Internal Revenue Bulletin 2002-13 (PDF rendition): IRS Revenue Rulings

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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.
SPECIAL ANNOUNCEMENT
Announcement 2002–37, page 703.
Methods of accounting.This announcement discusses some
of the most significant and prevalent issues raised in com-
ments received in connection with Notice 98–31 (1998–1 C.B.
1165), which proposed procedures for Service-imposed
accounting method changes and the resolution of accounting
method issues on a nonaccounting-method-change basis.
INCOME TAX
Rev. Rul. 2002–15, page 668.
Fringe benefits aircraft valuation formula.The Standard
Industry Fare Level (SIFL) cents-per-mile rates and terminal
charges in effect for the first half of 2002 are set forth for pur-
poses of determining the value of noncommercial flights on
employer-provided aircraft under section 1.61–21(g) of the
regulations.
T.D. 8984, page 668.
REG–102740–02, page 701.
Temporary, final, and proposed regulations under sections
337(d) and 1502 of the Code permit certain losses recognized
on sales of subsidiary stock by members of a consolidated
group. The regulations apply to corporations filing consoli-
dated returns, both during and after the period of affiliation,
and also affect purchasers of the stock of members of a con-
solidated group. A public hearing on the proposed regulations
is scheduled for July 17, 2002.
Announcement 2002–34, page 702.
Extension of time to file Forms 1042-S.The Service
announces an extension of time to file 2001 Form(s) 1042-S
from March 15, 2002, to May 15, 2002.
EMPLOYEE PLANS
Announcement 2002–36, page 703.
Employee plans determinations letters; future of pro-
gram.The Service extends the time, as stated in Announce-
ment 2001–83 (2001–35 I.R.B. 205), for the submission of
public comments on the future of the EP determination letter
program from March 31, 2002, to July 1, 2002.
ADMINISTRATIVE
Rev. Proc. 2002–17, page 676.
Inventories; replacement cost; automobile dealers.A
safe harbor method of accounting (the “replacement cost
method”) is provided for automobile dealers to approximate
the cost of their vehicle parts inventory using the replacement
cost of the parts. Procedures are also provided for automobile
dealers to obtain the automatic consent of the Commissioner
to change to the replacement cost method. Rev. Proc. 2002–9
modified and amplified.
Rev. Proc. 2002–18, page 678.
Changes in method of accounting; examinations.Proce-
dures are provided under section 446 of the Code for changes
in method of accounting imposed by the Service. Procedures
are also provided for resolving accounting method issues on a
nonaccounting-method basis.
Rev. Proc. 2002–19, page 696.
Changes in method of accounting; prior consent; auto-
matic consent.Rev. Procs. 97–27 and 2002–9 are modified
to (1) allow certain taxpayers under examination or before
appeals or a federal court to change their method of account-
ing prospectively without audit protection, (2) reduce from 4
years to 1 year the adjustment period for prospective changes
resulting in a net negative adjustment under section 481(a) of
the Code, and (3) make certain other conforming changes.
Rev. Procs. 97–27 and 2002–9 modified and amplified.
Finding Lists begin on page ii.
Index for January through March begins on page v.
Bulletin No. 2002–13
April 1, 2002

The IRS Mission
Provide America’s taxpayers top quality service by helping
them understand and meet their tax responsibilities and by
applying the tax law with integrity and fairness to all.
Introduction
The Internal Revenue Bulletin is the authoritative instrument of
the Commissioner of Internal Revenue for announcing official
rulings and procedures of the Internal Revenue Service and for
publishing Treasury Decisions, Executive Orders, Tax Conven-
tions, 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 are consolidated semiannually into Cumulative Bulle-
tins, 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 Bul-
letin. All published rulings apply retroactively unless otherwise
indicated. Procedures relating solely to matters of internal
management are not published; however, statements of inter-
nal 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 rev-
enue ruling. In those based on positions taken in rulings to tax-
payers or technical advice to Service field offices, identifying
details and information of a confidential nature are deleted to
prevent unwarranted invasions of privacy and to comply with
statutory requirements.
Rulings and procedures reported in the Bulletin do not have the
force and effect of Treasury Department Regulations, but they
may be used as precedents. Unpublished rulings will not be
relied on, used, or cited as precedents by Service personnel in
the disposition of other cases. In applying published rulings and
procedures, the effect of subsequent legislation, regulations,
court decisions, rulings, and procedures must be considered,
and Service personnel and others concerned are cautioned
against reaching the same conclusions in other cases unless
the facts and circumstances are substantially the same.
The Bulletin is divided into four parts as follows:
Part I.—1986 Code.
This part includes rulings and decisions based on provisions of
the Internal Revenue Code of 1986.
Part II.—Treaties and Tax Legislation.
This part is divided into two subparts as follows: Subpart A, Tax
Conventions and Other Related Items, and Subpart B, Legisla-
tion and Related Committee Reports.
Part III.—Administrative, Procedural, and
Miscellaneous.
To the extent practicable, pertinent cross references to these
subjects are contained in the other Parts and Subparts. Also
included in this part are Bank Secrecy Act Administrative Rul-
ings. Bank Secrecy Act Administrative Rulings are issued by
the Department of the Treasury’s Office of the Assistant Secre-
tary (Enforcement).
Part IV.—Items of General Interest.
This part includes notices of proposed rulemakings, disbar-
ment and suspension lists, and announcements.
The first Bulletin for each month includes a cumulative index for
the matters published during the preceding months. These
monthly indexes are cumulated on a semiannual basis, and are
published in the first Bulletin of the succeeding semiannual
period, respectively.
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.
April 1, 20022002–13 I.R.B.

