us-irs-revenue-rulings-irb-1997-33-pdf•Internal Revenue Bulletin 1997-33 (PDF rendition): IRS Revenue Rulings
Internal Revenue Bulletin 1997-33 (PDF rendition): IRS Revenue Rulings
us-irs-revenue-rulings-irb-1997-33-pdfInternal Revenue Bulletin 1997-33 (PDF rendition): IRS Revenue RulingsGuidance
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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 bbuulllleettiinn 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 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. Internal Revenue Service Washington, DC 20224 Official Business Penalty for Private Use, $300 First Class Mail Postage and Fees Paid IRS 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
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