Internal Revenue Bulletin 1997-33 (PDF rendition): IRS Revenue Rulings

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. 97–32, page 4.
LIFO; price indexes; department stores. The June
1997 Bureau of Labor Statistics price indexes are accept-
ed for use by department stores employing the retail inven-
tory and last-in, first-out inventory methods for valuing
inventories for tax years ended on, or with reference to,
June 30, 1997.
EMPLOYEE PLANS
Rev. Proc. 97–41, page 51.
Plan amendments; discretionary extension of the
remedial amendment period. This procedure provides an
extended remedial amendment period for certain qualified
plans described in sections 401(a) and 403(a) of the Code
and describes the time for making amendments to certain
tax-sheltered annuities described in section 403(b).
Notice 97–45, page 7.
Highly compensated employee; definition. This notice
sets forth the changes in determining who is a highly com-
pensated employee within the meaning of section 414(q) of
the Code as a result of section 1431 of the Small Business
Job Protection Act of 1996.
ADMINISTRATIVE
Rev. Proc. 97–35, page 11.
Package design costs; methods of accounting. Three
alternative methods of accounting for package design costs
are provided: (1) the capitalization method; (2) the design-by-
design and 60-month amortization method; and (3) the pool-
of-cost and 48-month amortization method.
Rev. Proc. 97–36, page 14.
Last-in, first-out inventory method; methods of
accounting. An alternative last-in, first-out (LIFO) inventory
computation method of accounting is provided for taxpayers
engaged in the trade or business of retail sales of new auto-
mobiles or new light-duty trucks.
Rev. Proc. 97–37, page 18.
Methods of accounting; automatic consent. Procedures
are provided under which a taxpayer may obtain automatic
consent of the Commissioner to change certain methods of
accounting.
Rev. Proc. 97–38, page 43.
Warranty contracts; methods of accounting. Procedures
are provided under which accrual method manufacturers,
wholesalers, and retailers of motor vehicles or other durable
consumer goods 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 in-
come generally over the life of the service warranty obliga-
tion.
Rev. Proc. 97–39, page 48.
Original issue discount; methods of accounting.
Taxpayers are allowed to use an aggregate method of
accounting, termed the “principal-reduction” method, for de
minimis original issue discount on certain loans originated by
the taxpayer.
Rev. Proc. 97–40, page 50.
Late S corporation elections. If an S corporation election is
filed late for a current taxable year, Rev. Proc. 97–40 pro-
vides a special procedure to permit taxpayers to request re-
lief instead of applying for a private letter ruling.
Rev. Proc. 97–42, page 57.
Low-income housing tax credit. This procedure publishes
the amounts of unused housing credit carryovers allocated
to qualified states under section 42(h)(3)(D) of the Code for
calendar year 1997.
Announcement 97–77, page 58.
This announces that the Internal Revenue Service will elimi-
nate Form 4782, Employee Moving Expense Information,
effective for tax year 1998.
Internal Revenue
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Bulletin No. 1997–33
August 18, 1997
Finding Lists begin on page 60.
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

Mission of the Service
The purpose of the Internal Revenue Service is to collect
the proper amount of tax revenue at the least cost; serve
the public by continually improving the quality of our prod-
ucts and services; and perform in a manner warranting
the highest degree of public confidence in our integrity, effi-
ciency, and fairness.
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.

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 quarterly and
semiannual basis, and are published in the first Bulletin of the
succeeding quarterly and semiannual 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.

August 18, 199741997–33 I.R.B.
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. 97–37, page 18.
Section 165.—Losses
26 CFR 1.165–2: Obsolescence of nondepreciable
property.
When may a taxpayer deduct a loss arising from
the obsolescence of a package design. See Rev.
Proc. 97–35, page 11.
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. 97–37, page 18.
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.
97–37, page 18.
Section 167.—Depreciation
26 CFR 1.167(a)–3: Intangibles.
How may a taxpayer recover the costs of creating
a package design. See Rev. Proc. 97–35, page 11.
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. 97–37, page 18.
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. 97–37, page 18.
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. 97–37, page 18.
Section 263.—Capital
Expenditures
26 CFR 1.263(a)–2: Examples of capital expenditures.
Must the costs of creating a package design be
capitalized. See Rev. Proc. 97–35, page 11.
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. 97–37, page 18.
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. 97–37,
page 18.
26 CFR 1.263A–2: Rules relating to property pro-
duced by the taxpayer.
Are the costs incurred in connection with the de-
velopment and design of product packages subject
to the rules under section 263A. See Rev. Proc.
97–35, page 11.
Section 401.—Qualified
Pension, Profit-sharing, and
Stock Bonus Plans.
26 CFR 1.401(b)–1: Certain retroactive changes in
plan.
Aprocedure describes when plans that are quali-
fied under § 401(a) or § 403(a) must be amended for
the Small Business Job Protection Act of 1996, Pub.
L. 104–188, the Uruguay Round Agreements Act,
Pub. L. 103–465, and the Uniformed Services Em-
ployment and Reemployment Rights Act of 1994,
Pub. L. 103–353. See Rev. Proc. 97–41, page 51.
Section 403.—Taxation of
Employee Annuities
Aprocedure describes when tax-sheltered annu-
ity plans within the meaning of § 403(b) must be
amended for the Small Business Job Protection Act
of 1996, Pub. L. 104–188. See Rev. Proc. 97–41,
page 51.
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. 97–35, page 11.
How may an automobile dealer change its
method of accounting to use the Alternative LIFO
Method. See Rev. Proc. 97–36, page 14.
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. 97–37, page 18.
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.
97–37, page 18.
Section 455.—Prepaid
Subscription Income
26 CFR § 1.455–6: Time and manner of making
election.
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. 97–37, page 18.
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. 97–37,
page 18.
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. 97–37, page 18.
Section 472.—Last-in, First-out
Inventories
26 CFR 1.472-1: Last-in, first-out inventories.
LIFO; price indexes; department
stores. The June 1997 Bureau of Labor
Statistics price indexes are accepted for
use by department stores employing the
retail inventory and last-in, first-out in-
ventory methods for valuing inventories
for tax years ended on, or with reference
to, June 30, 1997.
Rev. Rul. 97-32
The following Department Store Inven-
Part I. Rulings and Decisions Under the Internal Revenue Code of 1986

1997–33 I.R.B.5August 18, 1997
tory Price Indexes for June 1997 were is-
sued by the Bureau of Labor Statistics on
July 16, 1997. The indexes are accepted
by the Internal Revenue Service, under
§1.472–1(k) of the Income Tax Regula-
tions and Rev. Proc. 86–46, 1986–2 C.B.
739, for appropriate application to inven-
tories of department stores employing the
retail inventory and last-in, first-out in-
ventory methods for tax years ended on,
or with reference to, June 30, 1997.
The Department Store Inventory Price
Indexes are prepared on a national basis
and include (a) 23 major groups of de-
partments, (b) three special combinations
of the major groups — soft goods,
durable goods, and miscellaneous goods,
and (c) a store total, which covers all de-
partments, including some not listed sep-
arately, except for the following: candy,
foods, liquor, tobacco, and contract de-
partments.
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).
What is the “Alternative LIFO Method.” See
Rev. Proc. 97–36, page 14.
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. 97–37, page 18.
Section 481.—Adjustments
Required by Changes in
Mehtods of Accounting
26 CFR 1.481–4: Adjustments taken into account
with consent.
How is the section 481(a) adjustment taken into
account when a taxpayer changes its method of ac-
counting for package design costs. See Rev. Proc.
97–35, page 11.
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 au-
tomatic consent of the Commissioner to change a
method of accounting. See Rev. Proc. 97–37, page 18.
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.
97–37, page 18.
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 minimis original
issue discount. See Rev. Proc. 97–37, page 18.
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. 97–37, page 18.
BUREAU OF LABOR STATISTICS, DEPARTMENTSTORE
INVENTORYPRICE INDEXES BYDEPARTMENTGROUPS
(January 1941 = 100, unless otherwise noted)
Percent Change
GroupsJuneJunefrom June 1996
19961997to June 1997
1
1. Piece Goods. . . . . . . . . . . . . . . . . . . . . . 551.1541.0-1.8
2. Domestics and Draperies. . . . . . . . . . . . 641.0644.10.5
3. Women’s and Children’s Shoes. . . . . . . 649.3651.00.3
4. Men’s Shoes. . . . . . . . . . . . . . . . . . . . . . 895.4904.01.0
5. Infants’Wear. . . . . . . . . . . . . . . . . . . . . . 627.1642.52.5
6. Women’s Underwear. . . . . . . . . . . . . . . . 535.4539.30.7
7. Women’s Hosiery. . . . . . . . . . . . . . . . . . 288.0295.72.7
8. Women’s and Girls’Accessories. . . . . . . 545.5569.44.4
9. Women’s Outerwear and Girls’Wear. . . 401.1415.33.5
10. Men’s Clothing. . . . . . . . . . . . . . . . . . . . 612.2625.02.1
11. Men’s Furnishings. . . . . . . . . . . . . . . . . 584.5589.80.9
12. Boys’Clothing and Furnishings. . . . . . . 485.7494.51.8
13. Jewelry. . . . . . . . . . . . . . . . . . . . . . . . . 1011.51002.1-0.9
14. Notions. . . . . . . . . . . . . . . . . . . . . . . . . . 774.1752.1-2.8
15. Toilet Articles and Drugs. . . . . . . . . . . . 877.8913.54.1
16. Furniture and Bedding. . . . . . . . . . . . . . 673.6673.2-0.1
17. Floor Coverings. . . . . . . . . . . . . . . . . . . 576.4592.42.8
18. Housewares. . . . . . . . . . . . . . . . . . . . . . . 808.7808.1-0.1
19. Major Appliances. . . . . . . . . . . . . . . . . . 245.5243.5-0.8
20. Radio and Television. . . . . . . . . . . . . . . . 79.376.2-3.9
21. Recreation and Education
2
. . . . . . . . . . . 112.8109.5-2.9
22. Home Improvements
2
. . . . . . . . . . . . . 127.4132.84.2
23. Auto Accessories
2
. . . . . . . . . . . . . . . . . . 107.5108.00.5
Groups 1 – 15: Soft Goods. . . . . . . . . . . . . 592.4602.51.7
Groups 16 – 20: Durable Goods. . . . . . . . . . 469.7465.9-0.8
Groups 21 – 23: Misc. Goods
2
. . . . . . . . . . . 113.7112.2-1.3
Store Total
3
. . . . . . . . . . . . . . . . . . . . . . . . . 550.3554.80.8
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, ex-
cept for the following: candy, foods, liquor, tobacco, and contract departments.

August 18, 199761997–33 I.R.B.
Section 1362.—Election;
Revocation; Termination
26 CFR 1.1362–6: Elections and consents.
If a taxpayer files an S corporation election after
the statutory date, but within 6 months of that statu-
tory due date, may the taxpayer obtain relief under
§ 1362(b)(5) of the Internal Revenue Code without
applying for a private letter ruling? See Rev. Proc.
97–40, page 50.
Section 1363.—Effect of
Election on Corporation
What procedures must a taxpayer use to obtain au-
tomatic consent of the Commissioner to change its
method of accounting. See Rev. Proc. 97–37, page 18.

Highly Compensated Employee
Definition
Notice 97–45
I. PURPOSE
This notice provides guidance relating
to the definition of highly compensated
employee (“HCE”) under §414(q) of the
Internal Revenue Code (“Code”), as
amended by §1431 of the Small Business
Job Protection Act of 1996, Pub. L. 104-
188 (“SBJPA”). The §414(q) definition of
HCE is incorporated by certain provisions
of the Code that apply nondiscrimination
requirements to various employee benefit
plans, entities, or arrangements (“plans”).
Specifically, this notice provides:
• Guidance on making the top-paid
group election permitted by
§414(q)(1)(B)(ii), under which an
employee (other than a 5-percent
owner) with compensation in excess
of the dollar threshold is an HCE
only if the employee is among the
highest paid 20 percent of an em-
ployer’s workforce.
• Anew calendar year data election
under which an employer that main-
tains one or more plans on a fiscal
year basis has the option to use calen-
dar year data to simplify the determi-
nation of whether an employee is an
HCE on account of compensation
under §414(q)(1)(B).
• Transition relief from certain require-
ments of the top-paid group election
and the calendar year data election.
• Guidance on plan amendments to re-
flect the revised definition of HCE, in-
cluding the application of the remedial
amendment period under § 401(b),
and certain other matters relating to
the determination of HCE status.
II. BACKGROUND
(1)Section 414(q) prior to SBJPA.
Prior to amendment by SBJPA,
§414(q)(1) generally provided that an
employee was an HCE if, at any time dur-
ing the year or the preceding year, the em-
ployee:
(A) was a 5-percent owner,
(B) received more than $100,000 (for
1996) in annual compensation from the
employer,
(C) received more than $66,000 (for
1996) in annual compensation from the
employer and was in the top-paid group
of employees during the same year, or
(D) was an officer of the employer who
received compensation in excess of
$60,000 (for 1996).
(2) Guidance under § 414(q) prior to
SBJPA. Under §1.414(q)–1T, A–14(b) of
the temporary Income Tax Regulations,
employers were allowed to make a calen-
dar year calculation election, under which
the preceding year’s calculations relating
to HCE determinations were made on the
basis of the calendar year ending with or
within the current year. Under section 4 of
Rev. Proc. 93–42, 1993–2 C.B. 540, as
modified by Rev. Proc. 95–34, 1995–2
C.B. 385, an employer was permitted to
use a simplified method for determining
HCEs. Rev. Proc. 95–34 also provided
model plan language for employers to use
the simplified method.
(3) SBJPAamendments to § 414(q).
Section 414(q)(1), as amended by SBJPA,
provides that the term “highly compen-
sated employee” means any employee
who:
(A) was a 5-percent owner at any time
during the year or the preceding year, or
(B) for the preceding year had compen-
sation from the employer in excess of
$80,000 and, if the employer so elects,
was in the top-paid group for the preced-
ing year.
The $80,000 amount is adjusted at the
same time and in the same manner as
under § 415(d), except that the base pe-
riod is the calendar quarter ending Sep-
tember 30, 1996.
Pursuant to § 414(q)(3), an employee is
in the top-paid group for any year if the
employee is in the group consisting of the
top 20 percent of the employees of the
employer when ranked on the basis of
compensation paid to employees during
such year. An election pursuant to §
414(q)(1)(B)(ii), under which an em-
ployee (who is not a 5-percent owner)
who has compensation in excess of
$80,000 is not an HCE if the employee is
not a member of the top-paid group, is re-
ferred to in this notice as a “top-paid
group election.”
The amendments made by § 1431 of
SBJPAgenerally apply to years beginning
after December 31, 1996.
III. EFFECT OF STATUTORY
CHANGES ON PRIOR GUIDANCE
(1) Prior guidance. Because of the
amendments made to § 414(q) by SBJPA,
certain portions of § 1.414(q)–1Tdo not
reflect current law. Except as provided in
section III(2), the calendar year calcula-
tion election under A–14(b) of §
1.414(q)–1Tdoes not apply for years be-
ginning after December 31, 1996. In addi-
tion, the guidance provided under section
4 of Rev. Proc. 93–42 and under Rev.
Proc. 95–34 does not apply for years be-
ginning after December 31, 1996. The
Service intends to publish guidance in the
future that will make appropriate modifi-
cations to these items of guidance.
(2) Transition relief for 1997. For any
year beginning on or after January 1,
1997 and before January 1, 1998, employ-
ers may continue to utilize the calendar
year calculation election, taking into ac-
count the statutory amendments to §
414(q)(1)(B), and the elimination of §
414(q)(1)(C) and (D), by SBJPA.
IV. PERIODS FOR DETERMINING
HCE STATUS
(1) Determination years and look-back
years. HCE status is determined on the
basis of the applicable year (as defined
below) of the plan or other entity for
which a determination is being made
(“determination year”) and the preceding
twelve-month period (“look-back year”)
in accordance with § 414(q). Thus, under
§ 414(q), as amended by SBJPA, an em-
ployee is an HCE for a determination year
if, (a) at any time during the determina-
tion year or the look-back year, the em-
ployee was a 5-percent owner or (b) for
the look-back year, the employee had
compensation from the employer in ex-
cess of $80,000 (as adjusted) and, if the
employer so elects, was in the top-paid
group.
(2) Applicable year.
(a) Retirement plans. The applicable
year for a retirement plan is the plan year.
For purposes of this notice, a retirement
plan is a plan that is qualified under §
401(a) or 403(a) or described in § 403(b)
or 408(k).
(b) Nonretirement plans. The applica-
1997–33 I.R.B.7August 18, 1997
Part III. Administrative, Procedural, and Miscellaneous

ble year for a nonretirement plan is the
plan year, as defined in the written plan
document or otherwise identified in the
Code and regulations. If a nonretirement
plan does not have an identified plan year,
then the employer may treat either the cal-
endar year or the employer’s fiscal year as
the applicable year. For purposes of this
notice, a nonretirement plan is any em-
ployee benefit arrangement to which the
definition of HCE is applicable under a
provision of the Code, other than a retire-
ment plan.
V. IMPLEMENTATION OF
ELECTIONS
(1) Top-paid group election. An em-
ployer may make a top-paid group elec-
tion for a determination year. The effect
of the top-paid group election is that an
employee (who is not a 5-percent owner
at any time during the determination year
or the look-back year) with compensation
in excess of $80,000 (as adjusted) for the
look-back year is an HCE only if the em-
ployee was in the top-paid group for the
look-back year. Atop-paid group election,
once made, applies for all subsequent de-
termination years unless changed by the
employer.
(2) Calendar year data election.
(a) This notice provides a new calendar
year data election which an employer may
make for a determination year. The effect
of the calendar year data election is that
the calendar year beginning with or
within the look-back year is treated as the
employer’s look-back year for purposes
of determining whether an employee is an
HCE on account of the employee’s com-
pensation for a look-back year under §
414(q)(1)(B). Acalendar year data elec-
tion, once made, applies for all subse-
quent determination years unless changed
by the employer.
(b) Acalendar year data election made
by an employer does not apply in deter-
mining whether the employer’s employ-
ees are HCEs under § 414(q)(1)(A) on ac-
count of being 5-percent owners.
Accordingly, if an employee is a 5-per-
cent owner in either the look-back year or
the determination year, then the employee
is an HCE, without regard to whether the
employee’s employer makes a calendar
year data election.
(c) If a plan has a calendar year as its
determination year, then the immediately
preceding calendar year is the look-back
year for the plan. This is the case whether
or not a calendar year data election is
made. Thus, a calendar year data election
would have no effect on the HCE deter-
mination for a calendar year plan.
(3) No separate notification require-
ment. Notification or filing with the Inter-
nal Revenue Service of a top-paid group
election or a calendar year data election is
not required in order for the election to be
valid. However, under certain circum-
stances, plan amendments may be re-
quired to reflect the election. See
sectionVII of this notice.
(4) Cross-references. Section VI of this
notice provides a consistency requirement
that applies if an employer maintains
more than one plan. Section VII of this
notice describes circumstances under
which a top-paid group election or calen-
dar year data election, or changes to such
elections, may have to be reflected in plan
documents.
VI. CONSISTENCY REQUIREMENT
FOR ELECTIONS
(1) Consistency requirement — in gen-
eral. Except as provided in section VI(3)
and (4), in order to be effective, a top-paid
group election made by an employer must
apply consistently to the determination
years of all plans of the employer that
begin with or within the same calendar
year. Similarly, except as provided in sec-
tion VI(3) and (4), in order to be effective,
a calendar year data election made by an
employer must apply consistently to the
determination years of all plans of the em-
ployer, other than a plan with a calendar
year determination year, that begin within
the same calendar year.
(2) Interaction of top-paid group elec-
tion and calendar year data election. The
top-paid group election and the calendar
year data election are independent of each
other. Thus, an employer making one of
the elections is not required also to make
the other election. However, if both elec-
tions are made, the look-back year in de-
termining the top-paid group must be the
calendar year beginning with or within
the look-back year, in accordance with
section Vof this notice.
(3) Multiemployer plans. Satisfaction of
the consistency requirement is determined
without regard to any multiemployer plans
in which the employer participates.
(4) Transition relief for years prior to
2000.
(a) Transition relief for 1997. The con-
sistency requirement will not apply to de-
termination years beginning with or
within the 1997 calendar year. Thus, an
employer may make a top-paid group
election or a calendar year data election
for a plan for a determination year begin-
ning with or within 1997, without regard
to whether the employer makes that elec-
tion for any other plan.
(b) Transition relief for 1998 and 1999.
For determination years beginning on or
after January 1, 1998, and before January
1, 2000, (i) nonretirement plans are not
subject to the consistency requirement,
and (ii) satisfaction of the consistency re-
quirement with respect to retirement plans
is determined without regard to any plans
of the employer that are nonretirement
plans.
VII. QUALIFIED RETIREMENT
PLAN AMENDMENTS FOR HCE
DEFINITION
(1) Qualified plans that must be
amended. If a retirement plan qualified
under § 401(a) or 403(a) contains the def-
inition of HCE under § 414(q), as in ef-
fect before SBJPA, the plan must be
amended to reflect the definition of HCE
under § 414(q), as amended by SBJPA. If
an employer makes either a top-paid
group or calendar year data election for a
determination year, a plan that contains
the definition of HCE must reflect the
election. If the employer changes either a
top-paid group or calendar year data elec-
tion, the plan must be amended to reflect
the change. However, a plan is not re-
quired to add a definition of HCE merely
to reflect a top-paid group or calendar
year data election.
(2) Amendment date. Rev. Proc. 97–41,
1997–33 IRB, provides that qualified re-
tirement plans have a remedial amend-
ment period under § 401(b) so that certain
plan amendments for SBJPAare not re-
quired to be adopted before the last day of
the first plan year beginning on or after
January 1, 1999 (with a later date for gov-
ernmental plans). Pursuant to Rev. Proc.
97–41, a plan provision reflecting the def-
inition of HCE is a disqualifying provi-
sion and thus any plan amendments to re-
flect the definition of HCE in § 414(q), as
amended by SBJPA, and to reflect any
August 18, 199781997–33 I.R.B.

choices regarding the top-paid group or
calendar year data elections, are not re-
quired to be made until the end of this re-
medial amendment period. However,
plans must be operated in accordance
with the SBJPAchanges to the HCE defi-
nition in § 414(q) as of the statutory effec-
tive date, and plans required to be
amended to reflect those changes must be
so amended retroactively effective as of
that date. In addition, under Rev. Proc.
97–41, any retroactive amendments must
reflect the choices made in the operation
of the plan for each determination year,
including choices made with respect to
the top-paid group election and the calen-
dar year data election (and any changes to
those elections), and the first date that the
plan operated in accordance with those
choices (and any such changes).
VIII. OTHER ISSUES RELATING
TO DETERMINATION OF HCE
STATUS
(1) Determining HCE status for 1997.
As noted earlier, the amendments made
by § 1431 of the SBJPAgenerally apply
to years beginning after December 31,
1996. However, § 1431(d)(1) provides
that, in determining whether an employee
is an HCE for years beginning in 1997,
the amendments to § 414(q) are treated as
having been in effect for years beginning
in 1996. Accordingly, in determining
whether an employee is an HCE for the
determination year beginning with or
within the 1997 calendar year, an em-
ployer must consider whether the em-
ployee was a 5-percent owner or had
compensation in excess of $80,000 for the
look-back year that began with or within
the 1996 calendar year. An employer also
may make the calendar year data election
and/or the top-paid group election with
respect to determination years beginning
with or within the 1997 calendar year, in
accordance with the guidance in this no-
tice. The SBJPAamendments to § 414(q)
are not applicable in determining the em-
ployer’s HCEs for determination years
beginning prior to January 1, 1997.
(2) Highly compensated former em-
ployees. For purposes of determining sta-
tus as a highly compensated former em-
ployee under § 1.414(q)–1T, A–4,
whether an employee was a highly com-
pensated active employee for a determi-
nation year that ended on or after the em-
ployee’s 55th birthday, or that was a sepa-
ration year, is based on the rules applica-
ble to determining HCE status as in effect
for that determination year.
(3) Determining 5-percent ownership
by attribution of ownership interest to
family members. The definition of 5-per-
cent owner in § 414(q)(2) refers to §
416(i)(1), which in turn refers to the attri-
bution rules of § 318. Under the rules of
§318, an individual is considered to own
any stock owned directly or indirectly by
the individual’s spouse, children, grand-
children or parents. Consequently, an em-
ployee who is the spouse, child, parent or
grandparent (“family member”) of an in-
dividual who has a 5-percent interest in
the employer at any time during the look-
back year or the determination year is
treated as an HCE under § 414(q)(1)(A),
regardless of the family member’s com-
pensation level. These statutory provi-
sions relating to the definition of 5-per-
cent owner under § 414(q)(2) are different
from the family aggregation rules under
former § 414(q)(6) and are unaffected by
the repeal of those rules under §
1431(b)(1) of SBJPA.
IX. EXAMPLES
The following examples illustrate the
rules in this notice:
Example 1: (a) Employer Ahas main-
tained a defined benefit plan qualified
under § 401(a) (Plan M) since 1996 with a
plan year beginning April 1 and ending
March 31. Employer Ahas never had a 5-
percent owner. For Plan M’s determina-
tion year beginning April 1, 2000 and
ending March 31, 2001, Employer Adoes
not make a calendar year data election or
a top-paid group election.
(b) Under § 414(q)(1)(B), Employer A
determines HCEs for Plan M’s determina-
tion year beginning April 1, 2000, based
upon the compensation of Employer A’s
employees in Plan M’s look-back year.
Thus, the HCEs are those employees who
had compensation over $80,000 (as ad-
justed) during the period beginning April
1, 1999 and ending March 31, 2000.
Example 2: (a) Assume the same facts
as in Example 1, except that Employer A
hires a new employee, Employee X, on
March 1, 2000 at an annual salary of
$240,000. Employee X is not a 5-percent
owner during the determination year be-
ginning April 1, 2000 or the look-back
year beginning April 1, 1999. During the
month of March, 2000, Employee X’s
compensation was $20,000.
(b) Because Employee X’s compensa-
tion during Plan M’s look-back year be-
ginning April 1, 1999 was less than
$80,000 (as adjusted), Employee X is not
an HCE for Plan M’s determination year
beginning April 1, 2000.
Example 3: (a) Employer B has main-
tained a qualified defined benefit plan
(Plan N) since 1996 that has a calendar
plan year. Employer B makes a top-paid
group election for Plan N’s 1998 determi-
nation year, which is the 1998 calendar
year. Employer B had 15 employees in
the 1997 calendar year and has never had
a 5-percent owner. These employees,
along with their compensation for the
1997 calendar year, are listed below.
Employees1997 Compensation
1$200,000
2110,000
3101,000
490,000
5-1550,000 or less
(b) In determining Employer B’s HCEs
for the calendar year 1998 under the top-
paid group election, Plan N’s relevant
look-back year is the 1997 calendar year.
Employer B must determine whether any
employee had compensation above
$80,000, and was in the group consisting
of the top 20 percent of the employees of
Employer B in the 1997 calendar year,
when ranked on the basis of compensa-
tion from Employer B during the 1997
calendar year.
(c) Employees 1, 2 and 3 comprise the
top 20 percent of Employer B’s 15 em-
ployees for the 1997 calendar year based
on compensation from Employer B dur-
ing the 1997 calendar year. Although Em-
ployee 4 had compensation over $80,000
in the 1997 calendar year, Employee 4
was not in the top-paid group for the 1997
calendar year and is therefore not an HCE
for Plan N’s 1998 determination year.
This will be the case regardless of
whether Employees 1, 2 and 3 continue to
be employed in the 1998 calendar year.
Example 4: (a) Employer C has a quali-
fied profit sharing plan (Plan O) with a
calendar plan year. Employer C also has a
qualified defined benefit plan (Plan P)
with a plan year beginning April 1 and
ending March 31. Employer C makes the
1997–33 I.R.B.9August 18, 1997