Part I. Rulings and Decisions Under the Internal Revenue Code of 1986
Section 61.—Gross Income
Defined
26 CFR 1.61–21: Taxation of fringe benefits.
Rev. Rul. 2002–15
Fringe benefits aircraft valuation
formula. For purposes of section 1.61–
21(g) of the Income Tax Regulations,
relating to the rule for valuing non-
commercial flights on employer-provided
aircraft, the Standard Industry Fare Level
(SIFL) cents-per-mile rates and terminal
charge in effect for the first half of 2002
are set forth.
For purposes of the taxation of fringe
benefits under section 61 of the Internal
Revenue Code, section 1.61–21(g) of the
Income Tax Regulations provides a rule
for valuing noncommercial flights on
employer-provided aircraft. Section 1.61–
21(g)(5) provides an aircraft valuation
formula to determine the value of such
flights. The value of a flight is determined
under the base aircraft valuation formula
(also known as the Standard Industry Fare
Level formula or SIFL) by multiplying
the SIFL cents-per-mile rates applicable
for the period during which the flight was
taken by the appropriate aircraft multiple
provided in section 1.61–21(g)(7) and
then adding the applicable terminal
charge. The SIFL cents-per-mile rates in
the formula and the terminal charge are
calculated by the Department of Trans-
portation and are reviewed semi-annually.
The following chart sets forth the ter-
minal charges and SIFL mileage rates:
Period During Which
the Flight Is Taken
Terminal
Charge
SIFL Mileage
Rates
1/1/02 — 6/30/02$37.12Up to 500 miles
= $.2031 per mile
501–1500 miles
= $.1548 per mile
Over 1500 miles
= $.1489 per mile
DRAFTING INFORMATION
The principal author of this revenue
ruling is Kathleen Edmondson of the
Office of Division Counsel/Associate
Chief Counsel (Tax Exempt and Govern-
ment Entities). For further information
regarding this revenue ruling, contact Ms.
Edmondson at (202) 622–6040 (not a toll-
free call).
Section 337.—Nonrecognition
for Property Distributed to
Parent in Complete
Liquidation of Subsidiary
26 CFR 1.337(d)–2: Loss limitation window period.
T.D. 8984
DEPARTMENT OF THE
TREASURY
Internal Revenue Service
26 CFR Parts 1 and 602
Loss Limitation Rules
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Final and temporary regula-
tions.
SUMMARY: This document contains
regulations under sections 337(d) and
1502. These regulations permit certain
losses recognized on sales of subsidiary
stock by members of a consolidated
group. These regulations apply to corpo-
rations filing consolidated returns, both
during and after the period of affiliation,
and also affect purchasers of the stock of
members of a consolidated group. The
text of these temporary regulations also
serves as the text of the proposed regula-
tions set forth in the notice of proposed
rulemaking on this subject on page 701 of
this issue of the Bulletin.
DATES:Effective Date: These regula-
tions are effective March 7, 2002.
Applicability Date: For dates of appli-
cability, see §§ 1.337(d)–2T(g), 1.1502–
20T(i) and 1.1502–32T(b)(4)(v).
FOR FURTHER INFORMATION
CONTACT: Sean P. Duffley (202) 622–
7530 or Lola L. Johnson (202) 622–7550
(not toll-free numbers).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
These regulations are being issued
without prior notice and public procedure
pursuant to the Administrative Procedure
Act (5 U.S.C. 553). For this reason, the
collection of information contained in
these regulations has been reviewed and,
pending receipt and evaluation of public
comments, approved by the Office of
Management and Budget under control
number 1545–1774. Responses to this
collection of information are voluntary.
An agency may not conduct or spon-
sor, and a person is not required to
respond to, a collection of information
unless it displays a valid control number
assigned by the Office of Management
and Budget.
For further information concerning
this collection of information, and where
to submit comments on the collection of
2002-13 I.R.B.668April 1, 2002

information and the accuracy of the esti-
mated burden, and suggestions for reduc-
ing this burden, please refer to the pre-
amble to the cross-referencing notice of
proposed rulemaking (REG–102740–02)
on page 701 of this Bulletin.
Books or records relating to the collec-
tion of information must be retained as
long as their contents may become mate-
rial 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.
Background
Section 337(d) of the Internal Revenue
Code, enacted in 1986, directs the Secre-
tary to prescribe regulations to ensure that
the purposes ofGeneral Utilitiesrepeal,
which generally requires a corporation to
recognize gain or loss on a disposition of
any asset, may not be circumvented
through the use of the consolidated return
regulations. Pursuant to that directive, in
1990, the IRS and Treasury promulgated
§1.337(d)–2. Section 1.337(d)–2 gener-
ally disallows any loss recognized by a
member of a consolidated group on the
disposition of subsidiary stock, except to
the extent the consolidated group dis-
poses of its entire equity interest in a sub-
sidiary to persons not related to any mem-
ber of the consolidated group within the
meaning of section 267(b) or section
707(b)(1) (applying the language“10 per-
cent”instead of“50 percent”) and can
establish that such loss is not attributable
to the recognition of built-in gain. Section
1.337(d)–2, however, only applies with
respect to dispositions and deconsolida-
tions that occur on or after November 19,
1990, and that are not subject to
§1.1502–20.
Section 1.1502–20, which applies to
all dispositions and deconsolidations of
subsidiary stock that occur on or after
February 1, 1991, disallows certain losses
recognized by a member of a consoli-
dated group on the disposition of subsid-
iary stock. The rule disallows losses to
the extent of the sum of“extraordinary
gain dispositions,”“positive investment
adjustments,”and“duplicated loss.”The
rule is designed not only to implement
General Utilitiesrepeal, but also to fur-
ther single entity principles by preventing
the allowance of stock losses that are
reflected in a subsidiary’s assets or loss
carryovers.
