obsoleted by
98–37, 1998–32 I.R.B. 5
71–574
Obsoleted by
98–37, 1998–32 I.R.B. 5
72–75
Obsoleted by
98–37, 1998–32 I.R.B. 5
72–120
Obsoleted by
98–37, 1998–32 I.R.B. 5
Revenue Rulings—Continued
72–121
Obsoleted by
98–37, 1998–32 I.R.B. 5
72–122
Obsoleted by
98–37, 1998–32 I.R.B. 5
74–77
Obsoleted by
98–37, 1998–32 I.R.B. 5
75–19
Obsoleted by
98–37, 1998–32 I.R.B. 5
76–562
Obsoleted by
98–37, 1998–32 I.R.B. 5
77–214
Obsoleted by
98–37, 1998–32 I.R.B. 5
79–106
Obsoleted by
98–37, 1998–32 I.R.B. 5
83–113
Obsoleted by
98–37, 1998–32 I.R.B. 5
85–143
Obsoleted by
98–37, 1998–32 I.R.B. 5
88–8
Obsoleted by
98–37, 1998–32 I.R.B. 5
88–76
Obsoleted by
98–37, 1998–32 I.R.B. 5
88–79
Obsoleted by
98–37, 1998–32 I.R.B. 5
93–4
Obsoleted by
98–37, 1998–32 I.R.B. 5
93–5
Obsoleted by
98–37, 1998–32 I.R.B. 5
93–6
Obsoleted by
98–37, 1998–32 I.R.B. 5
93–30
Obsoleted by
98–37, 1998–32 I.R.B. 5
93–38
Obsoleted by
98–37, 1998–32 I.R.B. 5
93–49
Obsoleted by
98–37, 1998–32 I.R.B. 5
93–50
Obsoleted by
98–37, 1998–32 I.R.B. 5
93–53
Obsoleted by
98–37, 1998–32 I.R.B. 5
Revenue Rulings—Continued
93–81
Obsoleted by
98–37, 1998–32 I.R.B. 5
3–91
Obsoleted by
98–37, 1998–32 I.R.B. 5
93–92
Obsoleted by
98–37, 1998–32 I.R.B. 5
93–93
Obsoleted by
98–37, 1998–32 I.R.B. 5
94–5
Obsoleted by
98–37, 1998–32 I.R.B. 5
94–6
Obsoleted by
98–37, 1998–32 I.R.B. 5
94–30
Obsoleted by
98–37, 1998–32 I.R.B. 5
94–51
Obsoleted by
98–37, 1998–32 I.R.B. 5
94–79
Obsoleted by
98–37, 1998–32 I.R.B. 5
95–2
Obsoleted by
98–37, 1998–32 I.R.B. 5
95–9
Obsoleted by
98–37, 1998–32 I.R.B. 5
97–37
Obsoleted by
98–39, 1998–33 I.R.B. 4
1
A cumulative finding list for previously published
items mentioned in Internal Revenue Bulletins
1998–1 through 1998–28 will be found in Internal
Revenue Bulletin 1998–29, dated July 20, 1998.
IRB 1998-51 12/17/98 2:42 PM Page 51

December 21, 1998521998–51 I.R.B.
Notes
IRB 1998-51 12/17/98 2:42 PM Page 52

Notes
1998–51 I.R.B.53December 21, 1998
IRB 1998-51 12/17/98 2:42 PM Page 53

Notes
December 21, 1998541998–51 I.R.B.
IRB 1998-51 12/17/98 2:42 PM Page 54

IRB 1998-51 12/17/98 2:42 PM Page 55

INTERNAL REVENUE BULLETIN
The Introduction on page 3 describes the purpose and content of this publication. The weekly Internal Revenue Bulletin is sold
on a yearly subscription basis by the Superintendent of Documents. Current subscribers are notified by the Superintendent of
Documents when their subscriptions must be renewed.
CUMULATIVE BULLETINS
The contents of this weekly Bulletin are consolidated semiannually into a permanent, indexed, Cumulative Bulletin. These are
sold on a single copy basis and are not included as part of the subscription to the Internal Revenue Bulletin. Subscribers to the week-
ly Bulletin are notified when copies of the Cumulative Bulletin are available. Certain issues of Cumulative Bulletins are out of print
and are not available. Persons desiring available Cumulative Bulletins, which are listed on the reverse, may purchase them from the
Superintendent of Documents.
HOW TO ORDER
Check the publications and/or subscription(s) desired on the reverse, complete the order blank, enclose the proper remittance,
detach entire page, and mail to the Superintendent of Documents, U.S. Government Printing Office, Washington, DC 20402. Please
allow two to six weeks, plus mailing time, for delivery.
WE WELCOME COMMENTS ABOUT THE
INTERNAL REVENUE BULLETIN
If you have comments concerning the format or production of the Internal Revenue Bulletin or suggestions for improving it, we
would be pleased to hear from you. You can e-mail us your suggestions or comments through the IRS Internet Home Page
(www.irs.ustreas.gov) or write to the IRS Bulletin Unit, OP:FS:FP:P, Room 5617, 1111 Constitution Avenue NW, Washington,
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IRB 1998-51 12/17/98 2:42 PM Page 56