top-paid group election for Plan O for the
calendar year 2000.
(b) Pursuant to the consistency rule re-
quiring that the employer make the same
election for all determination years of all
plans of the employer that begin with or
within the same calendar year, Employer
C must also make the top-paid group elec-
tion for Plan P’s determination year be-
ginning April 1, 2000 and ending March
31, 2001.
(c) The look-back year for purposes of
determining whether any of Employer C’s
employees is an HCE under Employer C’s
top-paid group election for Plan O is the
1999 calendar year and for Plan Pis the
April 1, 1999 to March 31, 2000 year. The
group of Employer C’s employees that are
HCEs for Plan O’s 2000 determination
year are those employees who had com-
pensation above $80,000 (as adjusted)
and who were in the top 20 percent of em-
ployees based on compensation for the
1999 calendar year, while the group of
Employer C’s employees that are HCEs
for Plan P’s determination year beginning
April 1, 2000 are those employees who
had compensation above $80,000 (as ad-
justed) and who were in the top 20 per-
cent of employees based upon compensa-
tion for Plan P’s look-back year beginning
April 1, 1999.
Example 5: (a) Since 1998, Employer
D has maintained a qualified cash or de-
ferred arrangement under § 401(k) (Plan
Q). Plan Q has a calendar plan year. Em-
ployer D has never made a calendar year
data election or a top-paid group election
for Plan Q and has never had a 5-percent
owner. Under § 401(k)(3)(A)(ii), as
amended by the SBJPA, unless an em-
ployer elects to use current year data for
all eligible employees, the actual deferral
percentage (ADP) test for the plan year is
applied by comparing the ADPfor all eli-
gible HCEs for the plan year to the ADP
for all other eligible employees (non-
HCEs) for the preceding plan year. Em-
ployer D has not elected to use current
year data for the nonHCEs for the 2000
calendar year.
(b) In conducting the ADPtest for the
2000 calendar year, Employer D com-
pares the ADPfor the 2000 calendar year
for the group of employees who had com-
pensation above $80,000 (as adjusted) for
the 1999 calendar year, and who are eligi-
ble under the plan for the 2000 calendar
year, with the ADPfor the 1999 calendar
year for the group of employees who were
nonHCEs for the 1999 calendar year and
who were eligible under the plan for the
1999 calendar year. Employer D would
have previously determined who the
HCEs were for the 1999 calendar year,
that is, the employees of Employer D who
had compensation above $80,000 (as ad-
justed) for the 1998 calendar year. The
nonHCEs for the 1999 calendar year are
those employees who were employees in
the 1999 calendar year and who were not
determined to be HCEs for the 1999 cal-
endar year.
Example 6: (a) Employer E has main-
tained a qualified profit sharing plan (Plan
R) since 1996 with an April 1 to March 31
plan year. Employer E has also main-
tained a defined benefit plan (Plan S)
since 1996 with an October 1 to Septem-
ber 30 plan year. Employer E decides to
make the calendar year data election for
determination years of Plan R and Plan S
beginning in the 2000 calendar year.
Thus, Employer E makes the election for
Plan R’s determination year beginning
April 1, 2000 and ending March 31, 2001,
and Plan S’s determination year begin-
ning October 1, 2000 and ending Septem-
ber 30, 2001.
(b) The 2000 calendar year begins
within Plan R’s look-back year beginning
April 1, 1999 and ending March 31, 2000,
and Plan S’s look-back year beginning
October 1, 1999 and ending September
30, 2000 and is treated as Employer E’s
look-back year for both Plans R and S for
purposes of determining Employer E’s
HCEs on the basis of compensation.
Thus, in determining HCE status under §
414(q)(1)(B) Employer E determines
whether an employee has compensation
for the look-back year in excess of
$80,000 (as adjusted), and if applicable,
the composition of the top-paid group, on
the basis of compensation for the 2000
calendar year.
Example 7: (a) Assume the same facts
as in Example 6, except that Employer E
also maintains Plan T, a qualified defined
benefit plan with a calendar plan year.
Employer E fails to make the calendar
year data election for Plan T.
(b) Because the consistency require-
ment for the calendar year data election is
applied without regard to calendar year
plans, the consistency requirement is sat-
isfied regardless of whether Employer E
makes a calendar year data election for
Plan T.
Example 8: Assume the same facts as
in Example 6. For Plan R, in determining
whether any of Employer E’s employees
is an HCE on account of being a 5-percent
owner, the employee’s ownership in Em-
ployer E is examined for Plan R’s 2000
and 2001 plan years (April 1, 1999 to
March 31, 2000, and April 1, 2000 to
March 31, 2001). For Plan S, in determin-
ing whether any of Employer E’s employ-
ees is an HCE on account of being a 5-
percent owner, the employee’s ownership
in Employer E is examined for Plan S’s
2000 and 2001 plan years (October 1,
1999 to September 30, 2000, and October
1, 2000 to September 30, 2001). This is
because the calendar year data election
does not apply in determining whether an
employee is a 5-percent owner.
Example 9: (a) Employer F maintains
Plan U, a defined benefit plan with a cal-
endar year plan year. Employee Ywas
employed by Employer F since 1990.
Employee Yretired at age 65 from em-
ployment with Employer F in 1998. Em-
ployee Ywas an HCE in 1992 under the
rules applicable in 1992 to determine
HCE status, but was not an HCE in any
other year, including 1998.
(b) Because Employee Ywas an HCE
for a determination year (1992) ending on
or after Employee Y’s 55th birthday, Em-
ployee Yis a highly compensated former
employee for determination years begin-
ning after Employee Y’s retirement.
X. PAPERWORK REDUCTION
ACT
The collection of information con-
tained in this notice has been reviewed
and approved by the Office of Manage-
ment and Budget in accordance with the
Paperwork Reduction Act (44 U.S.C.
3507) under control number 1545–1550.
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
control number.
The collection of information in this
notice is in Section VII. This requirement
to amend plan documents is necessary to
update plan documents to reflect the
amended definition of HCE under §
414(q). This information will be used to
August 18, 1997101997–33 I.R.B.

determine which employees are HCEs for
purposes of determining contributions,
benefits, or the availability of other rights
or features under the plan. The collection
of information is required to obtain a ben-
efit. The likely respondents are businesses
or other for-profit institutions, nonprofit
institutions, and small businesses or orga-
nizations.
The estimated total annual recordkeep-
ing burden is 65,605 hours.
The estimated annual burden per
recordkeeper varies from 10 minutes to
30 minutes, depending on individual cir-
cumstances, with an estimated average of
18 minutes. The estimated number of
recordkeepers is 218,683.
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 re-
quired by 26 U.S.C. 6103.
XI. COMMENTS
This notice does not address all of the
procedural requirements that may be nec-
essary to implement the top-paid group
election or the calendar year data election
for future years. However, any additional
requirements would be applied prospec-
tively only. The Treasury and the Service
invite comments and suggestions regard-
ing procedural issues and the other mat-
ters discussed in this notice.
Comments can be addressed to
CC:DOM:CORP:R (Notice 97–45), room
5228, Internal Revenue Service, POB
7604, Ben Franklin Station, Washington,
DC 20044. In the alternative, comments
may be hand delivered between the hours
of 8 a.m. and 5 p.m. to CC:DOM:CORP:R
(Notice 97–45), Courier’s Desk, Internal
Revenue Service, 1111 Constitution Av-
enue, NW, Washington, DC. Alternatively,
taxpayers may transmit comments elec-
tronically via the IRS Internet site at
http://www.irs.ustreas.gov/prod/tax_regs/
comments.html.
DRAFTING INFORMATION
The principal author of this notice is In-
grid Grinde of the Employee Plans Divi-
sion. For further information regarding
this notice, please contact the Employee
Plans Division’s taxpayer assistance tele-
phone service at (202) 622-6074 or (202)
622-6075, between the hours of 1:30 p.m.
and 3:30 p.m. Eastern Time, Monday
through Thursday, or Ms. Grinde at (202)
622-6214, or Patricia McDermott of the
Office of the Associate Chief Counsel
(Employee Benefits and Exempt Organi-
zations) at (202) 622-6030. These are not
toll-free numbers.
26 CFR 601.204: Changes in accounting periods
and in methods of accounting.
(Also Part I, §§ 165, 167, 263, 263A, 446, 481;
1.165-2, 1.167(a)-3, 1.263(a)-2, 1.263A-2, 1.446-1,
1.481-4.)
Rev. Proc. 97-35
SECTION 1. PURPOSE
.01 This revenue procedure describes
three alternative methods of accounting
for package design costs: (1) the capital-
ization method (seesection 5.01 of this
revenue procedure), (2) the design-by-de-
sign capitalization and 60-month amorti-
zation method (seesection 5.02 of this
revenue procedure), and (3) the pool-of-
cost capitalization and 48-month amorti-
zation method (seesection 5.03 of this
revenue procedure). Ataxpayer may
change to or adopt any one of these three
methods. The procedures for a taxpayer
to change to one of these three methods
are provided in Rev. Proc. 97–37, page
18, which provides simplified and uni-
form procedures to obtain automatic con-
sent to make this and other changes in
methods of accounting. This revenue pro-
cedure modifies and supersedes Rev.
Proc. 90–63, 1990–2 C.B. 664.
.02 The three methods of accounting
for package design costs described in this
revenue procedure are the same methods
of accounting that were described in Rev.
Proc. 90–63. Accordingly, a taxpayer that
properly changed to or adopted one of
these methods pursuant to Rev. Proc.
90–63 is not required to change its
method of accounting to comply with this
revenue procedure.
SECTION 2. DEFINITIONS
For purposes of this revenue procedure,
the terms “package design” and “package
design cost” have the meanings provided
in Rev. Rul. 89–23, 1989–1 C.B. 85. If
the taxpayer develops the package design,
the term includes the cost of materials,
labor, and overhead associated with the
design, including all design exploration
and study (for example, the development
of any related design which, although
abandoned, advances the development of
the design selected), refinement of the
basic design selected, testing, and prepa-
ration of the final master comprehensive
design. If an independent contractor per-
forms the work, the term includes all
billings related to the development of the
particular package, including all design
exploration and study (for example, the
development of any related design which,
although abandoned, advances the devel-
opment of the design selected), refine-
ment of the basic design selected, testing,
and preparation of the final master com-
prehensive design. If the taxpayer pur-
chases the package, the term includes the
purchase price. The costs associated with
coupon inserts, refund offers, and other
short-lived promotion-related changes are
specifically excepted from the definition
of “package design cost.”
SECTION 3. BACKGROUND
.01 Section 263(a) of the Internal Rev-
enue Code provides that no deduction is
allowed for any amount paid for new
buildings or for permanent improvements
or betterments made to increase the value
of any property or estate. Section
1.263(a)–2 of the Income Tax Regulations
includes in its examples of capital expen-
ditures the costs of acquiring property
having a useful life substantially beyond
the tax year.
.02 An expenditure generally must be
capitalized under § 263 if the expenditure
creates, enhances, or is part of the cost of
acquiring a tangible or intangible asset
having a useful life that extends substan-
tially beyond the end of the tax year in
which the expenditure is incurred. See
INDOPCO, Inc. v. Commissioner, 503
U.S. 79 (1992); Commissioner v. Lincoln
Savings and Loan Association, 403 U.S.
345 (1971), 1971-2 C.B. 116; Central
Texas Savings and Loan Association v.
United States, 731 F.2d 1181 (5th Cir.
1984); Ellis Banking Corp. v. Commis-
sioner, 688 F.2d 1376 (11th Cir. 1982),
cert. denied, 463 U.S. 1207 (1983); and
Cleveland Electric Illuminating Company
v. United States, 7 Cl. Ct. 220 (1985).
Generally, taxpayers must capitalize
package design costs incurred prior to
1997–33 I.R.B.11August 18, 1997

January 1, 1987 under § 263 because
those costs create intangible assets having
useful lives that extend substantially be-
yond the end of the tax year in which the
costs are incurred. See Rev. Rul. 89-23.
.03 Section 263A, enacted by the Tax
Reform Act of 1986, provides, in part, for
the capitalization of certain direct and in-
direct costs with respect to real or tangible
personal property produced by the tax-
payer. All costs that are incurred with re-
spect to real or tangible personal property
that the taxpayer produces are to be capi-
talized with respect to the property. The
term “produce” includes construct, build,
install, manufacture, develop, improve,
create, raise, or grow. For purposes of
§263A, “tangible personal property” in-
cludes a film, sound recording, video
tape, book, or similar property embodying
words, ideas, concepts, images, or sounds
(see2 H.R. Conf. Rep. No. 841, 99th
Cong., 2d Sess. II–308 (1986), 1986–3
(Vol. 4) C.B. 308) without regard to
whether the property is treated as tangible
or intangible under other provisions of the
Code. See § 1.263A-2(a)(2)(ii). Section
263Aand the regulations thereunder re-
quire that costs incurred after December
31, 1986 in connection with the develop-
ment and design of product packages
must be capitalized. SeeRev. Rul. 89–23.
.04 As stated in Rev. Rul. 89–23, pack-
age designs generally do not have an as-
certainable useful life, and thus no depre-
ciation or amortization is allowed under §
167 and the regulations thereunder. See §
1.167(a)–3. Only when such a package
design is abandoned may the capitalized
costs be deducted. See § 165 and
§1.165–2(a).
.05 Thus, taxpayers are generally re-
quired under the Code and regulations to
use the capitalization method of account-
ing for package design costs described in
section 5.01 of this revenue procedure.
However, to minimize disputes regard-
ing the accounting for package design
costs, the Internal Revenue Service, as a
matter of administrative convenience,
will allow a taxpayer that complies with
the requirements of this revenue proce-
dure to choose one of two alternative
methods of accounting for package de-
sign costs:
(1) the capitalization and 60-month
amortization method described in section
5.02 of this revenue procedure, deter-
mined on a design-by-design basis for all
package designs or;
(2) the capitalization and 48-month
amortization method described in section
5.03 of this revenue procedure, deter-
mined on a pool-of-cost basis for all pack-
age design costs.
SECTION 4. SCOPE
This revenue procedure applies to a
taxpayer that wants to change to or adopt
a method of accounting for package de-
sign costs. Achange in method of ac-
counting for package design costs made
pursuant to this revenue procedure does
not affect the taxpayer’s method of ac-
counting for intangible property other
than package designs described in section
2 of this revenue procedure.
SECTION 5. ALTERNATIVE
METHODS OF ACCOUNTING
.01 The capitalization method.
(1) Description of method. The treat-
ment of the costs of developing new pack-
age designs or modifying existing designs
in accordance with the capitalization
method constitutes a permissible method
of accounting. Under the capitalization
method, the taxpayer must capitalize the
costs of developing (or modifying) any
package design if the asset created by
those costs has no ascertainable useful life
or an ascertainable useful life that extends
substantially beyond the end of the tax
year in which the costs are incurred. If
the asset created by the costs has an ascer-
tainable useful life, the taxpayer may
amortize the costs ratably over the useful
life, beginning with the month the pack-
age design (or modification to the design)
is placed in service. If the asset created
by the costs has no ascertainable useful
life, the taxpayer may deduct the costs
only upon the disposition or abandonment
of the package design (or modification to
the design). See Rev. Rul. 89-23.
(2) Computation of basis.The basis of
each package design (or modification to
the design) subject to capitalization is de-
termined by applying the provisions of
§ 263 and the regulations thereunder to
costs incurred prior to January 1, 1987,
and § 263Aand the regulations thereun-
der to costs incurred after December 31,
1986 (regardless of the tax year the design
(or modification to the design) is placed
in service). The costs required to be capi-
talized are described in section 2 of this
revenue procedure.
.02 The design-by-design capitalization
and 60-month amortization method.
(1) Description of method. The treat-
ment of the costs of developing new
package designs or modifying existing
designs in accordance with the design-
by-design capitalization and 60-month
amortization method constitutes a per-
missible method of accounting. Under
the design-by-design capitalization and
60-month amortization method, the tax-
payer must capitalize the costs of devel-
oping (or modifying) any package design
if the asset created by those costs has no
ascertainable useful life or an ascertain-
able useful life that extends substantially
beyond the end of the tax year in which
the costs are incurred. The taxpayer
must amortize the basis of any package
design (or modification to the design)
subject to capitalization over a period of
60 months. Thus, in computing taxable
income, the basis of each package design
(or modification to the design) subject to
capitalization is allowed as a deduction
ratably over a 60-month period, begin-
ning with the month the design (or modi-
fication to the design) is treated as
placed in service. See section 5.02(3) of
this revenue procedure. If the package
design (or modification to the design) is
disposed of or abandoned within the 60-
month period, the taxpayer is permitted
to deduct the unamortized portion of the
basis of the design (or modification to
the design) in the tax year of disposition
or abandonment.
(2) Computation of basis. Under the
design-by-design capitalization and 60-
month amortization method, the basis of
each package design (or modification of
the design) subject to capitalization must
be determined by applying the provisions
of § 263 and the regulations thereunder to
costs incurred prior to January 1, 1987,
and § 263Aand the regulations thereun-
der to costs incurred after December 31,
1986 (regardless of the tax year the design
(or modification to the design) is placed
in service). The costs required to be capi-
talized are described in section 2 of this
revenue procedure.
(3) Half-year convention. Under the
design-by-design capitalization and 60-
month amortization method, the amorti-
zation allowance for each package design
August 18, 1997121997–33 I.R.B.

(or modification to the design) subject to
capitalization must be determined by
treating a design (or modification to the
design) placed in service during the tax
year as placed in service on the mid-point
of the tax year. If the tax year in which
the package design (or modification to
the design) is placed in service is 12 full
months, the design (or modification to
the design) is treated as placed in service
on the first day of the seventh month of
the tax year. For guidance in computing
the amortization allowance under the de-
sign-by- design capitalization and 60-
month amortization method when a pack-
age design (or modification to the design)
is placed in service in a taxable year of
less than 12 months (a short taxable
year), see Rev. Proc. 89-15, 1989-1 C.B.
816.
.03 The pool-of-cost capitalization and
48-month amortization method.
(1) Description of method. The treat-
ment of the costs of developing new pack-
age designs or modifying existing designs
in accordance with the pool-of-cost capi-
talization and 48-month amortization
method constitutes a permissible method
of accounting. Under the pool-of-cost
capitalization and 48-month amortization
method, the taxpayer must capitalize all
its package design costs and amortize the
costs over a period of 48 months. Thus,
in computing taxable income, package
design costs incurred during the tax year
are allowed as a deduction ratably over a
48-month period, beginning with the
month the costs are treated as incurred.
See section 5.03(3) of this revenue proce-
dure. The taxpayer may not deduct the
unamortized portion of the cost of a pack-
age design (or modification to the design)
if the design (or modification to the de-
sign) is never placed in service or is dis-
posed of or abandoned within the 48-
month period.
(2) Costs subject to capitalization. All
package design costs are subject to capi-
talization without regard to whether the
costs create a package design (or modifi-
cation to the design) having an ascertain-
able useful life that extends substantially
beyond the end of the tax year in which
the costs are incurred. Thus, all package
design costs incurred prior to January 1,
1987 that would be capitalized under
§ 263 and the regulations thereunder but
for the fact that the costs create a package
design (or modification to the design)
having an ascertainable useful life that
does not extend substantially beyond the
end of the tax year in which the costs are
incurred must be capitalized. All pack-
age design costs incurred after December
31, 1986 that would be capitalized
under § 263Aand the regulations there-
under but for the fact that the costs create
a package design (or modification to the
design) having an ascertainable useful
life that does not extend substantially be-
yond the end of the tax year in which the
costs are incurred must be capitalized.
The costs required to be capitalized are
described in section 2 of this revenue
procedure.
(3) Half-year convention. Under the
pool-of-cost capitalization and 48-month
amortization method, the amortization al-
lowance for package design costs must be
determined by treating all package design
costs incurred during the tax year as in-
curred on the mid-point of the tax year. If
the tax year in which the package design
costs are incurred is 12 full months, the
costs are treated as incurred on the first
day of the seventh month of the tax year.
For guidance in computing the amortiza-
tion allowance under the pool-of-cost
capitalization and 48-month amortization
method when package design costs are in-
curred in a taxable year of less than 12
months (a short taxable year), see Rev.
Proc. 89–15.
SECTION 5. CHANGING PACKAGE
DESIGN COSTS METHOD
.01 Automatic change. Ataxpayer
wanting to change its method of account-
ing for package design costs must follow
the provisions in Rev. Proc. 97-37.
.02 Section 481(a) adjustment.
(1) Change to the capitalization
method. If the taxpayer is changing its
method of accounting for package design
costs to the capitalization method, the §
481(a) adjustment (which will be posi-
tive) will restore to income the total
amounts deducted or amortized in tax
years prior to the year of change with re-
spect to all package designs (or modifica-
tions to designs) subject to capitalization
and not abandoned as of the first day of
the tax year of change, less the amounts
that would have been amortized during
the tax years prior to the year of change
with respect to designs (or modifications
to designs) which had an ascertainable
useful life on the date the designs (or
modifications to the designs) were placed
in service. The § 481(a) adjustment is the
difference at the beginning of the tax year
of change between the basis of all such
package designs (or modifications to de-
signs) determined under the taxpayer’s
present method of accounting and the
basis redetermined under the capitaliza-
tion method.
(2)Change to the design-by-design
capitalization and 60-month amortiza-
tion method.If the taxpayer is changing
its method of accounting for package de-
sign costs to the design-by-design capi-
talization and 60-month amortization
method, the § 481(a) adjustment is equal
to the total amounts deducted or amor-
tized in tax years prior to the year of
change with respect to all package de-
signs (or modifications to designs) sub-
ject to capitalization and not abandoned
as of the first day of the tax year of
change, less the amounts that would have
been amortized during the tax years prior
to the year of change with respect to such
designs (or modifications to designs) had
the design-by-design capitalization and
60-month amortization method been
used.
(3) Change to the pool-of-cost capital-
ization and 48-month amortization
method. If the taxpayer is changing its
method of accounting for package design
costs to the pool-of-cost capitalization
and 48-month amortization method, the
§ 481(a) adjustment is equal to the total
amounts deducted or amortized in tax
years prior to the year of change with re-
spect to all package design costs treated
as incurred during the tax years prior to
the year of change, less the amounts that
would have been amortized during the tax
years prior to the year of change with re-
spect to such costs had the pool-of-cost
capitalization and 48-month amortization
method been used.
SECTION 6. INQUIRIES
Inquiries regarding this revenue proce-
dure may be addressed to the Commis-
sioner of Internal Revenue, Attention: Of-
fice of Assistant Chief Counsel (Income
Tax and Accounting) CC:DOM:IT&A,
1111 Constitution Avenue, NW, Washing-
ton, DC 20224.
1997–33 I.R.B.13August 18, 1997

SECTION 7. EFFECTON OTHER
DOCUMENTS
Rev. Proc. 90-63, 1990-2 C.B. 664, is
modified, and as modified, is superseded.
However, see the transition rules in sec-
tion 13.02 of Rev. Proc. 97-37.
SECTION 8. EFFECTIVE DATE
This revenue procedure is effective on
August 18, 1997.
DRAFTING INFORMATION
This revenue procedure was drafted in
the Office of Assistant Chief Counsel (In-
come Tax & Accounting). For further in-
formation regarding this revenue proce-
dure, contact Robert A. Testoff on (202)
622-4800 (not a toll free call).
26 CFR 601.204: Changes in accounting periods
and in methods of accounting.
(Also Part I, §§ 446, 472; 1.446–1, 1.472–1.)
Rev. Proc. 97–36
SECTION 1. PURPOSE
This revenue procedure provides an al-
ternative last-in, first-out (LIFO) inventory
computation method (the “Alternative
LIFO Method”) for a taxpayer engaged in
the trade or business of retail sales of new
automobiles or new light-duty trucks (“au-
tomobile dealer”). Ataxpayer may change
to or adopt the Alternative LIFO Method.
The procedures for a taxpayer to change to
the Alternative LIFO Method are provided
in Rev. Proc. 97–37, page 18, which pro-
vides simplified and uniform procedures to
obtain automatic consent to make this and
other changes in methods of accounting.
This revenue procedure modifies and su-
persedes Rev. Proc. 92–79, 1992–2 C.B.
457.
.02 The Alternative LIFO Method de-
scribed in this revenue procedure is the
same method of accounting that was de-
scribed in Rev. Proc. 92–79. Accordingly,
a taxpayer that properly changed to or
adopted this method pursuant to Rev.
Proc. 92-79 is not required to change its
method of accounting to comply with this
revenue procedure.
SECTION 2. BACKGROUND
.01 In general. Section 472(a) of the
Internal Revenue Code provides that a
taxpayer may use the LIFO inventory
method of inventorying goods if, among
other requirements, the change to, and
use of, the method is in accordance with
such regulations as the Secretary may
prescribe as necessary in order that the
use of the method may clearly reflect in-
come.
.02 Dollar-value LIFO method. Sec-
tion 1.472–8(a) of the Income Tax Regu-
lations provides that any taxpayer may
elect to determine the cost of its LIFO in-
ventories under the dollar-value LIFO
method of accounting, provided such
method is used consistently and clearly
reflects income in accordance with the
rules of that section.
.03 Link-chain method. Section
1.472–8(e)(1) permits the use of a “link-
chain” method of computing the LIFO
value of a dollar-value pool if the “dou-
ble-extension” method and an “index”
method would be impractical or unsuit-
able in view of the nature of the inventory
in the dollar-value pool. Further, in ap-
plying a link-chain method, an index may
be computed by “double extending” a
representative portion of the inventory in
a dollar-value, link-chain pool at both the
current-year cost and the prior-year cost.
Additionally, an index may be computed
under a link-chain method using other
sound and consistent statistical methods.
.04 Acceptable methods. Under exist-
ing LIFO inventory provisions, there are
three general dollar-value LIFO methods:
(1) Simplified dollar-value LIFO
method.
(a) Section 474 provides an elec-
tive simplified dollar-value LIFO method
for eligible small businesses. In general,
a taxpayer is an eligible small business for
any taxable year if its average annual
gross receipts for the three preceding
years do not exceed $5,000,000.
(b) The simplified dollar-value
LIFO method under § 474 is based on a
so-called link-chain method of computing
the LIFO value of an inventory pool.
Under § 474, inventory pools are estab-
lished by the major categories in the ap-
plicable Government price index, and an
annual index for each pool is obtained
from that Government price index.
Therefore, under § 474, an eligible auto-
mobile dealer uses a single inventory pool
for new automobiles and new trucks
under the major category, transportation
equipment, in the Producer Price Index
(“PPI”) published by the Bureau of Labor
Statistics (“BLS”).
(c) Under this link-chain method,
two price indexes are computed for each
pool, an annual index and a cumulative
index. The annual index represents the
change in price level of goods in the end-
ing inventory of the pool for the current
year from the price level of comparable
goods for the prior year. Under § 474, the
annual index for computing the LIFO
value of an automobile dealer’s single in-
ventory pool is obtained using the price
change from the preceding taxable year
for the major index category, transporta-
tion equipment, from the PPI.
(d) The cumulative index repre-
sents the price level change from the be-
ginning of the base year to the end of the
current year and is the product of each of
the annual indexes. The cumulative index
is used to convert the total current-year
cost in an inventory pool at the close of
the taxable year to base-year dollars by
dividing the total current-year cost by the
cumulative index, and also to determine
the value of any incremental increase in
the pool to be added to the ending inven-
tory of the preceding year by multiplying
that increment by the cumulative index.
(2) Inventory price index computa-
tion method.
(a) Section 1.472-8(e)(3) provides
another simplified dollar-value LIFO
method, the inventory price index compu-
tation (IPIC) method, which is available
to all taxpayers. An automobile dealer
using the IPIC method must use that
method in determining the value of all
goods for which the automobile dealer
has elected to use the LIFO method.
Under the IPIC method, special inventory
pooling rules permit an automobile dealer
to establish a single inventory pool for
new automobiles and new trucks under
the major category of the applicable Gov-
ernment price index published by the
BLS. See § 1.472–8(e)(3)(iv) and Rev.
Proc. 84–57, 1984–2 C.B. 496.
(b) The IPIC method under §
1.472–8(e)(3) is also based on a link-
chain method of computing the LIFO
value of an inventory pool. The annual
index for the pool is generally computed
using a stated percentage of the percent
change in the applicable detailed
index(es) for the major category of the ap-
August 18, 1997141997–33 I.R.B.