InRite Aid Corp. v. United States, 255
F.3d 1357 (Fed. Cir. 2001), the United
States Court of Appeals for the Federal
Circuit held that the duplicated loss com-
ponent of§1.1502–20 was an invalid
exercise of regulatory authority. As stated
in Notice 2002–11 (2002–7 I.R.B. 526),
the IRS has decided that the interests of
sound tax administration will not be
served by continuing to litigate the valid-
ity of the loss duplication factor of
§1.1502–20. Moreover, because of the
interrelationship in the operation of all of
the loss disallowance factors, the IRS and
Treasury have decided that new rules
governing loss disallowance on sales of
stock of a member of a consolidated
group should be implemented.
Explanation of Provisions
ThisTreasurydecisionadds
§§1.337(d)–2T, 1.1502–20T(i), and
1.1502–32T(b)(4)(v), as described below.
For dispositions and deconsolidations
of subsidiary stock on or after March 7,
2002, unless the disposition or deconsoli-
dation was effected pursuant to a binding
written contract entered into before such
date that was in continuous effect until
the disposition or deconsolidation, this
Treasurydecisionprovidesthat
§1.337(d)–2T, and not§1.1502–20, gov-
erns the amount of loss allowable on such
sales, or the amount of basis reduction
required on such deconsolidations, of
subsidiary stock. In substantial part,
§1.337(d)–2T restates the current
§1.337(d)–2, with certain modifications.
As described above, as currently in effect,
§1.337(d)–2 permits recognition of loss
only where a consolidated group disposes
of its entire equity interest in a member of
the group to persons not related to any
member of the consolidated group within
the meaning of section 267(b) or section
707(b)(1) (applying the language“10 per-
cent”instead of“50 percent”). Section
1.337(d)–2T eliminates those restrictions.
For dispositions and deconsolidations
of subsidiary stock before March 7, 2002,
and dispositions and deconsolidations of
subsidiary stock on or after March 7,
2002, that were effected pursuant to a
binding written contract entered into
before such date that was in continuous
effect until the disposition or deconsolida-
tion, this Treasury decision adds
§1.1502–20T(i). Section 1.1502–20T(i)
permits consolidated groups to calculate
allowable loss on the sale of subsidiary
stock by applying§1.1502–20 in its
entirety or, in lieu thereof, by electing to
apply one of two alternative regimes. In
particular, the group may elect to apply
the provisions of§1.1502–20 without
regard to the duplicated loss factor of the
loss disallowance formula,i.e., calculat-
ing disallowed loss by taking into account
only extraordinary gain dispositions and
positive investment adjustment amounts.
Alternatively, the group may elect to
apply the provisions of§1.337(d)–2T.
Such election may be made with the
original return for the taxable year that
includes the later of March 7, 2002, and
the date of the disposition or deconsolida-
tion of the stock of the subsidiary. Alter-
natively, the election may be made with
an amended return, provided that the
amended return is filed before the date
the original return for the taxable year
that includes March 7, 2002, is due.
An election described in§1.1502–
20(g) to reattribute losses will be
respected only if the requirements of
§1.1502–20(g), including the require-
ment that the election be filed with the
group’s income tax return for the year of
the disposition, have been or are satisfied.
The temporary regulations do not extend
the time for filing an election under
§1.1502–20(g). If a group made an elec-
tion described in§1.1502–20(g) and
elects to determine allowable loss by
applying one of the alternative regimes
pursuant to§1.1502–20T(i), the amount
of loss treated as reattributed may be
reduced. If the group elects to determine
allowable loss by applying the provisions
of§1.1502–20 without regard to the
duplicated loss factor of the loss disallow-
ance formula, the amount of loss treated
as reattributed is equal to the amount of
loss originally reattributed, reduced to the
extent that it exceeds the greater of (1)
the loss disallowance amount determined
by taking into account only extraordinary
gain dispositions and positive investment
adjustments (and not the duplicated loss
factor of the loss disallowance formula)
and (2) the amount of reattributed losses
that the common parent of the selling
group absorbed in closed years. If the
April 1, 20026692002-13 I.R.B.

group elects to determine allowable loss
by applying§1.337(d)–2T, the amount of
loss treated as reattributed is the greater
of (1) zero and (2) the amount of reattrib-
uted losses that the common parent of the
selling group absorbed in closed years.
For this purpose, a taxable year is a
closed year to the extent the assessment
of a deficiency is prevented by any law or
rule of law as of the date the election to
apply one of the alternative regimes is
filed and at all times thereafter.
To the extent that an election under
§1.1502–20T(i) results in a reduction in
the amount of losses treated as reattrib-
uted, such excess losses will be treated as
available for use by the subsidiary or any
other group of which the subsidiary is a
member, subject to any applicable limita-
tions (e.g., section 382). In order to per-
mit the subsidiary’s use of such losses
that are subject to an existing section 382
limitation,§1.1502–20T(i) allows the
common parent of the group that disposed
of the stock to make certain adjustments
to the amount of such a limitation appor-
tioned under§1.1502–95 or§1.1502–96.
Section 1.1502–20T(i) requires the
common parent of the selling group to
notify the subsidiary of the recomputed
reattribution amount and any adjustment
to the apportionment of a section 382
limitation made in connection with the
election to apply one of the alternative
regimes. In addition, if the acquirer was a
member of a consolidated group at the
time of the acquisition, the common par-
ent of the selling group must provide such
notification to the common parent of the
acquirer at the time of the acquisition.
The rules set forth in§1.1502–20T(i)
also confirm that any losses treated as
reattributed to the common parent of the
selling group will not be available to off-
set income of the subsidiary or any other
group of which such subsidiary is a mem-
ber.