plicable Government price index. The
stated percentage is 80 percent unless a
taxpayer qualifies as an eligible small
business under § 474, in which case the
stated percent is 100 percent.
(3) General dollar-value LIFO
method.
(a) If an automobile dealer does
not want to use either the simplified dol-
lar-value LIFO method for certain small
businesses provided in § 474 of the Code
(if the taxpayer is eligible) or the IPIC
method provided in § 1.472–8(e)(3), the
automobile dealer may use the general
dollar-value LIFO inventory rules con-
tained in § 1.472–8. Under these general
rules, an automobile dealer establishes
inventory pools for each separate trade or
business under § 1.472–8(c) by major
lines, types, or classes of goods (for ex-
ample, one separate pool for all new au-
tomobiles and another separate pool for
all new trucks).See Fox Chevrolet, Inc.
Maryland v. Commissioner,76 T.C. 708
(1981), acq., 1984–2 C.B. 1, and
Richardson Investments, Inc., and Sub-
sidiaries v. Commissioner,76 T.C. 736
(1981).
(b) An automobile dealer may use
the double-extension method, an index
method, or a link-chain method, to com-
pute the LIFO value of its inventory
pools. Under all three of these methods,
automobile dealers use their own cost
data to compute the index for each pool.
Because of the nature of the items in their
pools, automobile dealers generally use a
link-chain method. The annual index for
each pool under the link-chain method is
computed by “double extending” (that is,
pricing) the vehicles (or “items”) in each
inventory pool as of the close of the tax-
able year at the automobile dealer’s own
current year cost and at the automobile
dealer’s own prior-year cost. For each
pool, the total current-year cost of the ve-
hicles in ending inventory is divided by
the total prior-year cost of the vehicles in
ending inventory to compute the annual
index for the current year. The vehicles
used to determine the dealer’s own prior-
year cost of vehicles in the current year’s
ending inventory must be comparable to
the vehicles used to compute the current-
year cost of vehicles in the current year’s
ending inventory. For purposes of this
revenue procedure, this is referred to as
the § 1.472-8 “comparability require-
ment.”
.05 New alternative method. In addi-
tion to the three general dollar-value
LIFO methods briefly described in sec-
tion 2.04 of this revenue procedure, this
revenue procedure provides an additional
dollar-value LIFO method for automobile
dealers, the Alternative LIFO Method.
This method is described in section 4 of
this revenue procedure.
SECTION 3. SCOPE
The Alternative LIFO Method is avail-
able to any automobile dealer engaged in
the business of retail sales of new auto-
mobiles or new light-duty trucks 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 are also re-
ferred to as class 1, 2, or 3 trucks.
SECTION 4. ALTERNATIVE LIFO
METHOD
.01 In general.
(1) The Alternative LIFO Method is
a comprehensive dollar-value, link-chain
LIFO method of accounting that encom-
passes several LIFO sub-methods and
may only be used by an automobile dealer
engaged in the trade or business of retail
sales of new automobiles or new light-
duty trucks to value its inventory of new
automobiles and new light-duty trucks.
(2) The Alternative LIFO Method is
designed to simplify the dollar-value
computations of automobile dealers.
Under the authority of § 1.446–1(c)(2)(ii),
the Commissioner will waive strict adher-
ence of the § 1.472–8 comparability re-
quirement in applying the Alternative
LIFO Method, provided a taxpayer uses
the compensating sub-methods described
in section 4.02 of this revenue procedure,
which, in the opinion of the Commis-
sioner, are necessary to ensure that the Al-
ternative LIFO Method clearly reflects in-
come. These sub-methods include
requirements that (1) the current-year cost
of a new item be used as the prior year
cost for the new item, and (2) the automo-
bile dealer use the manufacturer’s base
model codes to define items for purposes
of § 1.472–8. Generally, the manufac-
turer’s base model codes used in defining
items and identifying new items under the
Alternative LIFO Method have an aver-
age life of approximately five to seven
years.
(3) The Alternative LIFO Method in-
cludes, by definition, all its sub-methods.
Individual sub-methods used alone, or in
combination with some but not all of the
sub-methods of the Alternative LIFO
Method, may not clearly reflect income.
Therefore, use of the Alternative LIFO
Method is conditioned upon an automo-
bile dealer computing its LIFO inventory
using all the sub-methods, definitions,
and special rules provided in section 4.02
of this revenue procedure, and the compu-
tational methodology provided in section
4.03 of this revenue procedure.
(4) The Alternative LIFO Method
will be accepted by the Commissioner as
an appropriate method of computing an
inventory index, and the use of the Alter-
native LIFO Method to compute the value
of the inventory pool or pools will be ac-
cepted as accurate, reliable, and suitable.
The automobile dealer’s computations
under the Alternative LIFO Method are,
however, subject to verification by the
district director upon examination of the
automobile dealer’s return.
.02 Sub-methods, definitions, and spe-
cial rules.
(1) LIFO pools. For each separate
trade or business, (a) all new automobiles
(regardless of manufacturer), including
those used as demonstrators, must be in-
cluded in one dollar-value LIFO pool, and
(b) all new light-duty trucks (regardless of
manufacturer), including those used as
demonstrators, must be included in an-
other separate dollar-value LIFO pool.
(2) Specific identification increment
method. The current-year cost of the
items making up a pool must be deter-
mined by reference to the actual cost of
the specific new automobiles or new
light-duty trucks in ending inventory.
Therefore, the actual cost of the specific
vehicles on hand at year end will be the
current-year cost of such vehicles.
(3) Item of inventory. An item of in-
ventory (“item category”) must be deter-
mined using the entire manufacturer’s
base model code number that represents
the most detailed description of the base
vehicle’s characteristics, such as model
line, body style, trim level, etc. The man-
ufacturer’s base model code numbers are
almost always used as part of the vehicle
identification on each dealer invoice (for
example, a domestic model, trim level, 4-
door sedan has a specific model code; a
foreign model, 4-door sedan, trim level,
1997–33 I.R.B.15August 18, 1997

5-speed has a specific model code). In
the case of conversion vans, an item of in-
ventory must be determined using both
(a) the entire manufacturer’s base model
code, as described in the preceding sen-
tence, and (b) the most detailed conver-
sion package designation.
(4) Cost of the vehicle used for pur-
poses of computing the pool index. The
actual base vehicle cost of each of the
specific vehicles in ending inventory is
used to compute the index under the Al-
ternative LIFO Method. The base vehicle
cost of each vehicle is not adjusted for
any options, accessories, or other costs.
The pool index computed from only the
base vehicle cost of vehicles is applied to
the total vehicle cost, including options,
accessories, and other costs, of all vehi-
cles in the pool at the end of the taxable
year.
(5) Definition of a new item. Anew
item category, which is an item category
not considered in existence in the prior
taxable year, is one of the following: (a)
any new or reassigned manufacturer’s
model code, as described in section
4.02(3) of this revenue procedure, that is
caused by a change in an existing vehicle,
or (b) a manufacturer’s model code, as de-
scribed in section 4.02(3) of this revenue
procedure, created or reassigned because
the classified vehicle did not previously
exist. Additionally, if there is no change in
a manufacturer’s model code, but there
has been a change to the platform (i.e., the
piece of metal at the bottom of the chassis
that determines the length and width of
the vehicle and the structural set-up of the
vehicle) that results in a change in track
width or wheel-base, whether or not the
same model name was previously used by
the manufacturer, a new item category is
created.
(6) Treatment of a new item not in
existence in the prior year. The automo-
bile dealer must use the current-year base
vehicle cost of the new item category as
the prior-year base vehicle cost of that
item category.
(7) Item in existence in the prior
year, but not stocked. If an item in ending
inventory was not stocked by the automo-
bile dealer at the end of the prior year, but
was in existence in the prior year, the au-
tomobile dealer must determine the prior-
year base vehicle cost for that item by re-
constructing what the base vehicle cost
for the item category would have been
using a manufacturer’s price list that pro-
vides dealer purchase prices. For each
such item category, the manufacturer’s
price list that must be used by the automo-
bile dealer is the list in effect as of the be-
ginning of the last month of the prior tax-
able year.
.03 Computational methodology.
The following rules are applied to com-
pute the LIFO value for each pool of an
automobile dealer’s ending inventory
under the Alternative LIFO Method:
STEP1. Obtain the actual invoice for
each vehicle in the automobile dealer’s
ending inventory.
STEP2. For each pool, group all the
invoices from Step l by item category, as
defined in section 4.02(3) of this revenue
procedure.
STEP3. For each item category, add
together the dealer’s base vehicle costs of
all vehicles within each item category,
from Step 2.
STEP4. Within each pool, compute an
average base vehicle cost for each item
category by dividing the result from Step
3 for each item category by the number of
vehicles in the item category. This aver-
age base vehicle cost for each item will be
used in Step 6 of the succeeding year’s
computations using the Alternative LIFO
Method.
STEP5. For each pool, compute the
total current-year base vehicle cost of the
pool by adding together the separate item
category totals from Step 3.
STEP6. For each pool, compute the
total base vehicle cost of the ending in-
ventory at prior-year’s base vehicle cost.
First, multiply the number of vehicles in
the current year’s ending inventory for
each item category by the average base
vehicle cost of the same item category
from Step 4 of the preceding year’s inven-
tory calculation. If the same item was not
in the prior year’s ending inventory, see
sections 4.02(6) and 4.02(7) of this rev-
enue procedure. Then, add together the
total prior-year base vehicle cost of all of
the item categories.
STEP7. For each pool, compute the
current-year (annual) index by dividing
the amount from Step 5 by the amount
from Step 6.
STEP8. For each pool, compute the
cumulative index by multiplying the cur-
rent-year index from Step 7 by the cumu-
lative index at the end of the preceding
year (from Step 8 of the preceding year’s
computation).
STEP9. For each pool, compute the
total current-year total- vehicle cost by
adding together the total invoice cost, in-
cluding installed options, accessories, and
other inventoriable cost(s), of all the vehi-
cles in inventory at the end of the current
year.
STEP10. For each pool, compute the
total cost of the current-year’s ending in-
ventory at base-year cost by dividing the
total current-year total-vehicle cost of all
the vehicles in ending inventory, from
Step 9, by the cumulative index from Step
8.
STEP11. For each pool, determine if
there is an increment for the current year
by comparing the total cost of the pool’s
current-year ending inventory at base-
year cost, from Step 10, with the total cost
of the pool’s preceding year’s ending in-
ventory at base-year cost, using the
amount from Step 10 of the preceding
year’s calculation. If the amount from
Step 10 of the current year’s calculation is
greater, there is an increment.
STEP12. For each pool, value the cur-
rent year’s increment at current-year cost
by multiplying the increment amount
from Step 11 by the cumulative index
from Step 8.
STEP13. If there is no increment for a
pool, but, rather, a liquidation (also re-
ferred to as a decrement), reduce the LIFO
layers in reverse chronological order until
the liquidation is fully absorbed.
STEP14. For each pool, add together
the current year’s increment, if any, at
current-year cost and the prior years’in-
crements at each prior year’s current-year
cost to compute the total LIFO value for
the pool.
SECTION 5. CHANGING TO
ALTERNATIVE LIFO METHOD
.01 Automatic change. Except as pro-
vided in section 5.02 of this revenue pro-
cedure, an automobile dealer wanting to
change to the Alternative LIFO Method
must follow the provisions in Rev. Proc.
97–37.
.02 Nonautomatic change. An automo-
bile dealer that uses the IPIC method for
goods other than new automobiles, new
light-duty trucks, parts and accessories,
used automobiles, and used trucks, must
August 18, 1997161997–33 I.R.B.

change to the Alternative LIFO Method
under Rev. Proc. 97–27, 1997–21 I.R.B.
10.
.03 Conditions. An automobile dealer
changing to the Alternative LIFO Method
must comply with the following condi-
tions:
(1) the automobile dealer must keep
its books and records for the year of
change and for later taxable years on the
LIFO inventory method and use the
LIFO inventory method for all reports,
including consolidated financial state-
ments, if any, and statements for credit
purposes, in conformity with the provi-
sions of § 1.472–2(e) of the regulations;
(2) the automobile dealer must value
its inventory of new automobiles and
new light-duty trucks as of the end of the
year of change and for later taxable years
under the Alternative LIFO Method, as
provided in section 4 of this revenue pro-
cedure, unless it obtains permission to
change to another recognized method;
(3) the automobile dealer changing
from the IPIC method for its inventory of
parts and accessories, used automobiles,
and used trucks must value its inventory
of parts and accessories, used automo-
biles and used trucks as of the end of the
year of change and for later taxable years
under the methods provided in section
10.03(2)(b) of the APPENDIX of Rev.
Proc. 97–37, unless it obtains permission
to change to another recognized method;
(4) the conversion from the specific
goods method, if applicable, to the dol-
lar-value method must be made in accor-
dance with § 1.472–8(f)(2);
(5) the automobile dealer must file
Form 970, Application to Use LIFO In-
ventory Method, with its federal income
tax return for the year of change and oth-
erwise comply with the provisions of §
472(d) and § 1.472–3 (see alsoRev. Rul.
76–282, 1976–2 C.B. 137) to extend the
LIFO election (i) to include any new au-
tomobiles and new light-duty trucks (for
example, demonstrators) to which the
LIFO election did not previously apply
but that are required to be included in
LIFO pools under the Alternative LIFO
Method, and (ii) for an automobile
dealer changing from the IPIC method,
to include any parts and accessories,
used automobiles, and used trucks, to
which the LIFO election did not previ-
ously apply but that are required to be in-
cluded in LIFO pools under section
10.03 of the APPENDIX to Rev. Proc.
97–37, as of the beginning of the year of
change;
(6) the automobile dealer must ef-
fect the change to the Alternative LIFO
Method, and in the case of an automobile
dealer changing from the IPIC method to
the methods provided in section
10.03(2)(b) of the APPENDIX of Rev.
Proc. 97–37, using the cut-off method.
Under the cut-off method, the value of
the automobile dealer’s new automobile
and new light-duty truck inventory, and
in the case of an automobile dealer
changing from the IPIC method, the parts
and accessories, used automobile, and
used truck inventory, at the beginning of
the year of change must be the same as
the value of such inventory at the end of
the preceding taxable year plus market
value restorations, if any, required pur-
suant to section 5.03(5) of this revenue
procedure;
(7) the automobile dealer must com-
bine and/or separate the dollar-value in-
ventory pool or pools, including any pool
resulting from section 5.03(4) of this rev-
enue procedure, if applicable, to conform
to the inventory pooling rules provided in
section 4 of this revenue procedure, and
in the case of an automobile dealer
changing from the IPIC method, to the
inventory pooling rules provided in sec-
tion 10.03(2)(b) of the APPENDIX of
Rev. Proc. 97–37, in accordance with the
provisions of § 1.472–8(g)(2);
(8) in effecting the changes, any lay-
ers of inventory increments previously
determined and the LIFO value of such
increments must be retained. Instead of
using the earliest taxable year for which
the automobile dealer adopted the LIFO
method for any items in the inventory
pool or pools, the year of change must be
used as the base year in determining the
LIFO value of the inventory pool or
pools for the year of change and later tax-
able years (the cumulative index at the
beginning of the year of change will be
1.00). The base-year costs of layers of
increments in the pool or pools at the be-
ginning of the year of change must be re-
stated in terms of the new base-year
costs, using the year of change as the new
base year; and
(9) the automobile dealer must
maintain and retain complete records of
the computations of the LIFO inventory
under the Alternative LIFO Method, as
well as copies of the actual purchase in-
voice for each vehicle used in the compu-
tation.
SECTION 6. 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, DC 20224.
SECTION 7. EFFECTON OTHER
DOCUMENTS
Rev. Proc. 92–79, 1992–2 C.B. 457, is
modified, and as modified, is superseded.
However, see the transition rules in sec-
tion 13.02 of Rev. Proc. 97–37.
SECTION 8. EFFECTIVE DATE
This revenue procedure is effective on
August 18, 1997.
SECTION 9. ELECTING LIFO AND
ADOPTING THE ALTERNATIVE LIFO
METHOD
.01 In general. An automobile dealer
that adopts the Alternative LIFO Method
provided in this revenue procedure at the
time the automobile dealer makes an
election to use (or extend) the dollar-
value LIFO inventory method must com-
plete and file a statement of election
made on a current Form 970, pursuant to
the instructions for Form 970, or in such
other manner as may be acceptable to the
Commissioner. The use of the Alterna-
tive LIFO Method should be clearly indi-
cated on the Form 970, or an attachment
to the Form 970, and reference should be
made to this revenue procedure. Appro-
priate LIFO sub-method elections that
are an integral part of the Alternative
LIFO Method, which are contained on
the Form 970, must be selected on the
Form 970 upon adoption of the Alterna-
tive LIFO Method.
.02 Conditions. Ataxpayer adopting
the Alternative LIFO Method must com-
ply with the conditions stated in section
5.03(1), (2), and (9) of this revenue proce-
dure.
SECTION 10. PAPERWORK
REDUCTION ACT
The collections of information con-
1997–33 I.R.B.17August 18, 1997

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 section 5. This
information is necessary and will be used
to determine whether the taxpayer is
properly using the Alternative LIFO
Method. The collections of information
are required for the taxpayer to use the Al-
ternative LIFO Method. The likely
recordkeepers are individuals, business or
other for-profit institutions, and small
businesses or organizations.
The estimated total annual recordkeep-
ing burden is 200,000 hours.
The estimated annual burden per
recordkeeper is 25 hours. The estimated
number of recordkeepers is 8,000.
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
This revenue procedure was drafted in
the Office of Assistant Chief Counsel (In-
come Tax and Accounting). For further
information regarding this revenue proce-
dure, contact Richard H. Berken on 202-
622-4970 (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, 197, 263,
263A, 446, 451, 454, 455, 461, 471, 472, 481, 585,
1273, 1281, 1363; 1.165–2, 1.167(e)–1, 1.263(a)–2,
1.263A–1, 1.263A–3, 1.446–1, 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, 1.1273–1,
1.1273–2.)
Rev. Proc. 97–37
TABLE OF CONTENTS
PAGE
SECTION 1. PURPOSE. . . . . . . . . . . 19
SECTION 2. BACKGROUND. . . . . . 19
.01 Change in method of accounting
defined. . . . . . . . . . . . . . . . . . . 19
.02 Securing permission to make a
method change. . . . . . . . . . . . 19
.03 Terms and conditions of a
method change. . . . . . . . . . . . 19
.04 No retroactive method
change. . . . . . . . . . . . . . . . . . . 19
.05 Method change with a § 481(a)
adjustment. . . . . . . . . . . . . . . . 19
(1) Need for adjustment. . . . . 19
(2) Adjustment period. . . . . . . 20
.06 Method change using a cut-off
method. . . . . . . . . . . . . . . . . . . 20
.07 Consistency and clear reflection
of income. . . . . . . . . . . . . . . . . 20
.08 Separate trades or businesses. 20
.09 Penalties. . . . . . . . . . . . . . . . . . 20
.10 Change made as part of an
examination. . . . . . . . . . . . . . . 20
SECTION 3. DEFINITIONS. . . . . . . 20
.01 Application. . . . . . . . . . . . . . . 20
.02 Taxpayer. . . . . . . . . . . . . . . . . 20
(1) In general. . . . . . . . . . . . . . 20
(2) Consolidated group. . . . . . 20
.03 Filed. . . . . . . . . . . . . . . . . . . . . 20
.04 Mailed. . . . . . . . . . . . . . . . . . . 20
.05 Timely performance of acts. . . 20
.06 Year of change. . . . . . . . . . . . . 21
.07 Section 481(a) adjustment
period. . . . . . . . . . . . . . . . . . . . 21
.08 Under examination. . . . . . . . . 21
(1) In general. . . . . . . . . . . . . . 21
(2) Partnerships and S corpora-
tions subject to TEFRA. . . . . . 21
.09 Issue under consideration. . . . 21
(1) Under examination. . . . . . 21
(2) Before an appeals office. . 21
(3) Before a federal court. . . . 21
.10 Change within the LIFO inven-
tory method. . . . . . . . . . . . . . . 21
SECTION 4. SCOPE. . . . . . . . . . . . . 22
.01 Applicability. . . . . . . . . . . . . . 22
.02 Inapplicability. . . . . . . . . . . . . 22
(1) Under examination. . . . . . 22
(2) Before an appeals office. . 22
(3) Before a federal court. . . . 22
(4) Consolidated group
member. . . . . . . . . . . . . . . . . . 22
(5) Partnerships and S
corporations. . . . . . . . . . . . . . . 22
(6) Prior change. . . . . . . . . . . . 22
(7) Section 381(a) transaction. 22
.03 Nonautomatic changes. . . . . . 22
SECTION 5. TERMS AND CONDI-
TIONS OF CHANGE. . . . . . . . . . . . . 22
.01 In general. . . . . . . . . . . . . . . . . 22
.02 Year of change. . . . . . . . . . . . . 22
.03 Section 481(a) adjustment. . . . 22
.04 Section 481(a) adjustment
period. . . . . . . . . . . . . . . . . . . . 22
(1) In general. . . . . . . . . . . . . . 22
(2) Short period as a separate
taxable year. . . . . . . . . . . . . . . 22
(3) Shortened or accelerated ad-
justment periods. . . . . . . . . . . 22
.05 NOLcarryback limitation for
taxpayer subject to criminal
investigation. . . . . . . . . . . . . . 23
.06 Change treated as initiated by the
taxpayer. . . . . . . . . . . . . . . . . . 24
SECTION 6. GENERAL
APPLICATION PROCEDURES. . . . 24
.01 Consent. . . . . . . . . . . . . . . . . . 24
.02 Filing requirements. . . . . . . . . 24
(1) Waiver of taxable year
filing requirement. . . . . . . . . . 24
(2) Timely duplicate filing
requirement. . . . . . . . . . . . . . . 24
(3) Label. . . . . . . . . . . . . . . . . 24
(4) Signature requirements. . . 24
(5) Additional statement
required. . . . . . . . . . . . . . . . . . 24
(6) Where to file. . . . . . . . . . . 24
(7) No user fee. . . . . . . . . . . . . 24
(8) Single application for certain
consolidated groups. . . . . . . . . 24
.03 Taxpayer under examination. . 24
(1) In general. . . . . . . . . . . . . . 24
(2) 90-day window period. . . . 25
(3) 120-day window period. . . 25
(4) Consent of district director25
.04 Taxpayer before an appeals
office. . . . . . . . . . . . . . . . . . . . 25
.05 Taxpayer before a federal
court. . . . . . . . . . . . . . . . . . . . . 25
.06 Compliance with provisions. . 25
SECTION 7. AUDITPROTECTION
FOR TAXABLE YEARS PRIOR TO
YEAR OF CHANGE. . . . . . . . . . . . . 25
.01 In general. . . . . . . . . . . . . . . . . 25
.02 Exceptions. . . . . . . . . . . . . . . . 26
(1) Change not made or made
improperly. . . . . . . . . . . . . . . . 26
(2) Change in sub-method. . . . 26
(3) Prior year Service-initiated
change. . . . . . . . . . . . . . . . . . . 26
(4) Criminal investigation. . . . 26
SECTION 8. EFFECTOF
CONSENT. . . . . . . . . . . . . . . . . . . . . 26
.01 In general. . . . . . . . . . . . . . . . . 26
.02 Retroactive change or modifica-
tion. . . . . . . . . . . . . . . . . . . . . . 26
August 18, 1997181997–33 I.R.B.

SECTION 9. REVIEWBYDISTRICT
DIRECTOR. . . . . . . . . . . . . . . . . . . . . 26
.01 In general. . . . . . . . . . . . . . . . . 26
.02 National office consideration. 26
SECTION 10. REVIEWBYNATIONAL
OFFICE. . . . . . . . . . . . . . . . . . . . . . . . 26
.01 In general. . . . . . . . . . . . . . . . . 26
.02 Incomplete application—21 day
rule. . . . . . . . . . . . . . . . . . . . . . 26
.03 Conference in the national
office. . . . . . . . . . . . . . . . . . . . 27
.04 National office determination. 27
SECTION 11. APPLICABILITYOF
REV. PROCS. 97–1 AND 97–4. . . . . 27
SECTION 12. INQUIRIES. . . . . . . . . 27
SECTION 13. EFFECTIVE DATE. . . 27
.01 In general. . . . . . . . . . . . . . . . . 27
.02 Transition rules. . . . . . . . . . . . 27
(1) Previously filed
applications. . . . . . . . . . . . . . . 27
(2) New applications. . . . . . . . 27
.03 Timing of incurring liabilities for
payroll taxes. . . . . . . . . . . . . . 28
SECTION 14. EFFECTON OTHER
DOCUMENTS. . . . . . . . . . . . . . . . . . 28
.01 Modified and superseded. . . . . 28
.02 Obsoleted. . . . . . . . . . . . . . . . . 28
SECTION 15. PAPERWORK
REDUCTION ACT. . . . . . . . . . . . . . . 28
DRAFTING INFORMATION. . . . . . 28
APPENDIX (TABLE OF
CONTENTS). . . . . . . . . . . . . . . . . . . . 28
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 consolidates and
supersedes most published automatic con-
sent guidance for changes in methods of
accounting, and generally provides sim-
plified, uniform procedures and terms and
conditions to obtain automatic consent to
make these changes. It also provides new
automatic consent procedures for changes
in several other methods of accounting. A
taxpayer complying with all the applica-
ble provisions of this revenue procedure
has obtained the consent of the Commis-
sioner of Internal Revenue to change its
method of accounting under § 446(e) of
the Internal Revenue Code and the In-
come Tax Regulations thereunder.
SECTION 2. BACKGROUND
.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. Amaterial 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) Achange 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. See Rev. Proc.
91–31.
(4) Achange 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. Section 446(e) and §
1.446–1(e) state that, except as otherwise
provided, a taxpayer must secure the con-
sent of the Commissioner before changing
a method of accounting for federal income
tax purposes. Section 1.446–1T(e)(3)-
(i)(B) 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 §
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
generally Rev. 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
1997–33 I.R.B.19August 18, 1997

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. Ataxpayer that is not required to use
inventories uses the overall cash receipts and dis-
bursements 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. Apositive § 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 §§ 1.446–1T(e)(3)(i) 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.Section 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 compu-
tation of taxable income must be made in a
manner that, in the opinion of the Commis-
sioner, does clearly reflect income. If a
taxpayer under examination is not eligible
to change a method of accounting under
this revenue procedure, the change may be
made by the district director. Achange re-
sulting in a positive § 481(a) adjustment
will ordinarily be made in the earliest tax-
able year under examination with a one-
year § 481(a) adjustment period.
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. See Notice
97–26, 1997–17 I.R.B. 6.
.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.
August 18, 1997201997–33 I.R.B.

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-
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 TEFRAunified 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 TEFRAuni-
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. Atax-
payer’s method of accounting for an item
is an issue under consideration for the tax-
able years under examination if the tax-
payer receives written notification (for
example, by examination plan, informa-
tion document request (IDR), or notifica-
tion of proposed adjustments or income
tax examination changes) from the exam-
ining agent(s) specifically citing the treat-
ment of the item as an issue under consid-
eration. 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 result of an examination plan that
merely identifies LIFO inventories as a
matter to be examined. Similarly, a tax-
payer’s method of determining inventori-
able costs under § 263Ais an issue under
consideration 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. 97–2, 1997–1 I.R.B. 64 (or
any successor).
(2) Before an appeals office. Atax-
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. Atax-
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. Achange within the LIFO in-
ventory method is a change from one
LIFO inventory method or sub-method to
another LIFO inventory method or sub-
method. Achange within the LIFO in-
ventory method does not include a
1997–33 I.R.B.21August 18, 1997

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. Except as otherwise
provided in section 4.02 of this revenue
procedure, this revenue procedure applies
to a taxpayer requesting the Commis-
sioner’s consent to change to a method of
accounting described in the APPENDIX
of this revenue procedure. Except as oth-
erwise provided in this revenue procedure
(see, for example, section 2.01 of the AP-
PENDIX of this revenue procedure), this
revenue procedure is the exclusive proce-
dure for a taxpayer within its scope to ob-
tain 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 and 12.01 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 na-
tional office, the taxpayer is before an ap-
peals office with respect to any income
tax issue and the method of accounting to
be changed is an issue under considera-
tion by the appeals office (as provided in
section 3.09(2) of this revenue proce-
dure);
(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
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 four taxable years prior to
the year of change, (a) has made a change
in the same method of accounting (with or
without obtaining the Commissioner’s
consent) or (b) has applied to change the
same method of accounting without ef-
fecting the change (whether the applica-
tion to change was withdrawn, not per-
fected, 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 either
section 4.02(6) or 4.02(7) of this revenue
procedure precludes a taxpayer from
using this revenue procedure to make a
change in method of accounting, the tax-
payer requesting such a change must file a
Form 3115 with the Commissioner in ac-
cordance with the requirements of §
1.446–1(e)(3)(i) and Rev. Proc. 97–27,
1997–21 I.R.B. 10 (or any other applica-
ble Code, regulation, or administrative
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 provided
in section 5.04 of this revenue procedure.
.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 tax-
able 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. Acalendar year taxpayer received
permission to change an accounting method begin-
ning with the 1997 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, 1998. The taxpayer must
include $7,500 of the § 481(a) adjustment in gross
income for the short period from January 1, 1998,
through September 30, 1998.
Example 2. Corporation X, a calendar year tax-
payer, received permission to change an accounting
method beginning with the 1997 calendar year. The
§ 481(a) adjustment is $30,000 and the adjustment
period is four taxable years. On July 1, 1999, Cor-
poration Z acquires 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 1997. 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, 1999, through June 30,
1999. In addition, Corporation Zmust include
$7,500 of the § 481(a) adjustment in gross income in
its income tax return for calendar year 1999.
(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. Ataxpayer
may elect to use a one-year adjustment
period in lieu of the § 481(a) adjustment
August 18, 1997221997–33 I.R.B.

period otherwise provided by this revenue
procedure if the entire § 481(a) adjust-
ment is less than $25,000 (either positive
or negative). Ataxpayer makes an elec-
tion under this de minimis rule 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. Acooperative
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. Ataxpayer 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-
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 an-
other 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 acquiring
corporation immediately after the transfer
pursuant to § 381(c). The acquiring cor-
poration is subject to any terms and con-
ditions imposed on the transferor (or any
predecessor of the transferor) as a result
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 trans-
action described in section 5.04(3)(c)(iv)
or 5.04(3)(c)(v)(A) of this revenue proce-
dure.
(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 member
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 transferor
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 member
ceases to be a member of a consolidated
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 NOLcarryback 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 proceeding con-
1997–33 I.R.B.23August 18, 1997

cerning (1) directly or indirectly, any
issue relating to the taxpayer’s federal tax
liability, or (2) the possibility of false or
fraudulent statements made by the tax-
payer with respect to any issue relating 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 Commissioner is
hereby granted to any taxpayer within the
scope of this revenue procedure to change
a method of accounting, provided the tax-
payer complies with all the applicable pro-
visions of this revenue procedure.
.02 Filing requirements.
(1) Waiver of taxable year filing re-
quirement. The requirement under §
1.446–1T(e)(3)(i)(B) 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.Ataxpayer chang-
ing a method of accounting pursuant to
this revenue procedure must complete and
file an application in duplicate. The origi-
nal must be attached to the taxpayer’s
timely filed (including extensions) origi-
nal federal income tax return for the year
of change. Acopy of the application must
be filed with the national office (see sec-
tion 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 in-
come tax return for the year of change.
(b) Limited relief for late applica-
tion. Ataxpayer that fails to file the ap-
plication for the year of change as pro-
vided in section 6.02(2)(a) 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 § 301.9100–3T(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. 97–37”
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. Ataxpayer, other
than an exempt organization, changing a
method of accounting pursuant to this
revenue procedure must file a copy of the
application with the national office ad-
dressed to the Commissioner of Internal
Revenue, Attention: CC:DOM:IT&A,
P.O. Box 7604, Benjamin Franklin Sta-
tion, Washington, DC 20044 (or, in the
case of a designated private delivery ser-
vice: Commissioner of Internal Revenue,
Attention: CC:DOM:IT&A, 1111 Consti-
tution Avenue, NW, Washington, DC
20224). An exempt organization must ad-
dress the application to the Assistant
Commissioner (Employee Plans and Ex-
empt Organizations), Attention: E:EO,
P.O. Box 120, Benjamin Franklin Station,
Washington, DC 20044 (or, in the case of
a designated private delivery service: As-
sistant Commissioner (Employee Plans
and Exempt Organizations), Attention:
E:EO, 1111 Constitution Avenue, NW,
Washington, DC 20224).
(7) No user fee. Auser fee is not re-
quired for an application filed under this
revenue procedure, and the receipt of an
application filed under this revenue pro-
cedure will not be acknowledged.
(8) Single application for certain
consolidated groups. Aparent 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
section 15.07(3) of Rev. Proc. 97–1,
1997–1 I.R.B. at 49 (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-
August 18, 1997241997–33 I.R.B.

enue procedure (see, for example, sec-
tions 4.01 and 12.01 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 if the
taxpayer is within the provisions of sec-
tion 6.03(2) (90-day window), 6.03(3)
(120-day window), or 6.03(4) (district di-
rector consent) of this revenue procedure.
Ataxpayer that files an application be-
yond the time periods provided in the 90-
day and 120-day windows will not be
granted an extension of time to file under
§ 301.9100, except in unusual and com-
pelling circumstances.
(2) 90-day window period.
(a) Ataxpayer 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 exam-
ining agent(s) has placed in suspense at
the time the copy of the application is
filed.
(b) Ataxpayer 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) Ataxpayer 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
period 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
application is filed or an issue the exam-
ining agent(s) has placed in suspense at
the time the copy of the application is
filed.
(b) Ataxpayer 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) Ataxpayer 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. 97–2 (or any successor).
(b) Ataxpayer 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.
Ataxpayer 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. 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
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 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 tax-
able years otherwise prescribed by this
revenue procedure.
SECTION 7. AUDITPROTECTION
FOR TAXABLE YEARS PRIOR TO
YEAR OF CHANGE
.01 In general. Except as provided in
section 7.02 or the APPENDIX of this
1997–33 I.R.B.25August 18, 1997

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
comply with all the applicable provisions
of this revenue procedure, or (c) the
method of accounting is changed or
modified because there has been a mis-
statement or omission of material facts
(seesection 8.02(2) of this revenue pro-
cedure).
(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. EFFECTOF CONSENT
.01 In general. Ataxpayer 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. REVIEWBYDISTRICT
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:
(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;
(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. 97–2 (or any successor) will be
followed.
SECTION 10. REVIEWBYNATIONAL
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-
August 18, 1997261997–33 I.R.B.

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. Arequest 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. 97–1 (or any successor).
For conference procedures for exempt or-
ganizations, see section 12 of Rev. Proc.
97–4, 1997–1 I.R.B. 96 (or any succes-
sor).
.04 National office determination. If
the national office determines that the
taxpayer has changed its method of ac-
counting 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 either
(1) is not granted, or (2) is granted, pro-
vided the taxpayer makes appropriate ad-
justments to conform its change in
method of accounting to the applicable
provisions of this revenue procedure.
Any adjustments so made must be ac-
companied by conforming amendments
to any federal income tax returns filed
for the year of change and subsequent
taxable years.
SECTION 11. APPLICABILITYOF
REV. PROCS. 97–1 AND 97–4
Rev. Procs. 97–1 and 97–4 (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, DC 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 August 18, 1997. Except as pro-
vided in sections 13.02 and 13.03 of this
revenue procedure, the Service will return
any application that is filed on or after
August 18, 1997, if the application is filed
with the national office pursuant to the
Code, regulations, or administrative guid-
ance other than this revenue procedure
and the change in method of accounting is
within the scope of this revenue proce-
dure.
.02 Transition rules.
(1) Previously filed applications.
(a) Applications for advance con-
sent. If a taxpayer filed an application
with the national office under Rev. Proc.
97–27 or Rev. Proc. 92–20, 1992–1 C.B.
685, to make a change in method of ac-
counting authorized by this revenue pro-
cedure, and the application is pending
with the national office on August 18,
1997, the taxpayer may make the change
under this revenue procedure. However,
the national office will process the appli-
cation in accordance with the revenue
procedure under which the application
was filed, unless prior to the later of Sep-
tember 30, 1997, or the issuance of the
letter ruling granting or denying consent
to the change, the taxpayer notifies the
national office that it wants to make the
change under this revenue procedure. If
the taxpayer timely notifies the national
office that it wants to make the method
change under this revenue procedure, the
national office will require the taxpayer to
make appropriate modifications to the ap-
plication to comply with the applicable
provisions of this revenue procedure. In
addition, any user fee that was submitted
with the application will be returned to
the taxpayer.
(b) Applications for automatic
consent. If a taxpayer filed an application
with the national office (or a service cen-
ter) previously authorized by an auto-
matic consent procedure listed in section
14.01 of this revenue procedure, before
August 18, 1997, to make a change in
method of accounting authorized by this
revenue procedure, the taxpayer may
make the change under this revenue pro-
cedure. However, the national office will
process the application in accordance
with the automatic consent procedure
under which the application was filed, un-
less prior to September 30, 1997, the tax-
payer notifies the national office in writ-
ing (at the address provided in section
6.02(6) of this revenue procedure) 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 to com-
ply with the applicable provisions of this
revenue procedure.
(2) New applications.
(a) Prior automatic consent pro-
cedures. Ataxpayer that wants to make a
change in method of accounting previ-
ously authorized by an automatic consent
procedure listed in section 14.01 of this
revenue procedure, for a taxable year that
ends on or after August 18, 1997, may
make the change under that automatic
consent procedure by complying with that
procedure and the following additional
filing requirement. In lieu of filing the
application with the national office (or a
service center) pursuant to that automatic
consent procedure, the taxpayer must file
a copy of the application with the national
office no earlier than the first day of the
year of change, and no later than the ear-
lier of December 31, 1997, or when the
original application is filed with the
timely filed original federal income tax
return (including extensions) for the year
of change. Ataxpayer changing its
method of accounting under Rev. Proc.
85–8, 1985–1 C.B. 495, for a taxable year
ending on or before December 31, 1997,
may file under that revenue procedure.
The additional filing requirement de-
scribed above does not apply to this
change.
(b) New automatic consent proce-
dures. Ataxpayer making a change in
method of accounting authorized by this
revenue procedure, other than a change
1997–33 I.R.B.27August 18, 1997

previously authorized by an automatic
consent procedure listed in section 14.01
of this revenue procedure or a change au-
thorized by section 13.01 of the APPEN-
DIX of this revenue procedure, that files a
copy of an application under the provi-
sions of this revenue procedure no later
than the earlier of December 31, 1997, or
when the original application is filed with
the timely filed original federal income
tax return (including extensions) for the
year of change, may apply the § 481(a)
adjustment period determined under sec-
tions 5 and 8 of Rev. Proc. 92–20. The
taxpayer must affirmatively state in an at-
tachment to the application (a) that it re-
quests to apply the § 481(a) adjustment
period determined under sections 5 and 8
of Rev. Proc. 92–20, and (b) the applica-
ble § 481(a) adjustment period and the au-
thority therefor.
.03 Timing of incurring liabilities for
payroll taxes. To change a method of ac-
counting under section 8.04 of the AP-
PENDIX of this revenue procedure, a tax-
payer may use the provisions of this
revenue procedure for taxable years end-
ing on or after October 21, 1996.
SECTION 14. EFFECTON OTHER
DOCUMENTS
.01 Modified and superseded. Rev.
Procs. 96–31, 1996–1 C.B. 714; 95–33,
1995–2 C.B. 380; 94–29, 1994–1 C.B.
616; 92–98, 1992–2 C.B. 512; 92–97,
1992–2 C.B. 510; 92–79, 1992–2 C.B.
457; 92–75, 1992–2 C.B. 448; 92–74,
1992–2 C.B. 442; 90–63, 1990–2 C.B.
664; 90–37, 1990–2 C.B. 361; 89–46,
1989–2 C.B. 597; 88–15, 1988–1 C.B.
683; 84–76, 1984–2 C.B. 751; and 74–11,
1974–1 C.B. 420; and Notice 95–57,
1995–2 C.B. 337; are modified, and as
modified, are superseded.
.02 Obsoleted. The following revenue
procedures are obsoleted:
(1) Rev. Proc. 85–8, 1985–1 C.B.
495 (a revenue procedure that allows a
taxpayer to change its method of account-
ing for bad debts);
(2) Rev. Proc. 84–30, 1984–1 C.B.
482 (a revenue procedure that allows a
taxpayer to change its method of account-
ing for interest on certain consumer loans
from the Rule of 78’s method to the eco-
nomic accrual method);
(3) Rev. Proc. 84–29, 1984–1 C.B.
480 (a revenue procedure that provides a
simplified procedure for an individual
borrower to use to compute interest de-
ductions for certain loans if the taxpayer
has been reporting interest deductions on
these loans based on the Rule of 78’s
method);
(4) Rev. Proc. 84–28, 1984–1 C.B.
475 (a revenue procedure that allows a
taxpayer to change its method of ac-
counting for interest from the Rule of
78’s method to the economic accrual
method, but only for those loans in
which the interest computed using the
Rule of 78’s method exceeds the loan
payments during any year of the term of
the loan);
(5) Rev. Proc. 84–27, 1984–1 C.B.
469 (a revenue procedure that allows a
taxpayer to change its method of account-
ing for interest from the Rule of 78’s
method to the economic accrual method);
and
(6) Rev. Proc. 83–40, 1983–1 C.B.
774 (a revenue procedure that allows a
taxpayer to use the Rule of 78’s method to
compute interest on certain short-term
consumer loans).
SECTION 15. PAPERWORK REDUC-
TION 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,
13, and sections 2, 3, 5, 6, 7, 10, and 12 of
the APPENDIX. This information is nec-
essary 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 5,464
hours.
The estimated annual burden per re-
spondent/recordkeeper varies from 1/10
hour to 5 7/10 hours, depending on indi-
vidual circumstances, with an estimated
average of 1 1/2 hours. The estimated
number of respondents is 2,000.
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 the following individuals:
(1) for changes in methods of accounting
under sections 2.01 and 2.02 of the AP-
PENDIX of this revenue procedure, Peter
Friedman of the Office of Assistant Chief
Counsel (Passthroughs and Special Indus-
tries) on (202) 622-3110 (not a toll-free
call); (2) for changes in methods of ac-
counting under sections 6 and 11 of the
APPENDIX of this revenue procedure,
Nicholas Bogos of the Office of Assistant
Chief Counsel (Financial Institutions and
Products) on (202) 622-3920 (not a toll-
free call); (3) for changes in methods of
accounting under sections 12 and 13 of
the APPENDIX of this revenue proce-
dure, William Blanchard of the Office of
Assistant Chief Counsel (Financial Insti-
tutions and Products) on (202) 622-3950
(not a toll-free call); and (4) for all other
matters, 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). . . . . . . . . . . . . . 30
.01 Advances made by a lawyer on
behalf of clients — Description
of change and scope. . . . . . . . 30
.02 Reserved. . . . . . . . . . . . . . . . . 30
August 18, 1997281997–33 I.R.B.

SECTION 2. DEPRECIATION OR
AMORTIZATION (§ 167, 168,
OR 197). . . . . . . . . . . . . . . . . . . . . . . . 30
.01 Claiming less than the
depreciation or amortization
allowable. . . . . . . . . . . . . . . . . 30
(1) Description of change. . . . 30
(2) Scope. . . . . . . . . . . . . . . . . 30
(3) Taxpayer with under- and
over-depreciated properties . . 31
(4) Additional requirements. . 31
(5) Section 481(a) adjustment. 32
(6) Basis adjustment. . . . . . . . 32
(7) Meaning of depreciation
allowable. . . . . . . . . . . . . . . . . 32
.02 Permissible to permissible
method of accounting for
depreciation. . . . . . . . . . . . . . . 32
(1) Description of change. . . . 32
(2) Scope. . . . . . . . . . . . . . . . . 32
(3) Changes covered. . . . . . . . 33
(4) Additional requirements. . 33
(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. . . . . . . . . . . . . . . . . . . 34
(3) No audit or ruling
protection. . . . . . . . . . . . . . . . 34
SECTION 3. CAPITAL
EXPENDITURES (§ 263). . . . . . . . . 34
.01 Package design costs. . . . . . . . 34
(1) Description of change and
scope. . . . . . . . . . . . . . . . . . . . 34
(2) Additional requirements. . 34
.02 Reserved. . . . . . . . . . . . . . . . . 34
SECTION 4. UNIFORM
CAPITALIZATION (§ 263A). . . . . . . 34
.01 Certain uniform capitalization
(UNICAP) methods used by small
resellers, formerly small resellers,
and reseller-producers. . . . . . 34
(1) Description of change and
scope. . . . . . . . . . . . . . . . . . . . 34
(2) Definitions. . . . . . . . . . . . . 34
(3) Section 481(a) adjustment. 34
(4) No audit protection. . . . . . 34
(5) Example. . . . . . . . . . . . . . . 34
.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. 36
(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
SECTION 6. OBLIGATIONS ISSUED
ATDISCOUNT(§ 454). . . . . . . . . . . 37
.01 Series E or EE U.S. savings
bonds. . . . . . . . . . . . . . . . . . . . 37
(1) Description of change and
scope. . . . . . . . . . . . . . . . . . . . 37
(2) Manner of making the
change. . . . . . . . . . . . . . . . . . . 37
.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. . . . . . . . . . . . . . . . . . 38
.02 Timing of incurring liabilities
for real property taxes. . . . . . . 38
(1) Description of change. . . . 38
(2) Scope. . . . . . . . . . . . . . . . . 38
(3) Amounts taken into
account. . . . . . . . . . . . . . . . . . 38
.03 Timing of incurring liabilities
under a workers’compensation
act, tort, breach of contract, or
violation of law. . . . . . . . . . . . 38
(1) Description of change and
scope. . . . . . . . . . . . . . . . . . . . 38
(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
SECTION 9. INVENTORIES (§ 471)39
.01 Cash discounts — Description
of change and scope. . . . . . . . 39
.02 Reserved. . . . . . . . . . . . . . . . . 39
SECTION 10. LAST-IN, FIRST-OUT
(LIFO) INVENTORIES (§ 472). . . . . 39
.01 Change from the LIFO inventory
method. . . . . . . . . . . . . . . . . . . 39
(1) Description of change and
scope. . . . . . . . . . . . . . . . . . . . 39
(2) Limitation on LIFO
election. . . . . . . . . . . . . . . . . . 40
(3) Effect of subchapter S
election by corporation. . . . . . 40
(4) Additional requirements. . 40
.02 Determining the cost of used
vehicles purchased or taken as
a trade-in. . . . . . . . . . . . . . . . . 40
(1) Description of change and
scope. . . . . . . . . . . . . . . . . . . . 40
(2) Manner of making the
change. . . . . . . . . . . . . . . . . . . 40
.03 Alternative LIFO inventory
method for retail automobile
dealers. . . . . . . . . . . . . . . . . . . 40
(1) Description of change and
scope. . . . . . . . . . . . . . . . . . . . 40
(2) Manner of making the
change. . . . . . . . . . . . . . . . . . . 40
.04 Inventory price index computation
(IPIC) method under the LIFO in-
ventory method. . . . . . . . . . . . 40
(1) Description of change and
scope. . . . . . . . . . . . . . . . . . . . 40
(2) Manner of making the
change. . . . . . . . . . . . . . . . . . . 41
.05 Determining current-year cost
under the LIFOinventory
method. . . . . . . . . . . . . . . . . . . 41
(1) Description of change and
scope. . . . . . . . . . . . . . . . . . . . 41
(2) Manner of making the
change. . . . . . . . . . . . . . . . . . . 41
SECTION 11. BANK RESERVES FOR
BAD DEBTS (§ 585). . . . . . . . . . . . . 41
.01 Changing from the § 585
reserve method to the § 166
specific charge-off method. . . 41
1997–33 I.R.B.29August 18, 1997

(1) Description of change and
scope. . . . . . . . . . . . . . . . . . . . 41
(2) Certain scope limitations
inapplicable. . . . . . . . . . . . . . . 41
(3) Section 481(a) adjustment. 41
(4) Change from § 585 required
when electing S corporation
status. . . . . . . . . . . . . . . . . . . . 41
.02 Reserved. . . . . . . . . . . . . . . . . 42
SECTION 12. ORIGINALISSUE
DISCOUNT(§ 1273). . . . . . . . . . . . . 42
.01 De minimis original issue dis-
count (OID). . . . . . . . . . . . . . . 42
(1) Description of change and
scope. . . . . . . . . . . . . . . . . . . . 42
(2) Manner of making the
change. . . . . . . . . . . . . . . . . . . 42
(3) Additional requirements. . 42
(4) No audit protection. . . . . . 42
.02 Reserved. . . . . . . . . . . . . . . . . 42
SECTION 13. SHORT-TERM
OBLIGATIONS (§ 1281). . . . . . . . . . 42
.01 Interest income on short-term
obligations. . . . . . . . . . . . . . . . 42
(1) Description of change and
scope. . . . . . . . . . . . . . . . . . . . 42
(2) Section 481(a) adjustment
period. . . . . . . . . . . . . . . . . . . 42
.02 Stated interest on short-term loans
of cash method banks in the
Eighth Circuit. . . . . . . . . . . . . 42
(1) Description of change and
scope. . . . . . . . . . . . . . . . . . . . 42
(2) Section 481(a) adjustment
period. . . . . . . . . . . . . . . . . . . 42
(3) No ruling protection. . . . . 42
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 Boccardo v. United States, 12
Cl. Ct. 184 (1987); Canelo v. Commis-
sioner, 53 T.C. 217 (1969), aff’d per cu-
riam, 447 F.2d 484 (9th Cir. 1971).
.02 Reserved.
SECTION 2. DEPRECIATION OR
AMORTIZATION (§ 167, 168, OR 197)
.01 Claiming less than the deprecia-
tion or amortization allowable.
(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 claimed less
than the depreciation allowable, to a per-
missible method of accounting for depre-
ciation under which the taxpayer will
claim the depreciation allowable. The
taxpayer has the option of either making
the change in method of accounting under
this revenue procedure or requesting per-
mission to make the change under Rev.
Proc. 97–27, 1997–21 I.R.B. 10. This
change was formerly provided in Rev.
Proc. 96–31, 1996–1 C.B. 714.
(b) Achange 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 depreciation under which the tax-
payer will claim the depreciation allow-
able is a change in method of accounting
for which the consent of the Commis-
sioner is required. Sections 1.167(e)–1(a)
and 1.446–1(e)(2)(ii)(b). This method
change, however, does not include any
correction of mathematical or posting er-
rors. Section 1.446–1(e)(2)-(ii)(b).
(2) Scope.
(a) Applicability. Except as pro-
vided in section 2.01(2)(b) of this AP-
PENDIX, this change applies to any tax-
payer that has used an impermissible
method of accounting for depreciation in
at least the two taxable years immediately
preceding the year of change, and is
changing that accounting method to a per-
missible method of accounting for depre-
ciation, 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 the depreciation allowable
(claimed less than the depreciation allow-
able);
(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 § 263Aand that is required to capital-
ize the costs with respect to which the
taxpayer wants to change its method of
accounting under section 2.01 of this AP-
PENDIX, if the taxpayer is not capitaliz-
ing 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 intangi-
bles). Ataxpayer may request consent to
revoke or make the election by submitting
a request for a letter ruling under Rev.
Proc. 97–1, 1997–1 I.R.B. 11 (or any suc-
cessor);
(vii) any property subject to §
167 (other than § 167(f), regarding cer-
tain 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 which depreciation is deter-
mined under § 167 (other than § 167(f))
must be made prospectively (see, for ex-
ample, § 1.167(b)–2(c)) (In contrast, sec-
tion 2.01 of this APPENDIX generally
applies to a change in the recovery pe-
riod of property for which depreciation
is determined under § 168 or former
§ 168);
(viii) any depreciable property
that changes use but continues to be
owned by the same taxpayer (see, for ex-
August 18, 1997301997–33 I.R.B.