The IRS and Treasury do not intend
for a purchasing consolidated group to be
unfairly disadvantaged in the event that
the common parent of a selling member
elects to apply one of the alternative
regimes under§1.1502–20T(i) and, as a
result, the amount of losses treated as
reattributed to the common parent of the
selling group is decreased and the amount
of losses treated as available to the sub-
sidiary is increased. Therefore, this Trea-
surydecisionadds§1.1502–
32T(b)(4)(v), which provides that, to the
extent that the subsidiary’s loss carry-
overs are increased by reason of an elec-
tion to apply one of the alternative
regimes and such loss carryovers expire,
or would have been properly used to off-
set income, in a closed year, the purchas-
ing group will be deemed to have made
an election to treat all of such expired
loss carryovers as expiring for all Federal
income tax purposes immediately before
the subsidiary became a member of the
purchasing group. Accordingly, no basis
reduction under§1.1502–32 will result
from the expiration of, or failure to use,
such losses.
Section 1.1502–32T(b)(4)(v) further
provides that, to the extent the subsid-
iary’s loss carryovers are increased by
reason of an election to apply one of the
alternative regimes and such loss carry-
overs have not expired, and would not
have been properly used to offset income,
in a closed year, the purchasing group
may make an election under§1.1502–
32(b)(4) to treat all or a portion of such
loss carryovers as expiring for all Federal
income tax purposes immediately before
the subsidiary became a member of the
purchasing group. The election must be
filed with the purchasing group’s return
for the taxable year in which the subsid-
iary receives the notification of the
recomputed reattributed loss amount.
Forpurposesof§1.1502–
32T(b)(4)(v), a taxable year is a closed
year to the extent the refund of an over-
payment is prevented by any law or rule
of law as of the date the group files its
original return for the taxable year in
which the subsidiary receives the notifi-
cation of the recomputed reattributed loss
amount and at all times thereafter.
Special Analyses
In light of the Federal Circuit’s deci-
sion inRite Aid Corp. v. United States,
255 F.3d 1357 (Fed. Cir. 2001), these
temporary regulations are necessary in
order to provide taxpayers with immedi-
ate guidance regarding allowable loss and
basis reductions in connection with dispo-
sitions and deconsolidations of subsidiary
stock and to carry out the principles of
General Utilitiesrepeal pending the issu-
ance of further guidance. These tempo-
rary regulations permit taxpayers to deter-
mine the amount of allowable loss or
basis reduction by applying§1.1502–20
in its entirety or, in lieu thereof, by elect-
ing to apply the provisions of either
§1.337(d)–2T or 1.1502–20 without
regard to§1.1502–20(c)(1)(iii). In addi-
tion, these temporary regulations provide
taxpayers with guidance on the effect of
elections previously made under
§1.1502–20(g) to reattribute losses to the
common parent of a selling group.
Accordingly, good cause is found for dis-
pensing with notice and public procedure
pursuant to 5 U.S.C. 553(b)(B) and with
a delayed effective date pursuant to 5
U.S.C. 553(d)(1) and (3).
Because no notice of proposed rule-
making is required, the provisions of the
Regulatory Flexibility Act (5 U.S.C. 601
et seq.) do not apply.
Drafting Information
The principal authors of these regula-
tions are Sean P. Duffley and Lola L.
Johnson, Office of Associate Chief Coun-
sel (Corporate). However, other personnel
from the IRS and Treasury Department
participated in their development.
*****
Amendments to the Regulations
Accordingly, 26 CFR parts 1 and 602
are amended as follows:
PA RT 1—INCOME TAXES
Paragraph 1. The authority citation for
part 1 is amended by adding entries in
numerical order to read in part as follows:
Authority: 26 U.S.C. 7805***
Section 1.337(d)–2T also issued under
26 U.S.C. 337(d).***
Section 1.1502–20T(i) also issued
under 26 U.S.C. 1502.***
Section 1.1502–32T(b)(4)(v) also
issued under 26 U.S.C. 1502.***
Par. 2. Section 1.337(d)–2 is amended
by adding paragraph (g)(4) to read as fol-
lows:
§1.337(d)–2 Loss limitation window
period.
*****
(g)***
(4) For dispositions and deconsolida-
tions on and after March 7, 2002, see
§1.337(d)–2T.
2002-13 I.R.B.670April 1, 2002

Par. 3. Section 1.337(d)–2T is added to
read as follows:
§1.337(d)–2T Loss limitation window
period (temporary).
(a)Loss disallowance—(1)General
rule. No deduction is allowed for any loss
recognized by a member of a consoli-
dated group with respect to the disposi-
tion of stock of a subsidiary.
(2)Definitions. For purposes of this
section:
(i) The definitions in§1.1502–1 apply.
(ii)Dispositionmeans any event in
which gain or loss is recognized, in whole
or in part.
(3)Coordination with loss deferral
and other disallowance rules. For pur-
poses of this section, the rules of
§1.1502–20(a)(3) apply, with appropriate
adjustments to reflect differences between
the approach of this section and that of
§1.1502–20.
(b)Basisreductionondecon-
solidation—(1)General rule. If the basis
of a member of a consolidated group in a
share of stock of a subsidiary exceeds its
value immediately before a deconsolida-
tion of the share, the basis of the share is
reduced at that time to an amount equal to
its value. If both a disposition and a
deconsolidation occur with respect to a
share in the same transaction, paragraph
(a) of this section applies and, to the
extent necessary to effectuate the pur-
poses of this section, this paragraph (b)
applies following the application of para-
graph (a) of this section.
(2)Deconsolidation.Deconsolidation
means any event that causes a share of
stock of a subsidiary that remains out-
standing to be no longer owned by a
member of any consolidated group of
which the subsidiary is also a member.
(3)Value.Valuemeans fair market
value.
(c)Allowable Loss—(1)Application.
This paragraph (c) applies with respect to
stock of a subsidiary only if a separate
statement entitled“§1.337(d)–2T(c)
statement”is included with the return in
accordance with paragraph (c)(3) of this
section.
(2)General rule. Loss is not disal-
lowed under paragraph (a)(1) of this sec-
tion and basis is not reduced under para-
graph (b)(1) of this section to the extent
the taxpayer establishes that the loss or
basis is not attributable to the recognition
of built-in gain on the disposition of an
asset (including stock and securities).
Loss or basis may be attributable to the
recognition of built-in gain on the dispo-
sition of an asset by a prior group. For
purposes of this section, gain recognized
on the disposition of an asset is built-in
gain to the extent attributable, directly or
indirectly, in whole or in part, to any
excess of value over basis that is
reflected, before the disposition of the
asset, in the basis of the share, directly or
indirectly, in whole or in part, after apply-
ing section 1503(e) and other applicable
provisions of the Internal Revenue Code
and regulations.
(3)Contents of statement and time of
filing. The statement required under para-
graph (c)(1) of this section must be
included with or as part of the taxpayer’s
return for the year of the disposition or
deconsolidation and must contain:
(i) The name and employer identifica-
tion number (E.I.N.) of the subsidiary.
(ii) The amount of the loss not disal-
lowed under paragraph (a)(1) of this sec-
tion by reason of this paragraph (c) and
the amount of basis not reduced under
paragraph (b)(1) of this section by reason
of this paragraph (c).
(4)Example. The principles of para-
graphs (a), (b), and (c) of this section are
illustratedbytheexamplesin
§§1.337(d)–1(a)(5) and 1.1502–20(a)(5)
(other thanExamples 3,4, and5) and (b),
with appropriate adjustments to reflect
differences between the approach of this
section and that of§1.1502–20, and by
the following example. For purposes of
the examples in this section, unless other-
wise stated, the group files consolidated
returns on a calendar year basis, the facts
set forth the only corporate activity, and
all sales and purchases are with unrelated
buyers or sellers. The basis of each asset
is the same for determining earnings and
profits adjustments and taxable income.
Tax liability and its effect on basis, value,
and earnings and profits are disregarded.
Investment adjustment systemmeans the
rules of§1.1502–32.
Example.Loss offsetting built-in gain in a prior
group. (i) P buys all the stock of T for $50 in Year
1, and T becomes a member of the P group. T has 2
assets. Asset 1 has a basis of $50 and a value of $0,
and asset 2 has a basis of $0 and a value of $50. T
sells asset 2 during Year 3 for $50, and recognizes a
$50 gain. Under the investment adjustment system,
P’s basis in the T stock increased to $100 as a result
of the recognition of gain. In Year 5, all of the stock
of P is acquired by the P1 group, and the former
members of the P group become members of the P1
group. T then sells asset 1 for $0, and recognizes a
$50 loss. Under the investment adjustment system,
P’s basis in the T stock decreases to $50 as a result
of the loss. T’s assets decline in value from $50 to
$40. P then sells all the stock of T for $40 and rec-
ognizes a $10 loss.
(ii) P’s basis in the T stock reflects both T’s
unrecognized gain and unrecognized loss with
respect to its assets. The gain T recognizes on the
disposition of asset 2 is built-in gain with respect to
both the P and the P1 groups for purposes of para-
graph (c)(2) of this section. In addition, the loss T
recognizes on the disposition of asset 2 is built-in
loss with respect to the P and P1 groups for pur-
poses of paragraph (c)(2) of this section. T’s recog-
nition of the built-in loss while a member of the P1
group offsets the effect on T’s stock basis of T’s
recognition of the built-in gain while a member of
the P group. Thus, P’s $10 loss on the sale of the T
stock is not attributable to the recognition of built-in
gain, and the loss is therefore not disallowed under
paragraph (c)(2) of this section.
(iii) The result would be the same if, instead of
having a $50 built-in loss in asset 2 when it
becomes a member of the P group, T has a $50 net
operating loss carryover and the carryover is used
by the P group.
(d)Successors. For purposes of this
section, the rules and examples of
§1.1502–20(d) apply, with appropriate
adjustments to reflect differences between
the approach of this section and that of
§1.1502–20.
(e)Anti-avoidance rules. For purposes
of this section, the rules and examples of
§1.1502–20(e) apply, with appropriate
adjustments to reflect differences between
the approach of this section and that of
§1.1502–20.
(f)Investment adjustments. For pur-
poses of this section, the rules and
examples of§1.1502–20(f) apply, with
appropriate adjustments to reflect differ-
ences between the approach of this sec-
tion and that of§1.1502–20.
(g)Effective dates. This section applies
with respect to dispositions and decon-
solidations on or after March 7, 2002,
unless the disposition or deconsolidation
was effected pursuant to a binding written
contract entered into before March 7,
2002, that was in continuous effect until
the disposition or deconsolidation. In
addition, this section applies to disposi-
tions and deconsolidations for which an
election is made under§1.1502–
20T(i)(2) to determine allowable loss
under this section. If loss is recognized
because stock of a subsidiary became
worthless, the disposition with respect to
April 1, 20026712002-13 I.R.B.

the stock is treated as occurring on the
date the stock became worthless. For dis-
positions and deconsolidations prior to
March 7, 2002, see§§1.337(d)–1 and
1.337(d)–2 as contained in the 26 CFR
part 1 edition revised as of April 1, 2001.
Par.4.In§1.1502–20, paragraph (i) is
added to read as follows:
§1.1502–20 Disposition or deconsolida-
tion of subsidiary stock.
*****
(i) [Reserved]. For further guidance,
see§1.1502–20T(i).
Par. 5. Section 1.1502–20T is added to
read as follows:
§1.1502–20T Disposition or deconsoli-
dation of subsidiary stock (temporary).
(a) through (h) [Reserved]. For further
guidance, see§1.1502–20(a) through (h).