ample, § 168(i)(5));
(ix) any property for which a
taxpayer has claimed depreciation in ex-
cess of the depreciation allowable;
(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. See Rev. Rul. 89–62,
1989–1 C.B. 78;
(B) a change in the classifica-
tion of a retail motor fuels outlet placed in
service before August 20, 1996, from
nonresidential real property to 15–year
property under § 168 (see Rev. Proc.
97–10, 1997–2 I.R.B. 59, for the exclu-
sive procedures for making this change);
or
(C) 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
salvage proceeds in taxable income (see
section 2.02 of this APPENDIX for mak-
ing this change for property for which de-
preciation is determined under § 167); or
(xii) 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 the depreciation allowable.
For example, a change in method of ac-
counting involving:
(A) a change in inventory
costs (for example, when property is re-
classified from inventory property to de-
preciable property); or
(B) a change in the character
of a transaction from sale to lease (see
section 2.03 of this APPENDIX for mak-
ing this change).
(3) Taxpayer with under- and over-
depreciated properties.
(a) Because this revenue proce-
dure is not the exclusive procedure to
change a method of accounting to which
section 2.01 of this APPENDIX applies,
a taxpayer that wants to change a method
of accounting for depreciation to which
section 2.01 of this APPENDIX applies
on some items of property and to change
an impermissible method of accounting
for depreciation under which the tax-
payer claimed more than the depreciation
allowable on other items of property, may
file:
(i) one application under Rev.
Proc. 97–27 for both the under- and over-
depreciated properties; or
(ii) two applications—one ap-
plication under this revenue procedure for
the under-depreciated property and one
application under Rev. Proc. 97–27 for
the over-depreciated property.
(b) In either situation, the omitted
depreciation for the under-depreciated
property and the excess depreciation for
the over-depreciated property from tax-
able years prior to the year of change will
be taken into account through a § 481(a)
adjustment.
(4) Additional requirements.Atax-
payer also must comply with the follow-
ing:
(a) Permissible depreciation
method. Ataxpayer 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(7) of this APPENDIX).
(b) Statements required. Atax-
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.
Ageneral 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 the taxpayer is changing
the classification of an item of § 1250
property 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
(vii) 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.
97–37 for the year of change beginning
[Insert the date], and that is reclassified
1997–33 I.R.B.31August 18, 1997

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.”
(5) Section 481(a) adjustment. The
§ 481(a) adjustment is a negative §
481(a) adjustment (a decrease in taxable
income) to prevent the omission of the al-
lowable but unclaimed depreciation for
open and closed years prior to the year of
change. This negative § 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(7) of this APPEN-
DIX), for all taxable years prior to the
year of change. The amount of the nega-
tive § 481(a) adjustment, however, must
be offset by any allowable but unclaimed
depreciation that is required to be capital-
ized under any provision of the Code (for
example, § 263A) at the beginning of the
year of change.
(6) Basis adjustment. 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(7) of this APPENDIX).
(7) Meaning of depreciation allow-
able.
(a) In general. Section 2.01(7) 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 taxable
year for property subject to § 167(f) (re-
garding certain property excluded from §
197) is determined by using the deprecia-
tion 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 alter-
native 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 al-
ternative 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,
depreciation allowances are computed
separately. This change was formerly
provided in Rev. Proc. 74–11, 1974–1
C.B. 420.
(2) Scope.
(a) Applicability. Except as pro-
vided in section 2.02(2)(b) of this AP-
PENDIX, this change applies to any tax-
payer wanting to make a change in
method of accounting for depreciation
specified in section 2.02(3) of this AP-
PENDIX for the property in an account:
(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 § 263Aand that is required to capitalize
the costs with respect to which the tax-
payer wants to change its method of ac-
counting under section 2.02 of this AP-
PENDIX, if the taxpayer is not
capitalizing 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
August 18, 1997321997–33 I.R.B.

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
(see Rev. 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 (see Rev. 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 (see Rev. 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. Atax-
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 im-
mediately preceding the year of change
(determined under the taxpayer’s present
method of accounting for depreciation).
If applicable under the taxpayer’s pro-
posed method of accounting for depreci-
ation, this adjusted basis is reduced by
the estimated salvage value of the prop-
erty (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.
(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.
(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. Except as pro-
vided in section 2.03(1)(b) of this AP-
PENDIX, this change applies to a tax-
payer that wants to change its method of
accounting from treating property as sold
by the taxpayer to treating property as
leased by the taxpayer, and vice versa,
and to a taxpayer that wants to change its
method of accounting from treating prop-
erty as purchased by the taxpayer to treat-
ing property as leased by the taxpayer,
and vice versa.
(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
1997–33 I.R.B.33August 18, 1997

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. See section 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 §
1.446–1T(e)(3)(i) and Rev. Proc. 97–27.
Achange 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 or ruling protection. A
taxpayer does not receive audit protection
under section 7 of this revenue procedure
in connection with this change. Further-
more, the Commissioner’s consent to this
change does not constitute acceptance or
approval of the taxpayer’s characteriza-
tion of any transaction as a sale or lease.
SECTION 3. CAPITAL
EXPENDITURES (§ 263)
.01 Package design costs.
(1) Description of change and scope.
This change applies to a taxpayer that
wants to change to one of the three alter-
native methods of accounting for package
design costs described in section 5 of Rev.
Proc. 97–35, page 11. The three alterna-
tive methods of accounting for package
design costs described are: (1) the capi-
talization method, (2) the design-by-de-
sign capitalization and 60-month amorti-
zation method, and (3) the pool-of-cost
capitalization and 48-month amortization
method. This change was formerly pro-
vided in Rev. Proc. 90–63, 1990–2 C.B.
664.
(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 Reserved.
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,
which was formerly provided in Rev.
Proc. 95–33, 1995–2 C.B. 380, applies to:
(i) a small reseller of personal
property changing from a permissible
UNICAPmethod to a permissible non-
UNICAPinventory capitalization method
in any taxable year that it qualifies as a
small reseller;
(ii) a formerly small reseller
changing from a permissible non-UNI-
CAPinventory capitalization method to a
permissible UNICAPmethod in the first
taxable year that it does not qualify as a
small reseller;
(iii) a reseller-producer chang-
ing from a permissible UNICAPmethod
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 UNICAPmethod 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.
Ataxpayer 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) 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-UNICAPin-
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 tax-
payer used its former method of account-
ing. See section 5.04(3) of this revenue
procedure for exceptions to this general
rule.
(4) No audit protection. Ataxpayer
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 per-
August 18, 1997341997–33 I.R.B.

sonal property, incorporated January 2,
1991, adopted a taxable year ending De-
cember 31. X determines that its average
annual gross receipts for the three taxable
years (or fewer, if applicable) immedi-
ately preceding taxable years 1991
through 2000 are as shown in the table
below:
AVERAGE Annual
Gross Receipts for the
CurrentThree Taxable Years
TaxableImmediately Preceding
Y
ear the Current 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
199911,000,000
200012,000,000
Furthermore, X, which adopted the dol-
lar-value LIFO inventory method, has the
following LIFO inventory balances deter-
mined without considering the effects of
the UNICAPmethod:
Beginning
Ending
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 § 263Ato change to
the UNICAPmethod 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 reseller exception. Assume that X
was required to capitalize $80,000 of “ad-
ditional § 263Acosts” to the cost of its
1995 beginning inventory because of this
change in inventory method. In addition,
X was required to include one-fourth of
the § 481(a) adjustment when computing
taxable income for each of the four tax-
able years beginning with 1995. Thus, X
was required to include a $20,000 posi-
tive § 481(a) adjustment in its 1995 tax-
able income.
X elected to use the simplified resale
method without a historic absorption ratio
election under § 1.263A–3(d)(3) for de-
termining the amount of additional §
263Acosts to be capitalized to each LIFO
layer. Assume that X was required to add
$10,000 of additional § 263Acosts to the
cost of its 1995 ending inventory because
of the $100,000 increment for 1995.
X’s 1995 Ending Inventory:
Beginning Inventory (Without
UNICAPcosts)$1,000,000
1995 Increment100,000
Additional § 263ACosts in Beginning
Inventory80,000
Additional § 263ACosts in 1995
Increment10,000
________
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 re-
seller exception for 1996, X was required
to continue using the UNICAPmethod
for its inventory costs. Furthermore, X
was required to include $20,000 of the
unamortized 1995 positive § 481(a) ad-
justment in 1996 taxable income. As-
sume that X was required to add $10,000
of additional § 263Acosts to the cost of
its 1996 ending inventory because of the
$100,000 increment for 1996.
X’s 1996 Ending Inventory:
Beginning Inventory (With
UNICAPcosts)$1,190,000
1996 Increment100,000
Additional § 263ACosts 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 volun-
tarily from the UNICAPmethod to a per-
missible non-UNICAPinventory capital-
ization method under section 4.01 of this
APPENDIX. To reflect the removal of
the additional § 263Acosts from the cost
of its 1997 beginning inventory, X must
compute a corresponding § 481(a) adjust-
ment, which is a negative $100,000
($1,200,000 — $1,300,000). Because X
used the UNICAPmethod for only two
years (that is, 1995 and 1996), X must in-
clude one-half of the § 481(a) adjustment
when computing taxable income for each
of the two taxable years beginning with
1997. Thus, X must include a $50,000
negative § 481(a) adjustment in 1997 tax-
able 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
UNICAPcosts)$1,300,000
1997 Increment100,000
1997 § 481(a) Adjustment <Negative><100,000>
________
Total 1997 Ending Inventory$1,300,000
________
________
X’s Unamortized 1995 § 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
________
Unamortized 1997 § 481(a)
Adjustment—12/31/97$< 50,000>
________
________
X also satisfies the small reseller ex-
ception for 1998 and, therefore, is not re-
quired to return to the UNICAPmethod
for 1998. X, however, must include
$20,000 of the unamortized 1995 positive
§ 481(a) adjustment and $50,000 of the
unamortized 1997 negative § 481(a) ad-
justment in 1998 taxable income.
X’s 1998 Ending Inventory:
Beginning Inventory (Without
UNICAPcosts)$1,300,000
1998 Increment100,000
________
Total 1998 Ending Inventory$1,400,000
________
________
X’s Unamortized 1995 § 481(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
________
________
1997–33 I.R.B.35August 18, 1997

In 1999, X fails to satisfy the small re-
seller exception and, therefore, must re-
turn to the UNICAPmethod as provided
under section 4.01 of this APPENDIX. X
changes to the simplified resale method
without a historic absorption ratio elec-
tion under § 1.263A–3(d)(3). Assume
that X must capitalize $120,000 of addi-
tional § 263Acosts to the cost of its 1999
beginning inventory because of this
change in inventory method. In addition,
X must determine the appropriate adjust-
ment period for the corresponding posi-
tive § 481(a) adjustment. Because X used
its former inventory method for two tax-
able years before 1999 (that is, 1997 and
1998), X must include one-half of the §
481(a) adjustment when computing tax-
able income for each of the two taxable
years beginning with 1999. Thus, X must
include a $60,000 positive § 481(a) ad-
justment in its 1999 taxable income. As-
sume that X must add $10,000 of addi-
tional § 263Acosts to the cost of its 1999
ending inventory because of the $100,000
increment for 1999.
X’s 1999 Ending Inventory:
Beginning Inventory (Without
UNICAPcosts)$1,400,000
1999 Increment100,000
Additional § 263Acosts in Beginning
Inventory120,000
Additional § 263Acosts in 1999
Increment10,000
________
Total 1999 Ending Inventory$1,630,000
________
________
X’s Unamortized 1999 § 481(a) Adjustment:
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 re-
seller exception for 2000, X must con-
tinue using the UNICAPmethod for its
inventory costs. Furthermore, X is re-
quired to include $60,000 of the unamor-
tized 1999 positive § 481(a) adjustment in
2000 taxable income. Assume that X is
required to add $10,000 of additional §
263Acosts to the cost of its 2000 ending
inventory because of the $100,000 incre-
ment for 2000.
X’s 2000 Ending Inventory:
Beginning Inventory (With
UNICAPcosts)$1,630,000
2000 Increment100,000
Additional § 263ACosts in
2000 Increment10,000
________
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. Except as pro-
vided in section 5.01(1)(b) of this AP-
PENDIX, this change, which was for-
merly provided, in part, in Rev. Proc.
92–75, 1992–2 C.B. 448, and Rev. Proc.
92–74, 1992–2 C.B. 442, applies to:
(i) a taxpayer that wants to
change to an overall accrual method, or
to an overall accrual method in conjunc-
tion with the recurring item exception
under § 461(h)(3), from the cash receipts
and disbursements method (cash
method), or from a hybrid method (under
which certain items of income or expense
are reported on the cash method and
other items of income or expense are re-
ported on an accrual method or other
methods); 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
described in § 581 or 591;
(ii) a farmer;
(iii) a cooperative organi-
zation described in § 501(c)(12), 521, or
1381;
(iv) an individual taxpayer,
except for activities conducted as a sole
proprietorship;
(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 tax-
payer is a small reseller within the mean-
ing of § 1.263A–3(a), and, if the taxpayer
has production activities, the taxpayer’s
production 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 tax-
payer is a reseller eligible to use the sim-
plified resale 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 accor-
dance with § 460, if the taxpayer is not in
compliance with that section and any re-
lated 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 automatic 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 thereunder) other than §
448 (for example, a taxpayer with invento-
ries).
(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
August 18, 1997361997–33 I.R.B.

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,
1997–21 I.R.B. 10. 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
applies to an eligible accrual method
manufacturer, wholesaler, or retailer of
motor vehicles or other durable con-
sumer goods that wants to change to the
service warranty income method de-
scribed in section 5 of Rev. Proc. 97–38,
page 43. Under the service warranty in-
come method, a qualifying taxpayer
may, in certain specified and limited cir-
cumstances, include a portion of an ad-
vance payment related to the sale of a
multi-year service warranty contract in
gross income generally over the life of
the service warranty obligation. This
change was formerly provided in Rev.
Proc. 92–98, 1992–2 C.B. 512.
(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
WARRANTYINCOME METHOD
UNDER SECTION 5.02 OF THE AP-
PENDIX OF REV. PROC. 97–37.” The
statement must set forth the information
required under section 6.03 of Rev. Proc.
97–38, except that the statement under sec-
tion 6.03(2) (that the taxpayer agrees to all
of the terms and conditions of the revenue
procedure) also should refer to Rev. Proc.
97–37.
(c) Ataxpayer 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. Except as pro-
vided in section 5.03(2) of this APPEN-
DIX, this change applies to a manufac-
turer, wholesaler, or retailer of motor
vehicles or other durable consumer goods
that wants to change its method of ac-
counting for insurance costs paid or in-
curred to insure its risks under multi-year
service warranty contracts to the method
described in section 5.03(3) of this AP-
PENDIX. Multi-year service warranty
contracts to which this change applies in-
clude only those separately priced con-
tracts sold by a manufacturer, wholesaler,
or retailer also selling the motor vehicles
or other durable consumer goods (to the
ultimate customer or to an intermediary)
underlying the contracts. The classifica-
tion 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. This change was
formerly provided in Rev. Proc. 92–97,
1992–2 C.B. 510.
(2) Inapplicability. This change
does not apply to a taxpayer that covers
its risks under its multi-year service war-
ranty contracts through arrangements not
constituting 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).
SECTION 6. OBLIGATIONS ISSUED
ATDISCOUNT(§ 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. This change was formerly pro-
vided in Rev. Proc. 89–46, 1989–2 C.B.
597.
(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. 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 IN METHOD OF
ACCOUNTING UNDER SECTION 6.01
OF THE APPENDIX OF REV. PROC.
97–37.” 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-
1997–33 I.R.B.37August 18, 1997

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. This change was formerly pro-
vided, in part, in Rev. Proc. 84–76,
1984–2 C.B. 751.
(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. 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 IN METHOD OF
ACCOUNTING FOR PREPAID SUB-
SCRIPTION INCOME UNDER SEC-
TION 7.01 OF THE APPENDIX OF REV.
PROC. 97–37.” The statement must set
forth the information required under §
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 (see Rev. Rul.
61–27, 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
(1987), 1987–2 C.B. 134.
(b) Inapplicability. This change
does not apply to a taxpayer that is subject
to § 263Aand that is required to capitalize
the costs with respect to which the tax-
payer wants to change its method of ac-
counting under section 8.01 of this AP-
PENDIX, if the taxpayer is not
capitalizing 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). Ataxpayer 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 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 § 263Aand 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
capitalizing the costs as required.
(3) Amounts taken into account.
Applicable provisions of the Code, regu-
lations, and other published guidance
prescribe the manner in which a liability
that has been incurred is taken into ac-
count. For example, for a taxpayer with
inventories, 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). Atax-
payer 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’
compensation, tort, breach of contract, or
violation of law as being incurred in the
taxable year in which all the events have
occurred which establish the fact of the
liability, 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
August 18, 1997381997–33 I.R.B.

to § 263Aand 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). Ataxpayer
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 FICAand FUTAtaxes to a method
consistent with the holding in Rev. Rul.
96–51, 1996–43 I.R.B. 5. Rev. Rul.
96–51 holds that, under the all events test
of § 461, an accrual method employer
may deduct in Year 1 its otherwise de-
ductible FICAand FUTAtaxes imposed
with respect to year-end wages properly
accrued in Year 1, but paid in Year 2, if
the requirements of the recurring item ex-
ception are met.
(b) Inapplicability. This change
does not apply to a taxpayer that is subject
to § 263Aand that is required to capitalize
the costs with respect to which the tax-
payer wants to change its method of ac-
counting under section 8.04 of this AP-
PENDIX, if the taxpayer is not
capitalizing the costs as required.
(2) Recurring item exception. As
part of this change, a taxpayer that previ-
ously has not changed to or adopted the
recurring item exception for FICAand
FUTAtaxes must change to the recurring
item exception method for FICAand
FUTAtaxes as specified in § 461(h)(3).
(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 taxes must be included in in-
ventory costs and may be recovered
through cost of goods sold. See §
1.263A–1(e)(3)(ii)(L). Ataxpayer may
not rely on the provisions of section 8.04
of this APPENDIX to take a current year
deduction.
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. See Rev. Rul.
73–65, 1973–1 C.B. 216.
.02 Reserved.
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,
which was formerly provided in Rev.
Proc. 88–15, 1988–1 C.B. 683, applies 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-
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 § 263Aand the
regulations thereunder, which govern the
types and amounts of costs required to be
included in inventory cost for taxpayers
subject to those provisions.
1997–33 I.R.B.39August 18, 1997

(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. The request
for consent to readopt the LIFO inventory
method must comply with Rev. Proc.
97–27.
(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 discontin-
ues use of the LIFO inventory method, §
1363(d) requires an increase in the tax-
payer’s gross income for the LIFO re-
capture amount (as defined in §
1363(d)(3)) for the taxable year preced-
ing the year of change (the taxpayer’s
last taxable year as a C corporation), and
a corresponding adjustment to the basis
of the taxpayer’s inventory as of the end
of the taxable year preceding the year of
change. Any increase in income tax as a
result of the inclusion of the LIFO recap-
ture amount is payable in four equal in-
stallments, beginning with the taxpayer’s
last taxable year as a C corporation as
provided in § 1363(d)(2). Any corre-
sponding basis adjustment is taken into
account in computing the § 481(a) ad-
justment (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. 97–37 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.
See Rev. 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. See section 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,
which was formerly provided in Rev.
Proc. 92–79, 1992–2 C.B. 457, applies to
a taxpayer engaged in the trade or busi-
ness of retail sales of new automobiles or
new light-duty trucks (“automobile
dealer”) that wants to change to the “Al-
ternative LIFO Method” described in
section 4 of Rev. Proc. 97–36, page 14,
for its LIFO inventories of new automo-
biles and new light-duty trucks. Light-
duty trucks are trucks with a gross vehi-
cle 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. See section
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
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
August 18, 1997401997–33 I.R.B.

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) Ataxpayer 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 taxpayer’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
taxpayer determines current-year cost by
reference 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 be-
ginning of its taxable year.
(c) Ataxpayer 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) Ataxpayer 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. See section 6.02(3) of
this revenue procedure.
(2) Manner of making the change.
This change is made using a cut-off
method. See section 2.06 of this revenue
procedure.
.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 determining 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. See section 2.06 of this revenue
procedure.
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. Except as pro-
vided in section 11.01(1)(b) of this AP-
PENDIX, this change applies to a bank
(as defined in § 581, including a bank for
which a qualified subchapter 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) 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, 1997–10 I.R.B. 53,
which applies to banks making this
change in method of accounting in 1997
to become eligible to elect S corporation
status for 1997. Abank 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
behalf of the bank.
(2) Certain scope limitations inap-
plicable. Abank that changed from the §
593 reserve method under § 593(g) to the
§ 585 reserve method will not be prohib-
ited under section 4.02(6) of this revenue
procedure from changing its method of
accounting for bad debts under section
11.01 of this APPENDIX solely because
of the § 593(g) change. Abank 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.
(3) 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.
(4) 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
1997–33 I.R.B.41August 18, 1997

this revenue procedure. The § 481(a) ad-
justment is recognized built-in gain under
§ 1374. See § 1.1374–4(d).
.02 Reserved.
SECTION 12. ORIGINALISSUE
DISCOUNT(§ 1273)
.01 De minimis original issue discount
(OID).
(1) Description of change and scope.
(a) Applicability. This change,
which was formerly provided in Rev.
Proc. 94–29, 1994–1 C.B. 616, applies to
a taxpayer that wants to change to the
principal-reduction method of accounting
described in section 5 of Rev. Proc.
97–39, page 48. The principal-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.
Ataxpayer 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. See section 2.06 of
this revenue procedure.
(b) The taxpayer must maintain
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. Ataxpayer
does not receive audit protection under
section 7 of this revenue procedure in
connection with this change.
.02 Reserved.
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.
This change was formerly provided in
Rev. Proc. 90–37, 1990–2 C.B. 361.
(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. See S. 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 obliga-
tion subject to § 1281 must include in
gross income an amount equal to the sum
of the daily portions 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 acquisition discount or OID. In addi-
tion, § 1281(a) requires the holder to in-
clude in gross income any stated interest
that is payable on the short-term obliga-
tion (other than stated interest taken into
account to determine the amount of the
acquisition discount or OID) as it ac-
crues.
(2) Section 481(a) adjustment pe-
riod. Ataxpayer 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 account-
ing from accruing stated interest on
short-term loans made in the ordinary
course of business to using the cash
method for that interest. This change
was formerly provided in Notice 95–57,
1995–2 C.B. 337.
(b) In Security Bank Minnesota v.
Commissioner, 994 F.2d 432 (8th Cir.
1993), aff’g 98 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
income stated interest on short-term
loans made in the ordinary course of
business as that interest accrues. The
Service disagrees with the interpretation
of § 1281 in Security Bank Minnesota
and intends to pursue this issue in other
circuits. In light of Security Bank Min-
nesota, however, cash method banks in
the Eighth Circuit will be granted permis-
sion to change to the cash method of ac-
counting 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 ac-
counting.
(2) Section 481(a) adjustment pe-
riod. Ataxpayer 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
August 18, 1997421997–33 I.R.B.

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.
26 CFR 601.204: Changes in accounting periods
and in methods of accounting.
(Also Part I, §§ 446; 1.446–1.)
Rev. Proc. 97–38
SECTION 1. PURPOSE
.01 This revenue procedure imple-
ments an administrative decision, made
by the Commissioner in the exercise of
discretion under section 446 of the Inter-
nal Revenue Code. Under this revenue
procedure, accrual method manufactur-
ers, wholesalers, and retailers of motor
vehicles or other durable consumer goods
may, in certain specified and limited cir-
cumstances, include a portion of an ad-
vance payment related to the sale of a
multi-year service warranty contract in
gross income generally over the life of
the service warranty obligation. Atax-
payer may change to or adopt the service
warranty income method. The proce-
dures for a taxpayer to change to the ser-
vice warranty income method are pro-
vided in Rev. Proc. 97–37, page 18,
which provides simplified and uniform
procedures to obtain automatic consent to
make this and other changes in methods
of accounting. This revenue procedure
modifies and supersedes Rev. Proc.
92–98, 1992–2 C.B. 512.
.02 The service warranty income
method described in this revenue proce-
dure is the same method of accounting
that was described in Rev. Proc. 92–98.
Accordingly, a taxpayer that properly
changed to or adopted this method pur-
suant to Rev. Proc. 92–98 is not required
to change its method of accounting to
comply with this revenue procedure.
SECTION 2. BACKGROUND
.01 In general, payments received by
an accrual method taxpayer for services
to be performed in the future must be in-
cluded in gross income in the taxable
year of receipt. The Commissioner rec-
ognizes that this treatment has resulted in
a significant and unique cash flow prob-
lem for certain accrual method taxpayers
that sell multi-year service warranty con-
tracts to customers in connection with the
sale of motor vehicles or other durable
consumer goods and immediately pay a
third-party to insure their risks under the
contracts.
.02 Accordingly, these taxpayers will
be permitted to adopt or change to a spe-
cial method of accounting for advance
payments that would alleviate the cash
flow problem arising in these situations
but would generally conform economi-
cally to the tax treatment of advance pay-
ments under current law. In general, this
method of accounting permits these tax-
payers to recognize and include in gross
income, generally over the period of their
service warranty contracts, a series of
equal payments, the present value of
which equals the portion of the advance
payment qualifying for deferral. This
method of accounting is described in fur-
ther detail in section 5 of this revenue pro-
cedure.
SECTION 3. DEFINITIONS
.01 The “service warranty income
method” for advance payments is the
method of accounting permitted by this
revenue procedure and described in sec-
tion 5 of this revenue procedure.
.02 The “qualified advance payment
amount” is the portion of an advance pay-
ment received by a taxpayer under a
multi-year service warranty contract that
is paid by that taxpayer to an unrelated
third party within 60 days after receipt for
insurance costs associated with a policy
insuring that taxpayer’s obligations under
the contract.
.03 The classification of goods as
“durable consumer goods” for purposes
of this revenue procedure depends on the
common usage of the goods, rather than
the purchaser’s actual intended use of the
goods. Thus, a taxpayer qualifying under
this revenue procedure does not have to
segregate, as non-qualifying advance pay-
ments, those payments under multi-year
service warranty contracts entered into
with a purchaser that will use the underly-
ing durable consumer goods in its trade or
business.
SECTION 4. SCOPE
.01 Except as provided in sections 4.03
and 4.04 of this revenue procedure, the
use of the service warranty income
method is available to any accrual method
manufacturer, wholesaler, or retailer of
motor vehicles or other durable consumer
goods with respect to qualified advance
payment amounts received on service
warranty contracts:
(1) that are fixed-term service
arrangements with respect to a motor ve-
hicle or other durable consumer good pur-
chased by a customer;
(2) that are separately priced, such
that customers have the option to pur-
chase the service warranty contracts for
an expressly stated amount separate from
the price of the underlying motor vehicle
or other durable consumer good;
(3) for which the service period be-
gins in the taxable year the advance pay-
ment is received or upon expiration of a
fixed-term manufacturer’s warranty be-
ginning in the taxable year the advance
payment is received;
(4) for which the taxpayer purchases
a policy that constitutes insurance for
federal income tax purposes from an un-
related third party to insure its obligation
under the service warranty contract; and
(5) for which the taxpayer makes
payment to the unrelated third party in-
surer within 60 days after receipt of the
advance payment for the entire amount of
the insurance costs associated with the
policy insuring its obligations under the
service warranty contract.
.02 For purposes of section 4.01 of this
revenue procedure, a service warranty
contract will be treated as a fixed-term
arrangement even if the contract provides
for a reasonable mileage or other usage
cap that is generally commensurate with
average consumer mileage or usage over
the term of the contract and which causes
termination of the fixed-term arrange-
ment when exceeded. Also for purposes
of section 4.01 of this revenue procedure,
a taxpayer has not made payment to an
unrelated third party insurer if the tax-
payer and the payee are related persons
within the meaning of § 267(b) or
707(b)(1).
.03 Ataxpayer is not within the scope
of this revenue procedure unless the tax-
payer either (1) has never previously re-
ceived advance payments under service
warranty contracts prior to the taxable
year of an adoption under this revenue
procedure, or (2) uses the proper method
1997–33 I.R.B.43August 18, 1997

of accounting for advance payments
under its service warranty contracts (see
Schlude v. Commissioner, 372 U.S. 128
(1963), 1963–1 C.B. 99).
.04 Ataxpayer also is not within the
scope of this revenue procedure unless the
taxpayer uses the proper method of ac-
counting for amounts paid or incurred for
insurance costs that cover the taxpayer’s
risks under service warranty contracts.
See section 5.03 of the APPENDIX of
Rev. Proc. 97–37 for a description of that
proper method.
SECTION 5. DESCRIPTION OF THE
SERVICE WARRANTYINCOME
METHOD
.01 In general. Taxpayers with an ad-
vance payment within the scope of sec-
tion 4 of this revenue procedure may elect
to include a qualified advance payment
amount, increased by an imputed income
amount, in gross income on a level basis
over the shorter of:
(1) the period beginning in the tax-
able year the advance payment is received
and ending when the service warranty
contract terminates; or
(2) a 6-taxable-year period begin-
ning in the taxable year the advance pay-
ment is received.
This method of accounting permits these
taxpayers to recognize and include in
gross income, generally over the period of
their service warranty contracts, a series
of equal payments, the present value of
which equals the qualified advance pay-
ment amounts received by the taxpayer.
Ataxpayer using the service warranty in-
come method provided by section 5 of
this revenue procedure must include in in-
come, in the taxable year of receipt, the
excess of aggregate advance payments re-
ceived during a taxable year over aggre-
gate qualified advance payment amounts
for the taxable year.
.02 Simplifying table.
(1) An electing taxpayer must use the
table in the APPENDIX of this revenue
procedure to determine the amount of the
gross income (attributable to a qualified
advance payment amount) that must be
reported annually under the service war-
ranty income method.
(2) To use the table for a particular
contract, a taxpayer first uses the column
headed by the “Term of Service Agree-
ment in Years.” The taxpayer determines
which column to use by ascertaining the
length (the number of years) of its service
warranty contract (limited to six years)
without regard to whether there is a pe-
riod for which there are no obligations
under the contract. For example, if a ser-
vice warranty contract begins in the third
year after payment is received and ends in
the fifth year after payment, the taxpayer
uses the column headed “5.” The tax-
payer then finds the factor in the row
headed by “The Applicable Interest
Rate,” which is defined in section 5.04 of
this revenue procedure. If the applicable
interest rate in this instance is 8 percent,
the resulting factor would be .2319. This
factor is multiplied by the qualified ad-
vance payment amount to determine the
“annual equal payment amount” included
in gross income each year for the number
of years at the top of the column.
(3) Ataxpayer may calculate the ag-
gregate amount to be included in gross in-
come each year by aggregating the quali-
fied advance payment amounts with
respect to contracts of the same class (that
is, 2-year contracts, 3-year contracts,
etc.). See section 5.08 of this revenue
procedure for examples of the service
warranty income method.
.03 Special rule for when the taxpayer’s
trade or business ceases. In the year in
which the taxpayer’s trade or business
ceases (as defined in section 5.02(3) of
Rev. Proc. 97–37), the remaining quali-
fied advance payment amounts that have
been deferred must be accelerated and in-
cluded in gross income, along with appro-
priate imputed income amounts. These
amounts must be determined using the ap-
plicable interest rates specified in section
5.04 of this revenue procedure and must
be sufficient to ensure that the net present
value of all amounts included in income
over the period of deferral equals the
qualified advance payment amounts that
would have been reported and included in
income upon receipt in the absence of an
election under this revenue procedure.
See the example in section 5.08(1)(c) of
this revenue procedure. The Service will
compute the amounts to be included in the
year of cessation for any taxpayer that
submits a request for a ruling pursuant to
Rev. Proc. 97–1, 1997–1 I.R.B. 11 (or any
successor). The Service waives the ap-
plicable user fee required under Rev.
Proc. 97–1 for these requests.
.04 Applicable interest rate. The ap-
plicable interest rate to be applied to the
qualified advance payment amount re-
ceived for a particular contract in a partic-
ular taxable year under the service war-
ranty income method is the applicable
federal rate in effect for purposes of §
1274(d) (compounded annually) for the
month with or within which the taxable
year ends. For purposes of this revenue
procedure, the applicable federal rate is
rounded to the nearest full percent (or if a
multiple of 1/2 of 1 percent, such rate
shall be increased to the next highest full
percent).
.05 Effects of the imputed income. Any
income imputed on a qualified advance
payment amount under this service war-
ranty income method must not be taken
into account for any purpose under the In-
ternal Revenue Code other than the deter-
mination of a taxpayer’s income. Thus,
for example, the income imputed on a
qualified advance payment amount may
not increase the basis of any asset held by
the taxpayer and may not be recovered as
a deduction in any taxable year. Addi-
tionally, any income imputed on a quali-
fied advance payment amount may not be
taken into account, for example, in deter-
mining:
(1) the earnings and profits of any
corporation under § 312;
(2) the adjustments to a share-
holder’s stock basis in an S corporation
under § 1367;
(3) the adjustments to a partner’s in-
terest in a partnership under § 705; or
(4) the investment adjustments (or
adjustments to an excess loss account)
under § 1.1502–32 of the Income Tax
Regulations with respect to the stock of
any consolidated group member owned
by another member of the group.
.06 Special rules for customer cancel-
lations of service warranty contracts and
terminations of service warranty con-
tracts because of mileage or usage limita-
tions.
(1) Customer cancellations. If a cus-
tomer cancels a service warranty contract
during the taxable year of sale and, in that
year, receives a refund of amounts paid,
the amount refunded is not included in the
taxpayer’s income for the year of the sale.
If a customer cancels a service warranty
contract after the year in which the tax-
payer sold the contract, the taxpayer must
August 18, 1997441997–33 I.R.B.

continue to include the annual equal pay-
ment amount obtained from the APPEN-
DIX table in gross income for the original
length of the cancelled contract. Any
amount refunded to the customer reduces
income in the year paid. Imputed income
amounts added to a qualified advance
payment amount are not considered in
(and have no effect on) the determination
of this reduction of income. Thus, reduc-
tions for refunds upon customer cancella-
tion of a multi-year service warranty con-
tract are to be determined in the same
manner as if the taxpayer did not make an
election under this revenue procedure.
(2) Terminations. If a contract termi-
nates because of a mileage or usage limi-
tation during or after the year in which the
taxpayer sold the contract, the taxpayer
must continue to include the annual equal
payment amount obtained from the AP-
PENDIX table in gross income for the
original length of the terminated contract.
See paragraph (b) of Example 1 in section
5.08 of this revenue procedure.
.07 Short taxable years. If a taxpayer
using the table in the APPENDIX of this
revenue procedure has a short taxable
year during the term of its service war-
ranty contract, the applicable table factor
for the short period must be multiplied by
a fraction, the numerator of which is the
number of months in the short period, and
the denominator of which is 12. After a
short taxable year for which the table fac-
tor adjustment of the preceding sentence
has been made, the taxpayer must con-
tinue to determine its gross income on a
prior year’s qualified advance payment
amount using the applicable table factor
for each 12-month taxable year (or that
table factor multiplied by an appropriate
fraction for any other short periods), until
the number of months for which the qual-
ified advance payment amount is taken
into account (determined as if the quali-
fied advance payment amount is first
taken into account in the first month of
the year in which the advance payment is
received) is equal to the number of
months in the original contract term (as
determined under section 5.02 of this rev-
enue procedure). If less than 12-months’
inclusion remains for the final year, the
applicable table factor for that year may
be determined as if it were a short period
containing the number of months remain-
ing on the contract not yet taken into ac-
count. See Example 2 in section 5.08 of
this revenue procedure.
.08 Examples of the service warranty
income method.
(1) Example 1.
(a) A, a calendar year accrual basis
taxpayer, elects under this revenue proce-
dure to use the service warranty income
method of accounting for its qualified ad-
vance payment amounts on service war-
ranty contracts. Asold 5 service warranty
contracts on January 1, 1997, for $800
each. Aalso sold 5 service warranty con-
tracts on December 31, 1997, for $800
each. All the service warranty contracts
sold by Ain 1997 carry a term of 5 years
and run concurrently with the manufac-
turer’s warranties. Further, Apays, within
60 days of the receipt of each advance
payment, $600 per contract to an unrelated
third party to insure (in an arrangement
that constitutes insurance) its obligations
under the service warranty contracts. The
applicable interest rate, determined in ac-
cordance with section 5.04 of this revenue
procedure, is 10 percent.
Aaggregates all its qualified ad-
vance payment amounts on its 5-year ser-
vice warranty contracts, thus determining
that $6,000 of qualified advance payment
amounts were received in 1997 with re-
spect to the class of 5-year service warranty
contracts. Applying the “10% and 5-year”
factor of .2398 found in the table in the AP-
PENDIX of this revenue procedure, Ade-
termines that it must report gross income of
$1,439 ($6,000 x .2398) in 1997 through
2001 under the election provided in this
revenue procedure. In addition, Amust in-
clude in gross income in 1997 the $2,000
payment received for services that is not
deferred under this revenue procedure.
Gross income is reported by Aas follows:
Assuming that Ais an S corporation
with a single shareholder and that Are-
ported no income other than that arising
from the above service warranty transac-
tions, the shareholder would report the
following § 1367 adjustments to stock
basis:
The stock basis adjustment for the de-
ferred advance payment amount is deter-
mined by ratably spreading the stock
basis adjustment over the term of the ser-
vice warranty contract. Since the service
warranty contract is treated as sold at the
beginning of the taxable year, the stock
basis adjustment each year would be
$1,200 ($6,000/5). The aggregate im-
puted income of $1,195 ($239 x 5) on the
$6,000 of aggregate qualified advance
payment amounts for 1997 is not taken
into account at any time by the share-
holder in determining its basis in the A
stock.
(b) If one of the service warranty
contracts described in paragraph (a) ter-
minates because of a mileage or usage
limitation in 1999, there is no effect on
the amounts that Amust include in gross
income each year. Under section 5.06 of
this revenue procedure, Awould continue
to report the amounts of gross income set
forth in section 5.08(1)(a) of this revenue
procedure even if one or more of its ser-
vice warranty contracts is terminated.
(c) If A’s business ceases in 1999,
Amust include the $2,000 non-qualified
advance payment amount in gross income
in 1997 and the $1,439 annual equal pay-
ment amount in gross income in 1997 and
1998, as in section 5.08(1)(a) of this rev-
enue procedure above. However, in 1999,
Amust accelerate and include in gross in-
come the remaining advance payment
amount plus an appropriate imputed in-
come amount.
To calculate this amount, Amust first
determine the portion of the qualified ad-
vance payment amount and the portion of
Description of Item19971998199920002001
Non-deferred Income$2,000
Deferred Income1,439$1,439$1,439$1,439$1,439
________________________________________________
Gross Income$3,439$1,439$1,439$1,439$1,439
________________________________________________
________________________________________________
Description of Item19971998199920002001
Non-deferred Income$2,000
Deferred Income1,200$1,200$1,200$1,200$1,200
________________________________________________
Gross Income$3,200$1,200$1,200$1,200$1,200
________________________________________________
________________________________________________
1997–33 I.R.B.45August 18, 1997

imputed income included in each annual
equal payment amount. For 1997, the an-
nual equal payment amount included in
income, $1,439, is entirely from the qual-
ified advance payment amount because
no income is imputed to the taxpayer in
the first taxable year. Thus, the $6,000
deferred qualified advance payment
amount is reduced for A’s inclusion of
$1,439 in 1997 leaving $4,561 of de-
ferred qualified advance payment amount
remaining.
For 1998, Amultiplies the applicable
interest rate of 10% by the 1997 remain-
ing qualified advance payment amount of
$4,561. That product, $456, constitutes
the imputed income portion of the 1998
annual equal payment amount of $1,439.
The difference between $1,439 and $456
($983) is the portion of the annual equal
payment amount that constitutes the
qualified advance payment amount. The
$983 reduces the qualified advance pay-
ment amount remaining after 1997 to
$3,578.
When A’s business ceases in 1999, A
must include in gross income the quali-
fied advance payment amount remaining
after 1998 and an appropriate imputed in-
come amount. The appropriate imputed
income amount is the product of the qual-
ified advance payment amount remaining
after 1998 and the applicable interest rate
($3,578 x 10%), which is $358. Thus, in
1999, Aincludes in gross income $3,936
($3,578 + $358).
(2) Example 2. X, a calendar year
accrual basis taxpayer, elects under this
revenue procedure to use the service war-
ranty income method of accounting for its
qualified advance payment amounts on
service warranty contracts. X sold 5 ser-
vice warranty contracts on January 1,
1997, for $800 each. X also sold 5 ser-
vice warranty contracts on December 31,
1997, for $800 each. All the service war-
ranty contracts sold by X in 1997 carry a
term of 5 years and run concurrently with
the manufacturer’s warranties. Further, X
pays, within 60 days of the receipt of each
advance payment, $600 per contract to an
unrelated third party to insure (in an
arrangement that constitutes insurance) its
obligations under the service warranty
contracts. The applicable interest rate,
determined in accordance with section
5.04 of this revenue procedure, is 10 per-
cent.
X aggregates all its qualified advance
payment amounts on its 5-year service
warranty contracts, thus determining that
$6,000 of qualified advance payment
amounts were received in 1997 with re-
spect to the class of 5-year service war-
ranty contracts. Applying the “10% and
5-year” factor of .2398 found in the table
in the APPENDIX of this revenue proce-
dure, X determines that it has annual
equal payment amounts of $1,439 in-
cludible in gross income in 1997 through
2001 under the election provided in this
revenue procedure. In addition, X must
include in gross income in 1997 the
$2,000 payment received for services that
is not deferred as a qualified advance pay-
ment amount by this revenue procedure.
After making the initial determinations
above, X experiences a short taxable year
of 7 months beginning on January l, 1999,
and ending on July 31, 1999. After the 7-
month short period, X’s taxable year ends
on July 31. When X experiences the 7-
month short period, X must multiply the
factor in the table in the APPENDIX of
this revenue procedure by a fraction, the
numerator of which is the number of the
months in the short period, and the de-
nominator of which is 12. This adjusted
factor of .1399 (7/12 x .2398) is applied to
the qualified advance payment amount of
$6,000. The product, $839, is included in
X’s gross income for the short taxable
year. Because X’s contracts had a term of
5 years or 60 months (and are assumed
under this revenue procedure to have
begun at the beginning of the 1997 taxable
year), there are 5 additional months in the
taxable year ending July 31, 2002, for
which a portion of the annual equal pay-
ment amount must be taken into account.
Thus, X includes $600 (5/12 x .2398 x
$6,000) in gross income. Gross income is
reported by X in each taxable year as fol-
lows:
SECTION 6. CHANGING TO OR
ADOPTING SERVICE WARRANTY
INCOME METHOD
.01 Automatic change. Ataxpayer
wanting to change its method of account-
ing to the service warranty income
method must follow the provisions of
Rev. Proc. 97–37.
.02 Adoption of method. Aqualifying
taxpayer may adopt the service warranty
income method in any taxable year end-
ing on or after August 18, 1997 by attach-
ing a statement to its timely filed original
federal income tax return (including ex-
tensions) for the year of adoption.
.03 Statement. The statement referred
to in section 6.02 of this revenue proce-
dure should be identified at the top as fol-
lows: “ELECTION OF THE SERVICE
WARRANTYINCOME METHOD
UNDER REV. PROC. 97–38.” The state-
ment should set forth:
(1) a paragraph stating that the tax-
payer is electing the service warranty in-
come method for all advance payments
(as defined in this revenue procedure) re-
ceived in the current taxable year and to
be received in subsequent taxable years;
(2) a paragraph stating that the tax-
payer agrees to all the terms and condi-
tions of this Rev. Proc. 97–38, and specif-
ically stating that the taxpayer agrees to
include in gross income all imputed in-
come amounts necessary at the applicable
interest rate determined in accordance
with section 5.04 of this revenue proce-
dure so that the net present value of gross
income inclusions in taxable years to
which qualified advance payment
amounts are being deferred equals the
amount of qualified advance payment
August 18, 1997461997–33 I.R.B.
7-month
ShortYr. EndYr. End
Description of Item19971998Yr.7/31/007/31/01
Non-deferred Income$2,000
Deferred Income1,439$1,439$ 839$1,439$1,439
________________________________________________
Gross Income$3,439$1,439$ 839$1,439$1,439
________________________________________________
________________________________________________
Description of ItemYr. End
7/31/02
Non-deferred Income
Deferred Income$ 600
________
Gross Income$ 600
________
________

amounts received in earlier taxable years;
(3) a description of the service war-
ranty contracts sold during the taxable
year the service warranty income method
is elected;
(4) the aggregate amount of the qual-
ified advance payment amounts received
for each class (3-year contracts, 4-year
contracts, etc.) of service warranty con-
tracts sold during the taxable year of elec-
tion;
(5) the future value factors that are to
be applied to the aggregate qualified ad-
vance payment amounts for each class of
service warranty contracts sold during the
election year; and
(6) the signature by or on behalf of
the taxpayer making the election by an in-
dividual with the authority to bind the tax-
payer 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, the statement submit-
ted on behalf of the taxpayer must be
signed by a duly authorized officer of the
common parent. See section 6.02(4) of
Rev. Proc. 97–37.
.04 Annual reporting requirement.
Upon election of the service warranty in-
come method of accounting, a taxpayer
must satisfy an annual reporting require-
ment. For each taxable year after election
of the service warranty income method,
the taxpayer must attach a statement to its
timely filed original federal income tax
return setting forth:
(1) a description of the service war-
ranty contracts sold during the taxable
year;
(2) the aggregate amount of the
qualified advance payment amounts re-
ceived for each class of service warranty
contracts sold during the taxable year;
and
(3) the future value factors that are to
be applied to the aggregate qualified ad-
vance payment amounts for each class of
service warranty contracts sold during the
taxable year.
SECTION 7. EFFECTOF AND
REVOCATION OF ELECTION
The election of the service warranty in-
come method under this revenue proce-
dure constitutes a change to or adoption
of a method of accounting. Because the
service warranty income method consti-
tutes a method of accounting, an electing
taxpayer must use that method for all its
qualified advance payment amounts on
service warranty contracts described in
section 4.01 of this revenue procedure.
The election of the service warranty in-
come method may only be revoked with
the consent of the Commissioner. Thus,
to request revocation of an election under
this revenue procedure, a taxpayer must
apply to the Commissioner to change its
method of accounting under the proce-
dures prescribed in Rev. Proc. 97–27,
1997–21 I.R.B. 10.
SECTION 8. FAILURE TOCOMPLY
Failure of the taxpayer (and, in the
case of, for example, an S corporation or
partnership, any of its shareholders or
partners) to comply with all the require-
ments of this revenue procedure will con-
stitute grounds for revocation of the ser-
vice warranty income method election by
the Commissioner and may result in revo-
cation of the election by an examining
agent beginning in the first open taxable
year of noncompliance.
SECTION 9. APPLICABILITYOF REV.
PROC. 97–37
The definitions in Rev. Proc. 97–37
apply for purposes of this revenue proce-
dure, except to the extent provided other-
wise in this revenue procedure.
SECTION 10. 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, DC 20224.
SECTION 11. EFFECTON OTHER
DOCUMENTS
Rev. Proc. 92–98, 1992–2 C.B. 512, is
modified, and as modified, is superseded.
However, see the transition rules in sec-
tion 13.02 of Rev. Proc. 97–37.
SECTION 12. EFFECTIVE DATE
This revenue procedure is effective for
any taxable year of a qualifying taxpayer
ending on or after August 18, 1997.
SECTION 13. PAPERWORK REDUC-
TION 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 spon-
sor, and a person is not required to re-
spond to, a collection of information un-
less the collection of information displays
APPENDIX
(Table)
ApplicableTerm of Service Agreement in Years
Interest
Rate123456
1.0%1.00000.50250.33670.25370.20400.1708
2.0%1.00000.50500.34000.25750.20800.1750
3.0%1.00000.50740.34320.26120.21200.1792
4.0%1.00000.50980.34650.26490.21600.1834
5.0%1.00000.51220.34970.26860.22000.1876
6.0%1.00000.51460.35290.27230.22400.1919
7.0%1.00000.51690.35610.27590.22790.1961
8.0%1.00000.51920.35930.27960.23190.2003
9.0%1.00000.52150.36240.28320.23590.2045
10.0%1.00000.52380.36560.28680.23980.2087
11.0%1.00000.52610.36870.29040.24380.2130
12.0%1.00000.52830.37170.29400.24770.2172
13.0%1.00000.53050.37480.29750.25160.2214
14.0%1.00000.53270.37780.30110.25550.2256
15.0%1.00000.53490.38080.30460.25940.2298
1997–33 I.R.B.47August 18, 1997

a valid OMB control number.
The collections of information in this
revenue procedure are in section 6. This
information is necessary and will be used
to determine whether the taxpayer is
properly using the service warranty in-
come method. The collections of infor-
mation are required for the taxpayer to
use the service warranty income method.
The likely respondents are the following:
individuals, business or other for-profit
institutions, and small businesses or orga-
nizations.
The estimated total annual reporting
burden is 5,000 hours.
The estimated annual burden per re-
spondent varies from 2 hours to 3 hours,
depending on individual circumstances,
with an estimated average of 2.5 hours.
The estimated number of respondents is
2,000.
The estimated annual frequency of re-
sponses is once.
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
This revenue procedure was drafted in
the Office of Assistant Chief Counsel (In-
come Tax & Accounting). For further in-
formation regarding this revenue proce-
dure, contact Michael F. Schmit on (202)
622-4960 (not a toll free call).
26 CFR 601.204: Changes in accounting periods
and in methods of accounting.
(Also Part I, §§ 1273; 1.1273–1, 1.1273–2.)
Rev. Proc. 97–39
SECTION 1. PURPOSE
.01 This revenue procedure allows a
taxpayer to use the principal-reduction
method of accounting — an aggregate
method of accounting for de minimis
original issue discount on certain loans
originated by the taxpayer. The principal-
reduction method is based on the rule
that, if a taxpayer holds a debt instrument
with de minimis original issue discount,
the taxpayer must include that discount in
income as stated principal payments are
made. See § 1.1273–1(d)(5) of the In-
come Tax Regulations. Ataxpayer may
change to or adopt the principal-reduction
method. The procedures for a taxpayer to
change to the principal-reduction method
are provided in Rev. Proc. 97–37, page
18, which provides simplified and uni-
form procedures to obtain automatic con-
sent to make this and other changes in
methods of accounting. This revenue pro-
cedure modifies and supersedes Rev.
Proc. 94–29, 1994–1 C.B. 616.
.02 The principal-reduction method de-
scribed in this revenue procedure is the
same method of accounting that was de-
scribed in Rev. Proc. 94–29. Accordingly,
a taxpayer that properly changed to or
adopted this method pursuant to Rev.
Proc. 94–29 is not required to change its
method of accounting to comply with this
revenue procedure.
SECTION 2. BACKGROUND
.01 Adebt instrument (loan) is issued
with original issue discount (OID) if the
loan’s issue price is less than its stated re-
demption price at maturity. See §
1273(a)(1) of the Internal Revenue Code.
In some cases, although a loan is issued
with OID, the amount of OID is treated as
zero. See § 1273(a)(3) and § 1.1273–1(d)
(concerning de minimis OID).
.02 Points treated as paid when a loan
is originated generally reduce the issue
price of the loan. See § 1.1273–2(g) (con-
cerning the effect of certain cash pay-
ments on the issue price of a loan). Thus,
all points charged on a loan create or in-
crease OID on the loan. As used in this
revenue procedure, the term “points”
refers only to amounts charged for the use
or forbearance of money.
.03 Section 1.1272–3 allows a holder of
a debt instrument to elect to use a constant
yield method to account for all interest
that accrues on the instrument. For pur-
poses of this election, interest includes
stated interest, acquisition discount, OID,
de minimis OID, market discount, de
minimis market discount, and unstated in-
terest, as adjusted by any amortizable
bond premium or acquisition premium. A
holder may make the election only for a
debt instrument acquired on or after April
4, 1994. Section 1.1272–3(d) provides
rules for the time and manner of making
the election under § 1.1272–3.
.04 Section 6001 and the regulations
thereunder require taxpayers to keep per-
manent books of account or records to es-
tablish the amount of gross income for a
taxable year.
SECTION 3. SCOPE
The principal-reduction method (de-
scribed in section 5 of this revenue proce-
dure) applies only to loans that—
(1) are acquired by the taxpayer at orig-
ination,
(2) do not have OID or, because the
OID is de minimis under § 1.1273–1(d),
are treated as not having OID,
(3) are not issued at a premium,
(4) are not subject to the election under
§ 1.1272–3, and
(5) produce ordinary gain or loss when
sold or exchanged by the taxpayer.
SECTION 4. USE OF THE
PRINCIPAL-REDUCTION METHOD
.01 Permissibility.
(1) In general. The principal-reduction
method of accounting (described in sec-
tion 5 of this revenue procedure) is a per-
missible method for use by taxpayers to
account for de minimis OID (discount) on
one or more categories of loans described
in section 4.02 or 4.03 of this revenue
procedure. If the principal-reduction
method is used to account for any loans in
a category of loans, the method must be
used for the entire category of loans. As
is more fully described in section 5 of this
revenue procedure, if the method is used
for more than one category, separate data
for each category must be kept, and the
computations must be made separately for
each category.
(2) Adopting principal-reduction
method. If a taxpayer does not already
have a method of accounting for discount
on one or more categories of loans, the
taxpayer may adopt the principal-reduc-
tion method for discount on all or any of
those categories of loans by using it on a
federal income tax return. The taxpayer
must attach to this return a statement
identifying the categories of loans to
which the new method will apply and de-
scribing any “additional categories” per-
mitted under section 4.03 of this revenue
procedure.
(3) Changes to principal-reduction
method. Ataxpayer wanting to change to
the principal-reduction method must fol-
low the provisions of Rev. Proc. 97–37.
.02 Standard categories of loans. The
August 18, 1997481997–33 I.R.B.