(i)Limitations on the applicability of
§1.1502–20—(1)Dispositions and
deconsolidations on or after March 7,
2002. Except to the extent specifically
incorporated in§1.337(d)–2T,§1.1502–
20 does not apply to a disposition or
deconsolidation of stock of a subsidiary
on or after March 7, 2002, unless the dis-
position or deconsolidation was effected
pursuant to a binding written contract
entered into before March 7, 2002, that
was in continuous effect until the disposi-
tion or deconsolidation.
(2)Dispositions and deconsolidations
prior to March 7, 2002. In the case of a
disposition or deconsolidation of stock of
a subsidiary by a member before March
7, 2002, or a disposition or deconsolida-
tion on or after March 7, 2002, that was
effected pursuant to a binding written
contract entered into before March 7,
2002, that was in continuous effect until
the disposition or deconsolidation, a con-
solidated group may determine the
amount of the member’s allowable loss or
basis reduction by applying§1.1502–20
in its entirety, or, in lieu thereof, subject
to the conditions set forth in this para-
graph (i), by making an irrevocable elec-
tion to apply the provisions of either—
(i) Section 1.1502–20, except that in
applying§1.1502–20(c)(1), the amount
of loss disallowed under§1.1502–
20(a)(1) and the amount of basis reduc-
tion under§1.1502–20(b)(1) with respect
to a share of stock will not exceed the
sum of the amounts described in
§1.1502–20(c)(1)(i) and (ii); or
(ii) Section 1.337(d)–2T.
(3)Operating rules—(i)Reattribution
of losses in the case of an election to
determine allowable loss by applying the
provisions described in paragraph
(i)(2)(i) of this section. If a consolidated
group elects to determine allowable loss
by applying the provisions described in
paragraph (i)(2)(i) of this section, an elec-
tion described in§1.1502–20(g) to reat-
tribute losses will be respected only if the
requirements of§1.1502–20(g), includ-
ing the requirement that the election be
filed with the group’s income tax return
for the year of the disposition, have been
or are satisfied. For example, if a consoli-
dated group did not file a valid election
described in§1.1502–20(g) with its
return for the year of the disposition, this
section does not authorize the group that
disposed of the stock to make such an
election with its return for the year in
which it elects to determine its allowable
stock loss under the provisions described
in paragraph (i)(2)(i) of this section. If a
consolidated group that made a valid
election described in§1.1502–20(g) with
respect to the disposition of stock elects
to determine allowable loss by applying
the provisions described in paragraph
(i)(2)(i) of this section, the election
described in§1.1502–20(g) may not be
revoked, and the amount of loss treated as
reattributed as of the time of the disposi-
tion pursuant to the election described in
§1.1502–20(g) is the amount of loss
originally reattributed, reduced to the
extent that it exceeds the greater of—
(A) The amount of stock loss disal-
lowed after applying the provisions
described in paragraph (i)(2)(i) of this
section; and
(B) The amount of reattributed losses
that the group that disposed of the stock
absorbed in years for which the assess-
ment of a deficiency is prevented by any
law or rule of law as of the date the elec-
tion to apply the provisions described in
paragraph (i)(2)(i) of this section is filed
and at all times thereafter.
(ii)Reattribution of losses in the case
of an election to determine allowable loss
by applying the provisions described in
paragraph (i)(2)(ii) of this section.Ifa
consolidated group elects to determine
allowable loss by applying the provisions
described in paragraph (i)(2)(ii) of this
section, the consolidated group may not
make an election described in§1.1502–
20(g) to reattribute any losses. If the con-
solidated group made an election
described in§1.1502–20(g) with respect
to the disposition of subsidiary stock, the
amount of loss treated as reattributed pur-
suant to such election will be the greater
of—
(A) Zero; and
(B) The amount of reattributed losses
that the group that disposed of the stock
absorbed in years for which the assess-
ment of a deficiency is prevented by any
law or rule of law as of the date the elec-
tion to apply the provisions described in
paragraph (i)(2)(ii) of this section is filed
and at all times thereafter.
(iii)Apportionment of section 382
limitation in the case of a reduction of
reattributed losses—(A)Losses subject to
a separate section 382 limitation. If, as a
result of the application of paragraph
(i)(3)(i) or (ii) and paragraph (i)(3)(vii) of
this section, pre-change separate
attributes that were subject to a separate
section 382 limitation are treated as losses
of a subsidiary and the common parent
previously elected to apportion all or a
part of such limitation to itself under
§1.1502–96(d), the common parent may
reduce the amount of such limitation
apportioned to itself.
(B)Losses subject to a subgroup sec-
tion 382 limitation. If, as a result of the
application of paragraph (i)(3)(i) or (ii)
and paragraph (i)(3)(vii) of this section,
pre-change subgroup attributes that were
subject to a subgroup section 382 limita-
tion are treated as losses of a subsidiary
and the common parent previously
elected to apportion all or a part of such
limitation to itself under§1.1502–96(d),
the common parent may reduce the
amount of such limitation apportioned to
itself. In addition, if such subsidiary has
ceased to be a member of the loss sub-
group to which the pre-change subgroup
attributes relate, the common parent may
increase the total amount of such limita-
tion apportioned to such subsidiary (or
loss subgroup that includes such subsid-
iary) under§1.1502–95(c) by an amount
not in excess of the amount by which
such limitation that is apportioned to the
common parent is reduced pursuant to the
previous sentence.