standard categories of loans are:
Category (1). Loans that are secured
by 1- to 4-family residential real property
and are not home equity lines of credit or
construction loans.
Category (2). Construction loans with
original terms not greater than three
years.
Category (3). Loans that are secured
by real property, are not contained in cate-
gory (1) or (2), and are not home equity
lines of credit.
Category (4). Loans that are consumer
loans with original terms not greater than
seven years, are not secured by real prop-
erty, and are not revolving credit loans.
.03 Additional categories of loans.
The principal-reduction method also may
be used for discount on loans that are de-
scribed in section 3 of this revenue proce-
dure but are not in one of the standard
categories described in section 4.02 of
this revenue procedure. This use is per-
missible, however, only if the taxpayer
defines one or more additional categories
of loans that are sufficiently homoge-
neous so that use of the principal- reduc-
tion method for those additional cate-
gories clearly reflects the taxpayer’s
income. In particular, each additional
category must consist solely of loans of
comparable duration. For this purpose,
duration means the weighted average
time to expected payments of principal
(including expected prepayments of prin-
cipal). The weighted average is com-
puted using the present value at issue of
the expected payments and prepayments.
SECTION 5. PRINCIPAL-REDUCTION
METHOD OF ACCOUNTING
Under the principal-reduction method
of accounting for discount —
.01 As of the date each loan in a cate-
gory is acquired, the taxpayer’s basis in
the loan is deemed to be the loan’s stated
principal amount. All the gain repre-
sented by the discount on the loan is rec-
ognized solely under the principal-reduc-
tion method described in this revenue
procedure.
.02 The required computations must be
made monthly. Thus, the computation pe-
riod referred to in this revenue procedure
is the month (or that portion of a month
that falls within a short taxable year).
.03 At the start of each computation pe-
riod, the taxpayer must record and retain
the following information for each cate-
gory of loans for which the taxpayer is
using the principal-reduction method:
(1) Unpaid stated principal as of the
end of the prior period of all loans in the
category that were held at the end of the
prior period (Starting Principal); and
(2) Unrecognized discount as of the
end of the prior period (Starting Dis-
count).
For the initial computation period,
Starting Principal and Starting Discount
are zero.
.04 During each computation period,
the taxpayer must record and retain the
following information for each category
of loans for which the taxpayer is using
the principal-reduction method:
(1) The stated principal amount at the
time of acquisition of all loans in the cate-
gory that were acquired at origination by
the taxpayer at any time during the pe-
riod, whether or not they are still held by
the taxpayer at the end of the period (Cur-
rent Principal). This amount includes
loans in the category that are acquired as
refinancings of, or in exchange for, loans
previously held by the taxpayer. Thus, if
a loan (whether or not in the category) is
modified and the modification results
under § 1001 in a deemed sale or ex-
change of the old loan for a new one that
is in the category, the stated principal
amount of the new loan is included in
Current Principal.
(2) The aggregate discount (including
discount attributable to points) at the time
of acquisition on all loans described in
section 5.04(1) of this revenue procedure
(Current Discount).
(3) The unpaid stated principal
amount of all loans in the category that
are still held by the taxpayer at the end of
the period (Ending Principal). Thus,
Ending Principal does not include the
stated principal amount of loans dis-
posed of in refinancings or exchanges
during the period. Ending Principal does
not include rights (such as mortgage ser-
vicing rights) that are retained on the
sale of a loan, except to the extent that
those rights represent a participation in-
terest in the stated principal amount of
the original loan. Ending Principal does
not include the stated principal amount
of any loan to the extent charged off by
the taxpayer during the period. Except
as provided in the following sentence, if
the taxpayer has foreclosed on the prop-
erty securing a loan, neither the unpaid
stated principal on the loan nor any re-
maining deficiency on the loan is
counted as part of Ending Principal. If
property securing a loan is acquired in a
transaction governed by former § 595
and the property has not been disposed
of before the end of the period, Ending
Principal includes the unpaid stated prin-
cipal of the loan immediately before the
transaction in which the property was ac-
quired.
.05 The discount taken into account as
gain (Recognized Discount) during each
computation period is the portion of total
discount that corresponds to the portion of
principal recovered during the period.
For this purpose, Recognized Discount is
the product of the sum of Starting Dis-
count plus Current Discount times a frac-
tion the denominator of which is the sum
of Starting Principal plus Current Princi-
pal and the numerator of which is the ex-
cess of the denominator over Ending Prin-
cipal. This can be restated as:
R = (D
Start
+ D
Current
) x ([P
Start
+
P
Current
– P
End
] / [P
Start
+ P
Current
])
where —
P
Start
=Starting Principal
D
Start
=Starting Discount
P
Current
=Current Principal
D
Current
=Current Discount
P
End
=Ending Principal
R=Recognized Discount
.06 The unrecognized discount at the
end of the period (Ending Discount) is the
excess of the sum of Starting Discount
plus Current Discount over Recognized
Discount. This amount must be used as
Starting Discount for the next period.
This can be restated as:
D
End
= D
Start
+ D
Current
– R
where —
D
End
= Ending Discount
.07 Ending Principal for the current pe-
riod must be used as Starting Principal for
the following period.
.08 The discount recognized as gain
during a taxable year is the sum of the
Recognized Discount for all computation
periods comprising the year.
.09 For each period, the amounts re-
ferred to above must be recorded and sep-
1997–33 I.R.B.49August 18, 1997

arately retained as part of the taxpayer’s
tax books and records. See § 6001 and
the regulations thereunder. These records
must be maintained as separate tax
records and not merely as a set of adjust-
ments to book figures. These records
must affirmatively demonstrate the pe-
riod-to-period consistency required by
sections 5.06 and 5.07 of this revenue
procedure.
SECTION 6. EXAMPLE
.01 Tproperly adopts the method de-
scribed in section 5 of this revenue proce-
dure for all the loans that it acquires that
are described in Category (1) in section
4.02 of this revenue procedure.
.02 For T’s first month in operation, it
acquired at origination loans in Category
(1) with an aggregate stated principal
amount of $10,000,000 at the time of ac-
quisition. The sum of the discount with
which these loans were acquired is
$400,000. At the end of the month,
$9,000,000 was the outstanding stated
principal amount on the Category (1)
loans still held by T. Thus, the discount
recognized during the month is $40,000.
That figure is derived as follows:
R = (D
Start
+ D
Current
) x ( [P
Start
+
P
Current
– P
End
] / [P
Start
+ P
Current
] )
= ($0 + $400,000) x ([$0 + $10,000,000 -
$9,000,000] / [$0 + $10,000,000])
= ($400,000) x ($1,000,000 / $10,000,000)
= $400,000 x 0.1
= $40,000
The amount of unrecognized discount at
the end of the month is $360,000. This
figure is derived as follows:
D
End
= D
Start
+ D
Current
– R
= $0 + $400,000 – $40,000
= $360,000
.03 In the second month of operation, T
acquired at origination $23,000,000 in
Category (1) loans with a total of
$760,000 in discount at the time of acqui-
sition. At the end of the month,
$28,000,000 was the outstanding stated
principal amount on Category (1) loans
still held by T. Thus, the discount recog-
nized during the second month is
$140,000. This figure is derived as fol-
lows:
R = (D
Start
+ D
Current
) x ( [P
Start
+
P
Current
– P
End
] / [P
Start
+ P
Current
] )
= ($360,000 + $760,000) x
($9,000,000 + $23,000,000 – $28,000,000)
/ ($9,000,000 + $23,000,000)
= $1,120,000 x ($4,000,000 / $32,000,000)
= $1,120,000 x 0.125
= $140,000
The amount of unrecognized discount at
the end of the month is $980,000 of dis-
count. This figure is derived as follows:
D
End
= D
Start
+ D
Current
– R
= $360,000 + $760,000 – $140,000
= $980,000
SECTION 7. INTERACTION
WITH § 475
If a loan is subject to both the mark-to-
market rules under § 475 and the princi-
pal-reduction method, see Notice 96–23,
1996–1 C.B. 374.
SECTION 8. INQUIRIES
Inquiries regarding this revenue proce-
dure may be addressed to the Commis-
sioner of Internal Revenue, Attention:
CC:DOM:FI&P, 1111 Constitution Av-
enue, NW, Washington, DC 20224.
SECTION 9. EFFECTON OTHER
DOCUMENTS
Rev. Proc. 94–29, 1994–1 C.B. 616, is
modified, and as modified, is superseded.
However, see the transition rules in sec-
tion 13.02 of Rev. Proc. 97–37.
SECTION 10. EFFECTIVE DATE
This revenue procedure is effective on
August 18, 1997.
SECTION 11. 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 4 and 5.
This information is necessary and will be
used to determine whether the taxpayer
properly has adopted the principal-reduc-
tion method of accounting. The collec-
tions of information are required for the
taxpayer to use the principal-reduction
method of accounting. The likely respon-
dents are business or other for-profit insti-
tutions.
The estimated total annual reporting
and/or recordkeeping burden is 3,650
hours.
The estimated annual burden per re-
spondent/record keeper varies from 12
hours to 14 hours depending on individ-
ual circumstances, with an estimated av-
erage of 12 hours. The estimated number
of respondents and/or recordkeepers is
350.
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
This revenue procedure was drafted in
the Office of Assistant Chief Counsel (Fi-
nancial Institutions and Products). For
further information regarding this revenue
procedure, contact
William E. Blanchard on (202) 622-
3950 (not a toll free call).
26 CFR 601.105: Examination of returns and
claims for refund, credit or abatement; determina-
tion of correct tax liability.
(Also Part I, § 1362; 1.1362–6.)
Rev. Proc. 97–40
SECTION 1. PURPOSE
This revenue procedure provides guid-
ance under § 1362(b)(5) of the Internal
Revenue Code for requesting relief for late
S corporation elections that are filed
within 6 months of the due date of the
election.
August 18, 1997501997–33 I.R.B.

SECTION 2. BACKGROUND
Section 1361(a)(1) defines an “S corpo-
ration,” with respect to any taxable year,
as a small business corporation for which
an S election is in effect for that year.
Section 1362(a)(1) provides that, ex-
cept in a situation described in § 1362(g),
a small business corporation may elect to
be treated as an S corporation.
Section 1362(b)(1) provides that the
corporation may make an election to be
treated as an S corporation (A) at any time
during the preceding taxable year, or (B)
at any time during the taxable year and on
or before the 15th day of the 3rd month of
the taxable year. Under § 1362(b)(3), if
an S corporation election is made for a
taxable year after the 15th day of the 3rd
month of that taxable year and on or be-
fore the 15th day of the 3rd month of the
following taxable year, then the S corpo-
ration election is treated as made for the
following taxable year.
Section 1362(b)(5) provides that if (A)
an election under § 1362(a) is made for
any taxable year (determined without re-
gard to § 1362(b)(3)) after the date pre-
scribed by § 1362(b) for making the elec-
tion for the taxable year or no election is
made for any taxable year, and (B) the
Secretary determines that there was rea-
sonable cause for the failure to timely
make the election, the Secretary may treat
the election as timely made for the taxable
year (and § 1362(b)(3) shall not apply).
SECTION 3. SCOPE
This revenue procedure provides a spe-
cial procedure to request relief for a late S
corporation election. This revenue proce-
dure applies only to a corporation (1) that
has not filed a timely S corporation elec-
tion under § 1362(a)(1), and (2) for which
an S corporation election is filed within 6
months of the original due date for the
election. This revenue procedure does not
provide relief for late shareholder elections
including a qualified subchapter S trust
(QSST) election or electing small business
trust (ESBT) election. This special proce-
dure is in lieu of the letter ruling procedure
that is used to obtain relief for a late S cor-
poration election under § 1362(b)(5). Ac-
cordingly, user fees do not apply to correc-
tive action under this revenue procedure.
Acorporation that is not eligible for relief
under this revenue procedure, or is denied
relief, may request relief by applying for a
private letter ruling. The procedural re-
quirements for requesting a private letter
ruling are described in Rev. Proc. 97–1,
1997–1 I.R.B. 11 (or its successor).
SECTION 4. RELIEF FOR LATE S
CORPORATION ELECTIONS UNDER
THIS REVENUE PROCEDURE
.01 Eligibility for Relief. Acorporation
is eligible for relief if it meets the follow-
ing requirements:
(1) The corporation fails to qualify as
an S corporation solely because the Form
2553 (Election by a Small Business Cor-
poration) was not filed timely pursuant to
§ 1362(b)(1); and
(2) The due date for the tax return (ex-
cluding extensions) for the first year the
corporation intended to be an S corpora-
tion has not passed.
.02 Procedural Requirements for Re-
lief. Within 6 months of the original due
date for the S corporation election, the
corporation must file with the applicable
service center a completed Form 2553,
signed by an officer of the corporation au-
thorized to sign and all persons who were
shareholders (or deemed to have been
shareholders) at any time during the pe-
riod that began on the first day of the tax-
able year for which the election is to be
effective and ends on the day the election
is made. The Form 2553 must state at the
top of the document “FILED PUR-
SUANTTO REV. PROC. 97–40.” At-
tached to the Form 2553 must be a state-
ment explaining the reason for the failure
to file a timely S corporation election.
.03 Relief for Late S Corporation Elec-
tions.Upon receipt of a completed appli-
cation requesting relief under this revenue
procedure, the Internal Revenue Service
will determine if there was reasonable
cause for the failure to file a timely S cor-
poration election and will notify the cor-
poration of the result of the reasonable
cause determination.
SECTION 5. EFFECTIVE DATE
This revenue procedure is effective for
all applications for relief satisfying the re-
quirements of section 4 of this revenue
procedure, including those applications
now being considered by the Service.
SECTION 6. PAPERWORK
REDUCTION ACT
The collection of information con-
tained in this revenue procedure has been
reviewed and approved by the Office of
Management and Budget in accordance
with the Paperwork Reduction Act (44
U.S.C. 3507) under control number
1545–1548.
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
control number.
The collection of information in this
revenue procedure is in Section 4.02. This
information is required to be submitted to
the applicable service center in order to
obtain relief for late S corporation elec-
tions. This information will be used to de-
termine if the reasonable cause require-
ment in § 1362(b)(5) has been met. The
collection of information is required to ob-
tain a benefit. The likely respondents are
business or other for-profit institutions.
The estimated total annual reporting
burden is 200 hours.
The estimated annual burden per re-
spondent varies from .5 hours to 1.5
hours, depending on individual circum-
stances, with an estimated average of 1
hour. The estimated number of respon-
dents is 200.
The estimated annual frequency of re-
sponses is one.
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 Mark D. Harris of the Office
of Assistant Chief Counsel (Passthroughs
and Special Industries). For further infor-
mation regarding this revenue procedure
contact Mr. Harris at (202) 622-3050 (not
a toll-free call).
26 CFR 601.601: Rules and regulations.
(Also, Part I, §§401, 403; 1.401(b)–1.)
Rev. Proc. 97–41
SECTION 1. PURPOSE
.01 This revenue procedure provides
1997–33 I.R.B.51August 18, 1997

guidance to sponsors of pension, profit-
sharing and stock bonus plans qualified
under §401(a) or 403(a) of the Internal
Revenue Code (qualified plans) and tax-
sheltered annuity plans described in
§403(b) (§ 403(b) plans) with respect to
the date by which they must adopt
amendments to comply with changes in
the law made by the Small Business Job
Protection Act of 1996, Pub. L. 104–188
(SBJPA), the Uruguay Round Agree-
ments Act, Pub. L. 103–465 (GATT), and
the Uniformed Services Employment and
Reemployment Rights Act of 1994, Pub.
L. 103–353 (USERRA). This revenue
procedure provides that:
1 In general, there is a single deadline
for adopting SBJPA, GATTand
USERRAamendments to qualified plans.
2 The deadline for adopting SBJPA,
GATTand USERRAamendments is the
same as the date by which certain plans
that have extended reliance on Tax Re-
form Act of 1986 (TRA‘86) determina-
tion letters must be amended.
3 Plan sponsors are allowed, for quali-
fication purposes, to anticipate in plan
operation certain plan amendments that
they intend to adopt as a result of changes
in the qualification requirements.
.02 Specifically, under this revenue
procedure:
1 Qualified plans have a remedial
amendment period under § 401(b) with
respect to certain amendments for
SBJPA, GATTor USERRAthrough the
last day of the first plan year beginning
on or after January 1, 1999. Thus, these
amendments will not have to be adopted
before the last day of a plan’s 1999 plan
year.
2 The deadline for adopting plan
amendments to reflect certain limitations
under § 415(b), as amended by GATT
and SBJPA, is also the last day of the first
plan year beginning on or after January 1,
1999. In addition, relief is provided so
that a plan amendment described in §
1449(d)(2) of SBJPArepealing an earlier
plan amendment that implemented cer-
tain amendments made by GATTto §
415(b) need not be adopted before the
last day of the first plan year beginning
on or after January 1, 1999.
3 Plan sponsors are advised of the Ser-
vice’s intention to publish procedures for
obtaining determination letters that in-
clude consideration of the changes to the
qualification requirements made by
SBJPAand GATTas soon as possible
after necessary guidance is issued.
4 Amendments for SBJPAto §403(b)
plans, or to annuity contracts purchased
under §403(b) plans, are not required to
be adopted before the first day of the first
plan year beginning on or after January 1,
1998.
PARTI. BACKGROUND
SECTION 2. SBJPA
.01 SBJPAchanged several of the re-
quirements of the Code that apply to pen-
sion, profit-sharing and stock bonus plans
qualified under §401(a) or 403(a). While
a number of these changes are effective in
plan years beginning after December 31,
1996, others are not effective until later
years.
.02 Section 1465 of SBJPAgenerally
provides an extended period for amending
plans and annuity contracts as required by
SBJPA. Under §1465, if any provision of
subtitle D (Pension Simplification) of
SBJPArequires an amendment to any
plan or annuity contract, the amendment
is not required to be made before the first
day of the first plan year beginning on or
after January 1, 1998, provided (1) the
amendment is made effective retroac-
tively to the date on which the provision
of SBJPAbecame effective with respect
to the plan or contract and (2) the plan or
contract is operated in accordance with
the requirements of the provision as of its
effective date. For a governmental plan
(as defined in §414(d) of the Code), the
year “2000” is substituted for the year
“1998” in §1465. Section 1465 applies
to plans and contracts in existence on or
after the date of enactment of SBJPA, Au-
gust 20, 1996.
.03 In Rev. Proc. 96–49, 1996–43
I.R.B. 74, the Service stated that plan
amendments to reflect the provisions of
USERRAand § 414(u), which was added
by §1704(n) in subtitle G (Technical Cor-
rections) of SBJPA, are not required to be
made before the date plan amendments
are required to be made under §1465 of
SBJPA.
SECTION 3. GATT
.01 GATT, which was enacted Decem-
ber 8, 1994, also changed several of the
Code’s qualification requirements. These
included the rules relating to the determi-
nation of certain benefits under §§411(a)-
(11)(B), 415(b)(2)(E) and 417(e)(3).
.02 The changes to §§411(a)(11)(B)
and 417(e)(3), relating to the determina-
tion of the present value of certain plan
distributions, were generally effective for
plan years beginning after December 31,
1994. However, § 767(a)(2) of GATT
provided a transition rule with respect to
the determination under §§411(a)(11)(B)
and 417(e)(3) of the present value of dis-
tributions from plans that were adopted
and in effect as of December 7, 1994
(“pre-GATTplans”). In general, under
this transition rule, the present value of a
distribution from a pre-GATTplan that is
made before the earlier of (i) the first
plan year beginning after December 31,
1999, or (ii) the later of the adoption or
effective date of a plan amendment ap-
plying the GATTchanges to §§411(a)-
(11)(B) and 417(e)(3) to the plan is to be
determined under the plan’s pre-GATT
terms. Thus, for pre-GATTplans,
amendments applying the GATTchanges
to §§411(a)-(11)(B) and 417(e)(3) to the
plan cannot be adopted retroactively. As
a result, these plans are not permitted to
operate in accordance with these changes
prior to the adoption of plan amend-
ments.
.03 Under section 767(d) of GATT, the
changes to § 415(b)(2)(E), relating to re-
quired adjustments to certain benefits for
limitation purposes, were effective for
limitation years beginning after Decem-
ber 31, 1994. In addition, § 767(d) of
GATTrequired plans to be operated in ac-
cordance with the GATTchanges to
§415(b)(2)(E) as of the first limitation
year beginning after December 31, 1994,
even though, under §767(d)(3)(B) of
GATT, plan amendments applying these
changes to the plan would not be required
until such date as the Secretary provides.
.04 Section 1449 of SBJPAamended
§ 767(d)(3)(A) of GATT, however, to
permit plan sponsors to delay the imple-
mentation of the GATTchanges to §
415(b)(2). Section 1449 provides that a
pre-GATTplan is not required to apply
the GATTchanges to §415(b)(2)(E)
with respect to benefits accrued before
the earlier of (i) the later of the date a
plan amendment applying the changes is
adopted or effective or (ii) the first day
of the first limitation year beginning
August 18, 1997521997–33 I.R.B.

after December 31, 1999. Further,
§1449(d) of SBJPAprovides that an
amendment applying specified GATT
changes that was adopted or effective be-
fore August 20, 1996, will be disre-
garded in applying § 767(d)(3)(A) of
GATT, as modified by § 1449(a) of
SBJPA, if that amendment is repealed by
another plan amendment that is adopted
no later than August 20, 1997.
SECTION 4. THE REMEDIAL
AMENDMENTPERIOD UNDER
SECTION 401(B)
.01 Section 401(b) provides a reme-
dial amendment period during which a
plan may be amended retroactively,
under certain circumstances, to comply
with the Code’s qualification require-
ments. Temporary and proposed amend-
ments to the regulations under §401(b)
were published in the Federal Register on
August 1, 1997. Section 1.401(b)–1(f) of
the regulations grants the Commissioner
the discretion to extend the remedial
amendment period. Absent such an ex-
tension, however, the remedial amend-
ment period is generally determined as
described below.
.02 Section 1.401(b)–1 provides that a
plan that fails to satisfy the requirements
of §401(a) solely as a result of a disquali-
fying provision defined under
§1.401(b)–1(b) need not be amended to
comply with those requirements until the
last day of the remedial amendment pe-
riod with respect to the disqualifying pro-
vision, provided the amendment is made
retroactively effective to the beginning of
the remedial amendment period. Under
§1.401(b)–1T(b)(3), a disqualifying pro-
vision includes a plan provision desig-
nated, at the Commissioner’s discretion,
as a disqualifying provision that either (i)
results in the failure of the plan to satisfy
the qualification requirements of the Code
by reason of a change in those require-
ments; or (ii) is integral to a qualification
requirement of the Code that has been
changed. For this purpose, §1.401(b)–
1T(c)(1) provides that a disqualifying
provision includes the absence from a
plan of a provision required by or, if ap-
plicable, integral to the applicable change
in the qualification requirements of the
Code, if the plan was in effect on the date
the change in those requirements became
effective with respect to the plan.
.03 For a disqualifying provision de-
scribed in § 1.401(b)–1T(b)(3), the reme-
dial amendment period generally begins
with the date on which the change be-
comes effective with respect to the plan
or, in the case of a provision that is inte-
gral to a qualification requirement that
has been changed, the first day on which
the plan was operated in accordance with
the provision as amended. The remedial
amendment period for a disqualifying
provision described in §1.401(b)–1T(b)-
(3) generally ends with the later of (1) the
due date (including extensions) for filing
the income tax return for the employer’s
taxable year that includes the date on
which the remedial amendment period be-
gins or (2) the last day of the plan year
that includes the date on which the reme-
dial amendment period begins. Aplan
maintained by more than one employer
need not be amended until the last day of
the tenth month following the last day of
the plan year in which the remedial
amendment period begins.
.04 Section 1.401(b)–1 also provides
that in the case of a new plan which con-
tains (or fails to contain) a provision that
causes the plan to fail to satisfy the re-
quirements of §401(a) as of the date the
plan is put into effect, the plan need not
be amended to comply with those require-
ments until the later of the due date in-
cluding extensions for filing the em-
ployer’s tax return for the taxable year in
which the plan is put into effect or the last
day of the plan year in which the plan is
put into effect. Anew plan maintained by
more than one employer need not be
amended until the last day of the tenth
month following the last day of the plan
year in which falls the date the plan is put
into effect.
.05 Section 1.401(b)–1 also provides
that in the case of an amendment to an ex-
isting plan which causes the plan to fail to
satisfy the requirements of § 401(a) as of
the date the amendment is adopted or ef-
fective (whichever is earlier), the plan
need not be amended to correct the
amendment until the later of the due date
for filing the employer’s tax return (in-
cluding extensions) for the taxable year in
which the amendment is adopted or effec-
tive (whichever is later) or the last day of
the plan year in which the amendment is
adopted or effective (whichever is later).
In the case of an amendment to an exist-
ing plan maintained by more than one em-
ployer, the plan need not be amended
until the last day of the tenth month fol-
lowing the last day of the plan year in
which the amendment is adopted or effec-
tive (whichever is later).
SECTION 5. EXTENDED RELIANCE
.01 Under Rev. Proc. 89–9, 1989–1
C.B. 780, Rev. Proc. 89–13, 1989–1 C.B.
801 (both as modified by Rev. Proc. 93–9,
1993–1 C.B. 474), Rev. Proc. 93–39,
1993–2 C.B. 513, Announcement 94–85,
1994–26 I.R.B. 23, and Rev. Proc. 95–12,
1995–1 C.B. 508, plans that were submit-
ted to the Service within certain deadlines
for determination, opinion, or notification
letters under the Tax Reform Act of 1986,
Pub. L. 99–514 (TRA’86), and received
favorable letters are entitled to extended
reliance. During the extended reliance
period, a plan is generally not required to
operationally comply with or be amended
for regulations or administrative guidance
of general applicability issued after the
date of the plan’s letter which interpret the
qualification requirements in effect when
the letter was issued. The extended re-
liance period continues until the earlier of
the last day of the last plan year com-
mencing prior to January 1, 1999, or the
date established for plan amendment by
any legislation that is effective after the
date of the plan’s letter.
PARTII. TIME FOR AMENDING
QUALIFIED PLANS FOR SBJPA,
GATT, AND USERRA
SECTION 6. DESIGNATION OF
CERTAIN PLAN PROVISIONS
RELATING TO SBJPA, GATT
AND USERRACHANGES AS
DISQUALIFYING PROVISIONS
.01 Pursuant to the Commissioner’s
authority under §1.401(b)–1T(b)(3), a
plan provision is hereby designated as a
disqualifying provision under §
1.401(b)–1(b) if the plan provision causes
a plan to fail to satisfy the qualification
requirements of the Code because of
changes made to those requirements by
SBJPAor GATTthat are effective before
the first day of the first plan year begin-
ning on or after January 1, 1999.
.02 Aplan provision is also hereby
designated as a disqualifying provision if
the plan provision is integral to a qualifi-
1997–33 I.R.B.53August 18, 1997

cation requirement changed by SBJPA,
but only to the extent the change in the
qualification requirement is effective be-
fore the first day of the first plan year be-
ginning on or after January 1, 1999, and
the plan provision as amended is effective
prior to the end of the remedial amend-
ment period as described in section 6.04,
below. For purposes of this paragraph,
the changes in the qualification require-
ments made by SBJPAinclude §414(u)
and USERRA. In accordance with §
1.401(b)–1T(d)(1)(v), an amendment of a
disqualifying provision described in this
paragraph may be made retroactively ef-
fective only to the first day on which the
plan was operated in accordance with the
provision. For example, Announcement
97–24, 1997–11 I.R.B. 24, and An-
nouncement 97–70, 1997–29 I.R.B. 14,
provide that an employer may offer cer-
tain employees an option to defer com-
mencement of benefits under its qualified
plan provided the employer amends the
plan retroactively to conform the plan to
its pre-amendment operation regarding
the option to defer. These announcements
also state that future guidance will pro-
vide the date by which such a retroactive
amendment must be adopted. The
retroactive amendment described in An-
nouncements 97–24 and 97–70 is an
amendment to a plan provision that is in-
tegral to a qualification requirement
changed by SBJPAand must therefore be
adopted by the end of the remedial
amendment period as described below.
Generally, plan provisions reflecting the
family aggregation rules as in effect prior
to 1997 would also be integrally related to
SBJPAqualification changes. See section
6.09.
.03 Aplan provision that causes a plan
to fail to satisfy § 401(a) because of a
change made by SBJPAor GATTto the
qualification requirements that is effec-
tive on or after the first day of the first
plan year beginning on or after January 1,
1999, is not a disqualifying provision
under section 6.01. Aplan provision that
is integral to a qualification requirement
changed by SBJPAis not a disqualifying
provision under section 6.02 if the
change in the qualification requirement is
effective on or after the first day of the
first plan year beginning on or after Janu-
ary 1, 1999, or if the plan provision as
amended is not effective prior to the end
of the remedial amendment period as de-
scribed in section 6.04, below. Thus, for
example, § 401(b) and the regulations
thereunder would not apply to permit the
adoption of the § 401(k) and § 401(m)
safe harbors described in § 1433(a) and
(b) of SBJPAon a retroactive basis, be-
cause the provisions of §1433(a) and (b)
are effective for plan years beginning
after December 31, 1998. Aplan provi-
sion that is integral to the limitation
under § 415(e), which was repealed by §
1452(a) of SBJPAeffective for limitation
years beginning after December 31,
1999, also is not a disqualifying provi-
sion under section 6.02.
.04 Pursuant to the Commissioner’s
authority under §1.401(b)–1(f), with re-
spect to plans other than governmental
plans, the remedial amendment period
for disqualifying provisions described in
sections 6.01 and 6.02 is hereby ex-
tended to the last day of the first plan
year beginning on or after January 1,
1999. Thus, for example, a single em-
ployer calendar year nongovernmental
plan that does not satisfy the require-
ments of § 401(a) because of a disquali-
fying provision described in section 6.01
or 6.02 may be retroactively amended to
meet those requirements by December
31, 1999. For governmental plans, the
remedial amendment period for disquali-
fying provisions described in sections
6.01 and 6.02 is extended to the later of
(i) the first day of the first plan year be-
ginning on or after January 1, 2000, or
(ii) the last day of the first plan year be-
ginning on or after the “1999 legislative
date” (that is, the 90th day after the
opening of the first legislative session
beginning on or after January 1, 1999, of
the governing body with authority to
amend the plan, if that body does not
meet continuously).
.05 In addition, the remedial amend-
ment period with respect to all disqualify-
ing provisions of new plans adopted or ef-
fective after December 7, 1994, and all
disqualifying provisions of existing plans
arising from a plan amendment adopted
after December 7, 1994, that causes the
plan to fail to satisfy the requirements of §
401(a) as of the date the amendment is
adopted or effective (whichever is ear-
lier), will not expire earlier than the last
day of the first plan year beginning on or
after January 1, 1999. For a governmen-
tal plan, this period will not expire before
the later of (i) the first day of the first plan
year beginning on or after January 1,
2000, or (ii) the last day of the first plan
year beginning on or after the 1999 leg-
islative date.
.06 Although plan amendments are not
required before the end of the remedial
amendment period, plan sponsors must
operate their plans in compliance with the
provisions of SBJPAor GATTprior to the
time plan amendments are required to the
extent earlier operational compliance is
required by law or regulation or by rev-
enue ruling, notice or other guidance pub-
lished in the Internal Revenue Bulletin.
In these cases, any retroactive amend-
ments will have to reflect the choices the
plan sponsor has already made in the op-
eration of the plan. The following are ex-
amples where earlier operational compli-
ance is required.
1 Section1465 of SBJPAgenerally re-
quires plans to be operated in compliance
with any provision of SBJPAthat is effec-
tive before the first day of the first plan
year beginning on or after January 1,
1998 (or January 1, 2000, in the case of a
governmental plan), as of such provi-
sion’s effective date.
2 Section 401(m)(6)(A) requires cor-
rection of excess aggregate contributions
to §401(m) plans to be accomplished
within 12 months of the end of the plan
year in which the contributions were
made. Thus, to this extent, for example, a
sponsor of a §401(m) plan will have to
operate the plan in a manner that satisfies
§401(a) as amended by SBJPAand any
retroactive amendments must reflect the
choices that the plan sponsor has already
made in the operation of the plan (for ex-
ample, the definition of highly compen-
sated employee).
3 Section 1.401(b)–1T(d)(1)(v) per-
mits a remedial amendment of a disquali-
fying provision that is integral to a quali-
fication requirement changed by SBJPA
(including § 414(u) and USERRA) to be
made retroactively effective only to the
first day on which the plan was operated
in accordance with the provision as
amended.
.07 Earlier plan amendment may be
required by law or regulation or by rev-
enue ruling, notice or other guidance
published in the Internal Revenue Bul-
letin. In these cases plan sponsors may
August 18, 1997541997–33 I.R.B.

not rely on the remedial amendment pe-
riod as a basis for making an amendment
retroactively effective. The following are
examples where the remedial amendment
period may not be relied on as a basis for
making an amendment retroactively ef-
fective.
1 Except as provided in Rev. Proc.
97–9, 1997–2 I.R.B. 55, a plan sponsor
may not retroactively amend a §401(k)
plan to adopt the alternative (“SIMPLE”)
method of satisfying the §401(k) and §
401(m) nondiscrimination tests added by
§1422 of SBJPA.
2 As provided in §417(e)(3)(B), the
present value of a distribution from a pre-
GATTplan that is made prior to the first
plan year beginning after December 31,
1999, and before a plan amendment ap-
plying the GATTchanges to §417(e)(3)
to the plan has been adopted and made ef-
fective generally must be determined
under the plan’s pre-GATTterms.
.08 Any amendment that would result
in an elimination or reduction of
§411(d)(6) protected benefits may not be
made retroactively effective unless
specifically permitted by law or regula-
tion or by revenue ruling, notice, or other
guidance published in the Internal Rev-
enue Bulletin.
.09 Section 1431(b)(1) of SBJPAelim-
inated the family aggregation require-
ments of § 414(q)(6), effective for years
beginning after December 31, 1996. Sec-
tion 1431(b)(2) of SBJPAalso eliminated
the family aggregation requirement that
formerly applied under § 401(a)(17)(A),
effective for years beginning after De-
cember 31, 1996. Aplan’s family aggre-
gation provisions generally would be dis-
qualifying provisions under § 401(b)
because they would be integrally related
to a qualification requirement of the Code
that has been changed by SBJPA, effec-
tive before 1999. In certain limited cir-
cumstances, the continued application of
the family aggregation rules in the opera-
tion of a plan could result in the loss of
qualified status. The plan’s family aggre-
gation provisions also would then be dis-
qualifying provisions because they would
cause disqualification as a result of
SBJPAchanges to the qualification re-
quirements effective before 1999. Re-
gardless of whether a plan’s family aggre-
gation provisions are disqualifying
provisions because they are integrally re-
lated to SBJPAqualification changes or
because they would cause plan disqualifi-
cation, a plan amendment eliminating the
provisions will not violate the require-
ments of § 411(d)(6) provided the amend-
ment is effective no earlier than the first
day on which the plan was operated in ac-
cordance with the amendment, and in no
event earlier than the first day of the first
plan year beginning after December 31,
1996.
SECTION 7. TIME FOR ADOPTING
CERTAIN AMENDMENTS RELATING
TO SECTION 415
For purposes of §767(d)(3)(B) of
GATT, the date provided by the Secretary
for adopting plan amendments reflecting
the changes to § 415(b)(2)(E) is the last
day of the plan’s remedial amendment pe-
riod under section 6.04. Moreover, as dis-
cussed in section 3.04, §1449(d) of
SBJPAprovides that an amendment ap-
plying specified GATTchanges that was
adopted or effective before August 20,
1996, will be disregarded in applying §
767(d)(3)(A) of GATT, as modified by §
1449(a) of SBJPA, if that amendment is
repealed by another plan amendment that
is adopted no later than August 20, 1997.
Pursuant to this revenue procedure, a plan
amendment applying the amendments
made by § 767 of GATTwhich was
adopted or made effective on or before
August 20, 1996, also shall not be taken
into account in applying § 767(d)(3)(A)
of GATTas amended by § 1449(a) of
SBJPA, if the amendment is repealed by
another plan amendment that is adopted
on or before the last day of the plan’s re-
medial amendment period under section
6.04. This relief will not fail to be avail-
able merely because a plan is not operated
in accordance with the repealing amend-
ment prior to the date specified in future
guidance. The Service intends to issue
additional guidance concerning the GATT
and SBJPAchanges to the limitations
under § 415(b) in the near future.
SECTION 8. MINIMUM FUNDING
REQUIREMENTS
Section 412 provides minimum fund-
ing standards applicable to pension plans
that are or were qualified plans under §
401. Section 1.412(c)(3)–1 provides rules
concerning the reasonable funding meth-
ods for defined benefit pension plans.
Section 1.412(c)(3)–1(d)(1)(i) provides
that, except as provided by the Commis-
sioner, a reasonable funding method does
not anticipate changes in plan benefits
that become effective, whether or not
retroactively, in a future plan year or that
become effective during a plan year but
after the first day thereof. Section
412(c)(12), which was added by GATT,
provides that the funding method of a col-
lectively bargained plan described in
§413(a) (other than a multiemployer
plan) must anticipate benefit increases
scheduled to take effect during the term of
the collective bargaining agreement ap-
plicable to the plan. Therefore, except to
the extent required by §412(c)(12) or as
otherwise provided by the Commissioner,
in determining the minimum funding
standards for a defined benefit plan under
§412, amendments that become effective,
whether or not retroactively, in a future
plan year may not be anticipated, even
though the amendments are made before
the end of any applicable remedial
amendment period. Contributions to a
defined benefit plan will be deductible
subject to the limitations of §404, with
the §412 minimum funding standards de-
termined without anticipating such future
amendments.
SECTION 9. TERMINATING PLANS
Aplan (including a master or proto-
type, regional prototype, or volume sub-
mitter plan) that is terminated after the ef-
fective date of changes in the
qualification requirements made by
SBJPAor GATTbut before the date that
plan amendments would otherwise be re-
quired must be amended in connection
with the plan termination to comply with
the changes as of their effective date with
respect to the plan. For this purpose, any
amendment that is adopted after the date
of plan termination in order to receive a
favorable determination letter will be con-
sidered as adopted in connection with the
plan termination. In addition, annuity
contracts distributed from such termi-
nated plans also must meet all the applica-
ble requirements of SBJPAand GATT. In
the case of changes in the qualification re-
quirements to which §1465 of SBJPAap-
plies, the operational compliance require-
ment of §1465 must also be satisfied.
(See Notice 87–57, 1987–2 C.B. 368, and
Announcement 88–8, 1988–4 I.R.B. 32,
1997–33 I.R.B.55August 18, 1997

which enunciated the same principles
with respect to plans that terminated be-
fore the amendment date described in
§1140 of TRA’86.)
SECTION 10. PLANS WITH EX-
TENDED RELIANCE
As described above, the sponsor of a
plan that is entitled to extended reliance
on a favorable TRA’86 letter may rely on
that letter until the earlier of the last day
of the last plan year commencing prior to
January 1, 1999, or the date established
for plan amendment by any legislation
that is effective after the date of the plan’s
letter. Aplan with extended reliance must
be amended by the last day of the first
plan year beginning on or after January 1,
1999, to the extent necessary to comply
with regulations or administrative guid-
ance of general applicability that has been
issued since the date of the plan’s favor-
able TRA’86 letter. These amendments
must be made effective no later than the
first day of the first plan year beginning
on or after January 1, 1999, and no earlier
than the first day of the plan year in which
the amendments are adopted. (But see
Rev. Rul. 94–76, 1994–2 C.B. 46, and
Rev. Rul. 96–48, 1996–40 I.R.B. 7.) Also
see section 11, below, regarding preap-
proved plans.
SECTION 11. DETERMINATION AND
OPINION LETTER PROGRAMS
.01 Effective with the date of enact-
ment of SBJPAor GATT, as applicable,
and until further notice is given, determi-
nation, opinion, notification, and advisory
letters, other than determination letters is-
sued for terminating plans, will not in-
clude consideration by the Service of any
amendments to the qualification require-
ments made by SBJPAor GATT, with the
following two exceptions. First, determi-
nation letters will include consideration of
the changes made to §401(a)(26) by
§1432 of SBJPA, which limited the ap-
plicability of §401(a)(26) to defined ben-
efit plans and made certain other changes.
See Announcement 97–2, 1997–2, I.R.B.
62. Second, determinations of leased em-
ployee status under §414(n) will reflect
the “primary direction or control” test
under §414(n)(2)(C), as amended by
§1454 of SBJPA, that replaces the former
“historically performed” test.
.02 Until further notice is given, plans
(including master or prototype, regional
prototype, and volume submitter plans),
other than terminating plans, that include
provisions that reflect the SBJPAor
GATTamendments to the qualification
requirements will not be subject to ad-
verse letters by reason of the inclusion of
the provisions. This will not preclude the
issuance of adverse letters for other rea-
sons, such as an impermissible elimina-
tion or reduction of §411(d)(6) protected
benefits resulting from the adoption of
amendments for SBJPAor GATT. How-
ever, favorable letters issued for plans,
other than terminating plans, may not be
relied upon with respect to whether the
plans satisfy the qualification require-
ments as amended by SBJPAor GATT.
.03 The Service will begin reviewing
both preapproved plans and individually
designed plans for compliance with the
qualification requirements as amended by
SBJPAand GATTas soon as possible
after the issuance of additional guidance
pertaining to the requirements of SBJPA.
Prior to that time, the Service intends to
publish procedures relating to the is-
suance of determination, opinion, notifi-
cation and advisory letters for plans that
take into account the requirements of
SBJPAand GATT. The procedures are
also expected to include rules pertaining
to the required time for sponsors to amend
preapproved plans for SBJPAand GATT
and actions that may be required of
adopters of these plans.
PARTIII. TIME FOR AMENDING
SECTION 403(B) PLANS
SECTION 12. SECTION 403(B)
PLANS
.01 SBJPAalso made certain changes
that may require the amendment of tax-
sheltered annuity plans described in
§403(b) or annuity contracts purchased
under these plans. The provisions of
§1465 of SBJPAapply with respect to
any plan or annuity contract that is re-
quired to be amended by any provision of
subtitle D of SBJPA. Section 1465 thus
applies not only to qualified plans but also
to §403(b) plans and annuity contracts
purchased under these plans. Therefore, if
a provision of subtitle D of SBJPAre-
quires an amendment to a §403(b) plan or
an annuity contract purchased under the
plan, the amendment will not be required
to be made before the time described in
§1465 of SBJPA, provided the retroactive
amendment and operational compliance
requirements of §1465 are satisfied. For
this purpose, the time described in §1465
with respect to a §403(b) plan that is a
governmental plan will be treated as not
expiring before the last day of the first
plan year beginning on or after the 1999
legislative date, that is, the 90th day after
the opening of the first legislative session
beginning on or after January 1, 1999, of
the governing body with authority to
amend the plan, if that body does not
meet continuously.
.02 For example, §1450(c)(1) of
SBJPAamended §403(b)(1)(E) to pro-
vide that each contract purchased under a
§403(b) plan salary reduction agreement
must provide that elective deferrals made
under the contract may not exceed the an-
nual limit on elective deferrals under
§402(g)(1). Prior to this amendment, the
§403(b) plan, not each contract, was re-
quired to provide this limitation. Section
1450(c)(2) provides that this amendment
applies to years beginning after December
31, 1995, except a contract will not be re-
quired to meet any change in any require-
ment by reason of the amendment before
the 90th day after enactment of SBJPA
(that is, November 18, 1996). Because
§1465 applies to any annuity contract
purchased under a §403(b) plan, such a
contract is not required to be amended to
comply with §1450(c)(1) before the first
day of the first plan year beginning on or
after January 1, 1998 (or, in the case of a
contract purchased under a §403(b) plan
that is a governmental plan, the later of (i)
the first day of the first plan year begin-
ning on or after January 1, 2000, or (ii)
the last day of the first plan year begin-
ning on or after the 1999 legislative date),
provided the retroactive amendment and
operational compliance requirements of
§1465 are satisfied with respect to the
contract.
SECTION 13. EFFECTIVE DATE
This revenue procedure is effective Au-
gust 18, 1997.
DRAFTING INFORMATION
The principal author of this revenue
procedure is James Flannery of the Em-
ployee Plans Division. For further infor-
mation regarding this revenue procedure,
August 18, 1997561997–33 I.R.B.

please contact the Employee Plans Divi-
sion’s taxpayer assistance telephone ser-
vice between the hours of 1:30 p.m. and 4
p.m. Eastern Time, Monday through
Thursday, by calling (202) 622-
6074/6075, or Mr. Flannery on (202) 622-
6214. (These telephone numbers are not
toll-free numbers.)
26 CFR 601.105: Examination of returns and
claims for refund, credit, or abatement; determina-
tion of correct tax liability.
(Also Part I, § 42; 1.42–14.)
Rev. Proc. 97–42
SECTION 1. PURPOSE
This revenue procedure publishes the
amounts of unused housing credit carry-
overs allocated to qualified states under
§ 42(h)(3)(D) of the Internal Revenue
Code for calendar year 1997.
SECTION 2. BACKGROUND
Rev. Proc. 92–31, 1992–1 C.B. 775,
provides guidance to state housing credit
agencies of qualified states on the proce-
dure for requesting an allocation of un-
used housing credit carryovers under §
42(h)(3)(D). Section 4.06 of Rev. Proc.
92–31 provides that the Internal Revenue
Service will publish in the Internal Rev-
enue Bulletin the amount of unused hous-
ing credit carryovers allocated to quali-
fied states for a calendar year from a na-
tional pool of unused credit authority (the
National Pool). This revenue procedure
publishes these amounts for calendar year
1997.
SECTION 3. PROCEDURE
The unused housing credit carryover
amount allocated from the National Pool
by the Secretary to each qualified state for
calendar year 1997 is as follows:
Qualified State
Amount Allocated
Alabama$ 77,659
Alaska11,032
California579,360
Colorado69,480
Connecticut59,503
Delaware13,176
Florida261,710
Georgia133,636
Idaho21,609
Illinois215,311
Indiana106,156
Iowa51,833
Kansas46,744
Maryland92,180
Massachusetts110,718
Michigan174,364
Minnesota84,656
Mississippi49,361
Missouri97,396
Nebraska30,024
Nevada29,133
New Hampshire21,119
New Jersey145,176
New York330,500
North Carolina133,090
Ohio203,061
Oregon58,230
Pennsylvania219,109
Rhode Island17,993
South Carolina67,227
South Dakota13,304
Texas347,638
Utah36,349
Vermont10,705
Virginia121,313
Washington100,558
SECTION 4. EFFECTIVE DATE
This revenue procedure is effective for
allocations of housing credit dollar
amounts attributable to the National Pool
component of a qualified state’s housing
credit ceiling for calendar year 1997.
DRAFTING INFORMATION
The principal author of this revenue
procedure is Christopher J. Wilson of the
Office of Assistant Chief Counsel
(Passthroughs and Special Industries).
For further information regarding this
revenue procedure, contact Mr. Wilson on
(202) 622-3040 (not a toll-free call).
1997–33 I.R.B.57August 18, 1997

August 18, 1997581997–33 I.R.B.
Changes in Employer Reporting
of Moving Expense
Reimbursements—Elimination of
Form 4782 and Changes to
Form W–2 Reporting
Announcement 97–77
Purpose
This announces that the Internal Rev-
enue Service will eliminate Form 4782,
Employee Moving Expense Information,
effective for tax year 1998. Also included
are changes to the reporting of moving
expense reimbursements by employers to
employees on Form W–2. These changes
are effective for 1998 Forms W–2 that
employees will receive in 1999.
Background
Form 4782 is used by employers to re-
port moving expense reimbursements
made to employees. P.L. 103–66 modi-
fied IRC Section 132 to exclude from an
employee’s gross income employer reim-
bursements for qualified moving ex-
penses. After that change in law, some
employers still found Form 4782 to be
helpful to employees in understanding the
amounts that appear on their Forms W–2.
However, many employers also told us
that Form 4782 was no longer needed,
was burdensome to file, and that it should
be eliminated.
As a result of input received from the
employer community, the Service has de-
cided to eliminate Form 4782. However,
employers may continue providing simi-
lar information to employees in any for-
mat they wish if they deem it helpful to
employees.
Form W–2 Reporting
With the elimination of Form 4782, the
IRS is further simplifying the reporting of
qualified moving expenses on Form W–2.
The IRS instructions for employers
preparing Forms W–2 for tax year 1998
will reflect that:
• Qualified moving expenses an em-
ployer pays to a third party on behalf of
the employee (e.g., to a moving com-
pany) and services that an employer fur-
nishes in kind to an employee will not be
reported at all on Form W–2.
• Qualified moving expenses reim-
bursements an employer pays directly to
an employee will be reported in Box 13
of Form W–2 and will be identified using
Code P. (Currently,
all qualified moving
expense reimbursements are identified
with Code P, regardless of whether or not
they were paid directly to the employee.)
• Other moving expense reimburse-
ments (so-called nonqualified expenses),
whether or not paid directly to a third
party, will continue to be included in
wages (Form W–2, box 1) and are subject
to income tax withholding and social se-
curity and Medicare taxes.
Employee Reporting on Form
3903
As a result of the simplification of em-
ployer reporting, the deduction for quali-
fied moving expenses by employees will
also be simplified. Beginning with 1998
returns filed in 1999, employees will re-
port on Form 3903, Moving Expenses,
only the qualified moving expenses paid
directly by them. On Form 3903, em-
ployees will reduce these expenses by the
amounts reimbursed by their employers
and reported in box 13 of Form W–2.
Part IV. Items of General Interest

1997–33 I.R.B.59August 18, 1997
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 Abut not
to B, and the new ruling holds that it ap-
plies to both Aand 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. Aruling
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

August 18, 1997601997–33 I.R.B.
Numerical Finding List
1
Bulletins 1997–27 through 1997–32
Announcements:
97–61, 1997–29 I.R.B. 13
97–67, 1997–27 I.R.B. 37
97–68, 1997–28 I.R.B. 13
97–69, 1997–28 I.R.B. 13
97–70, 1997–29 I.R.B. 14
97–71, 1997–29 I.R.B. 15
97–72, 1997–29 I.R.B. 15
97–73, 1997–30 I.R.B. 86
97–74, 1997–31 I.R.B.16
97–75, 1997–32 I.R.B. 28
97–76, 1997–32 I.R.B. 28
Court Decisions:
2061, 1997–31 I.R.B. 5
2062, 1997–32 I.R.B. 8
Delegation Orders:
172 (Rev. 5), 1997–28 I.R.B. 6
Notices:
97–37, 1997–27 I.R.B. 4
97–38, 1997–27 I.R.B. 8
97–39, 1997–27 I.R.B. 8
97–40, 1997–28 I.R.B. 6
97–41, 1997–28 I.R.B. 6
97–42, 1997–29 I.R.B. 12
97–43, 1997–30 I.R.B. 9
97–44, 1997–31 I.R.B. 15
Railroad Retirement Quarterly Rate:
1997–28 I.R.B. 5
Proposed Regulations:
REG–104893–97, 1997–29 I.R.B. 13
REG–107644–97, 1997–32 I.R.B. 24
Revenue Procedures:
97–32, 1997–27 I.R.B. 9
97–33, 1997–30 I.R.B. 10
97–34, 1997–30 I.R.B.14
Revenue Rulings:
97–27, 1997–27 I.R.B. 4
97–28, 1997–28 I.R.B. 4
97–29, 1997–28 I.R.B. 4
97–30, 1997–31 I.R.B.12
97–31, 1997–32 I.R.B.4
Treasury Decisions:
8722, 1997–29 I.R.B. 4
8723, 1997–30 I.R.B. 4
1
Acumulative list of all revenue rulings, revenue
procedures, Treasury decisions, etc., published in
Internal Revenue Bulletins 1997–1 through 1997–26
will be found in Internal Revenue Bulletin 1997–27,
dated July 7, 1997.

1997–33 I.R.B.61August 18, 1997
Finding List of Current Action on
Previously Published Items
1
Bulletins 1997–27 through 1997–32
*Denotes entry since last publication
Revenue Procedures:
96–36
Superseded by
97–34, 1997–30 I.R.B. 14
96–42
Superseded by
97–27, 1997–27 I.R.B. 9
Revenue Rulings:
89–42
Supplemented by
97–31, 1997–32 I.R.B. 4
1
Acumulative finding list for previously published
items mentioned in Internal Revenue Bulletins
1997–1 through 1997–26 will be found in Internal
Revenue Bulletin 1997–27, dated July 7, 1997.

Notes
August 18, 1997621997–33 I.R.B.

INTERNAL REVENUE BULLETIN
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WE WELCOME COMMENTS ABOUT THE
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If you have comments concerning the format or production of the Internal Revenue Bulletin or suggestions for improving it, we
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Permit No. G–48

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, T:FP:F:CD, Room 5560, 1111 Constitution Avenue NW, Washington, DC
20224. You can also leave a recorded message 24 hours a day, 7 days a week at 1–800–829–9043.
Superintendent of Documents
U.S. Government Printing Office
Washington, DC 20402
Official Business
Penalty for Private Use, $300
First Class Mail
Postage and Fees Paid
GPO
Permit No. G–26