2002-13 I.R.B.672April 1, 2002

(C)Losses subject to a consolidated
section 382 limitation. If, as a result of
the application of paragraph (i)(3)(i) or
(ii) and paragraph (i)(3)(vii) of this sec-
tion, pre-change consolidated attributes
(or pre-change subgroup attributes) that
were subject to a consolidated section 382
limitation (or subgroup section 382 limi-
tation where the common parent was a
member of the loss subgroup) are treated
as losses of a subsidiary, and the subsid-
iary has ceased to be a member of the
loss group (or loss subgroup), the com-
mon parent may increase the amount of
such limitation that is apportioned to such
subsidiary (or loss subgroup that includes
such subsidiary) under§1.1502–95(c).
The amount of each element of such limi-
tation that can be apportioned to a subsid-
iary (or loss subgroup that includes such
subsidiary) pursuant to this paragraph
(i)(3)(iii)(C), however, cannot exceed the
product of (x) the element and (y) a frac-
tion the numerator of which is the amount
of pre-change consolidated attributes (or
subgroup attributes) subject to that limita-
tion that are treated as losses of the sub-
sidiary (or loss subgroup) as a result of
the application of paragraph (i)(3)(i) or
(ii) and paragraph (i)(3)(vii) of this sec-
tion and the denominator of which is the
total amount of pre-change attributes sub-
ject to that limitation determined as of the
close of the taxable year in which the
subsidiary ceases to be a member of the
group (or loss subgroup).
(D)Operating rules—(i)Limitations
on apportionment. In making any adjust-
ment to an apportionment of a subgroup
section 382 limitation or a consolidated
section 382 limitation pursuant to para-
graph (i)(3)(iii)(B) or (C) of this section,
the common parent must take into
account the extent, if any, to which such
limitation has previously been appor-
tioned to another subsidiary or loss sub-
group prior to the date the election to
apply the provisions described in para-
graph (i)(2)(i) or (ii) of this section is
filed.
(ii)Manner and effect of adjustment to
previous apportionment of limitation to
common parent. Any reduction in a previ-
ous apportionment of a separate section
382 limitation or a subgroup section 382
limitation to the common parent made
pursuant to paragraph (i)(3)(iii)(A) or (B)
of this section is treated as effective when
the previous apportionment was effective.
Any such adjustment must be made in a
manner consistent with the principles of
§1.1502–95(c). For example, to the
extent the apportionment of a separate
section 382 limitation or a subgroup sec-
tion 382 limitation to a common parent is
reducedpursuanttoparagraph
(i)(3)(iii)(A) or (B) of this section, the
amount of such limitation available to the
subsidiary or loss subgroup, as appli-
cable, is increased.
(iii)Manner and effect of adjustment
to apportionment of limitation to depart-
ing subsidiary or loss subgroup. Any
increase in an amount of a subgroup sec-
tion 382 limitation or a consolidated sec-
tion 382 limitation apportioned to a
departing subsidiary (or loss subgroup
that includes such subsidiary) made pur-
suant to paragraph (i)(3)(iii)(B) or (C) of
this section is treated as effective for tax-
able years ending after the date the sub-
sidiary ceases to be a member of the
group or loss subgroup. Any such adjust-
ment may be made regardless of whether
the common parent previously elected to
apportion all or a part of such limitation
to such subsidiary (or loss subgroup that
includes such subsidiary) under§1.1502–
95(c) or 1.1502–95A(c), but must be
made in a manner consistent with the
principles of§1.1502–95(c). For
example, to the extent the apportionment
of an element of a subgroup section 382
limitation or a consolidated section 382
limitation to a departing subsidiary is
increased pursuant to paragraph
(i)(3)(iii)(B) or (C) of this section, the
amount of such element of such limitation
that is available to the loss subgroup or
loss group is reduced consistent with
§1.1502–95(c)(3).
(iv)Prohibition against other adjust-
ments. This paragraph (i)(3)(iii) does not
authorize the common parent to adjust the
apportionment of any separate section
382 limitation, subgroup section 382 limi-
tation, or consolidated section 382 limita-
tion that it previously apportioned to a
subsidiary, to a loss subgroup, or to itself
under§1.1502–95(c), 1.1502–95A(c), or
1.1502–96(d), other than as provided in
paragraphs (i)(3)(iii)(A), (B), and (C) of
this section.
(E)Time and manner of making
apportionment adjustment. An adjustment
to the apportionment of any separate sec-
tion 382 limitation, subgroup section 382
limitation, or consolidated section 382
limitation pursuant to paragraph
(i)(3)(iii)(A), (B), or (C) of this section
must be made as part of the group’s elec-
tion to apply the provisions of paragraph
(i)(2)(i) or (ii) of this section, as
described in paragraph (i)(4) of this sec-
tion.
(iv)Notification of reduction of reat-
tributed losses and adjustment of appor-
tionment of section 382 limitation.Ifthe
application of paragraph (i)(3)(i) or (ii) of
this section results in a reduction of the
losses treated as reattributed pursuant to
an election described in§1.1502–20(g),
then, prior to the date that the group files
its income tax return for the taxable year
that includes March 7, 2002, the common
parent must send the notification required
by this paragraph to the subsidiary, at the
subsidiary’s last known address. In addi-
tion, if the acquirer of the subsidiary
stock was a member of a consolidated
group at the time of the disposition, the
common parent must send a copy of such
notification to the person that was the
common parent of the acquirer’s group at
the time of the acquisition, at its last
known address. The notification is to be
in the form of a statement entitled
“Recomputation of Losses Reattributed
Pursuant to the Election Described in
§1.1502–20(g),”that is signed by the
common parent and that includes the fol-
lowing information—
(A) The name and employer identifica-
tion number (E.I.N.) of the subsidiary;
(B) The original and the recomputed
amount of losses treated as reattributed
pursuant to the election described in
§1.1502–20(g); and
(C) If the apportionment of a separate
section 382 limitation, a subgroup section
382 limitation, or a consolidated section
382 limitation is adjusted pursuant to
paragraph (i)(3)(iii)(A), (B), or (C) of this
section, the original and the adjusted
apportionment of such limitation.
(v)Items taken into account in closed
years. An election under paragraph (i)(2)
of this section affects a taxpayer’s items
of income, gain, deduction, or loss only
to the extent that the election gives rise,
April 1, 20026732002-13 I.R.B.

directly or indirectly, to items or amounts
that would properly be taken into account
in a year for which an assessment of defi-
ciency or a refund of overpayment, as the
case may be, is not prevented by any law
or rule of law.
(vi)Conforming amendments for items
previously taken into account in open
years. To the extent that, on any Federal
income tax return, the common parent
absorbed losses that were reattributed
pursuant to an election described in
§1.1502–20(g) and the amount of losses
so absorbed is in excess of the amount of
losses that are treated as reattributed after
application of paragraph (i)(3)(i) or (ii) of
this section, or that may be taken into
account after any adjustment to an appor-
tionment of a separate section 382 limita-
tion, a subgroup section 382 limitation, or
a consolidated section 382 limitation pur-
suant to paragraph (i)(3)(iii) of this sec-
tion, such returns must be amended to the
greatest extent possible to reflect the
reduction in the amount of losses treated
as reattributed and any adjustment to the
apportionment of such limitation.
(vii)Availability of losses to subsid-
iary. To the extent that any losses of a
subsidiary are reattributed to the common
parent pursuant to an election described
in§1.1502–20(g), such reattribution is
binding on the subsidiary and any group
of which the subsidiary is or becomes a
member. Therefore, if the subsidiary
ceases to be a member of the group, any
reattributed losses are not thereafter avail-
able to the subsidiary and may not be uti-
lized by the subsidiary or any other group
of which such subsidiary is or becomes a
member. To the extent that the application
of paragraph (i)(3)(i) or (ii) of this section
results in a reduction in the amount of
losses treated as reattributed to the com-
mon parent pursuant to an election
described in§1.1502–20(g), however,
losses in the amount of such reduction are
available to the subsidiary and may be
utilized by the subsidiary or any group of
which such subsidiary is a member, sub-
ject to applicable limitations (e.g., section
382).
(4)Time and manner of making the
election. An election to determine allow-
able loss or basis reduction by applying
the provisions described in paragraph
(i)(2)(i) or (ii) of this section is made by
including the statement required by this
paragraph with or as part of the original
return for the taxable year that includes
the later of March 7, 2002, and the date
of the disposition or deconsolidation of
the stock of the subsidiary, or with or as
part of an amended return filed before the
date the original return for the taxable
year that includes March 7, 2002, is due.
The statement shall be entitled“Allowed
Loss under Section [Specify Section
under Which Allowed Loss Is Deter-
mined] Pursuant to Section 1.1502–
20T(i)”and must include the following
information—
(i) The name and employer identifica-
tion number (E.I.N.) of the subsidiary and
of the member(s) that disposed of the
subsidiary stock;
(ii) In the case of an election to deter-
mine allowable loss or basis reduction by
applying the provisions described in para-
graph (i)(2)(i) of this section, a statement
that the taxpayer elects to determine
allowable loss or basis reduction by
applying such provisions;
(iii) In the case of an election to deter-
mine allowable loss or basis reduction by
applying the provisions described in para-
graph (i)(2)(ii) of this section, a statement
that the taxpayer elects to determine
allowable loss or basis reduction by
applying such provisions;
(iv) If an election described in
§1.1502–20(g) was made with respect to
the disposition of the stock of the subsid-
iary, the amount of losses originally
treated as reattributed pursuant to such
election and the amount of losses treated
as reattributed pursuant to paragraph
(i)(3)(i) or (ii) of this section;
(v) If an apportionment of a separate
section 382 limitation, a subgroup section
382 limitation, or a consolidated section
382 limitation is adjusted pursuant to
paragraph (i)(3)(iii)(A), (B), or (C) of this
section, the original and redetermined
apportionment of such limitation; and
(vi) If the application of paragraph
(i)(3)(i) or (ii) of this section results in a
reduction of the amount of losses treated
as reattributed pursuant to an election
described in§1.1502–20(g), a statement
that the notification described in para-
graph (i)(3)(iv) of this section was sent to
the subsidiary and, if the acquirer was a
member of a consolidated group at the
time of the stock sale, to the person that
was the common parent of such group at
such time, as required by paragraph
(i)(3)(iv) of this section.
(5)Cross references. See§1.1502–
32(b)(4)(v) for a special rule for filing a
waiver of loss carryovers.
Par 6. Section 1.1502–32 is amended
by adding paragraph (b)(4)(v) to read as
follows:
§1.1502–32 Investment adjustments.
*****
(b)***
(4)***
(v) [Reserved]. For further guidance,
see§1.1502–32T(b)(4)(v).
Par. 7. Section 1.1502–32T is added to
read as follows:
§1.1502–32TInvestmentadjustments
(temporary).
(a) through (b)(4)(iv) [Reserved]. For
further guidance, see§1.1502–32(a)
through (b)(4)(iv).
(v)Special rule for loss carryovers of
a subsidiary acquired in a transaction for
which an election under§1.1502–
20T(i)(2) is made—(A)Expired losses.
Notwithstanding§1.1502–32(b)(4)(iv),
to the extent that S’s loss carryovers are
increased by reason of an election under
§1.1502–20T(i)(2) and such loss carry-
overs expire or would have been properly
used to offset income in a taxable year for
which the refund of an overpayment is
prevented by any law or rule of law as of
the date the group files its original return
for the taxable year in which S receives
the notification described in§1.1502–
20T(i)(3)(iv) and at all times thereafter,
the group will be deemed to have made
an election under§1.1502–32(b)(4) to
treat all of such expired loss carryovers as
expiring for all Federal income tax pur-
poses immediately before S became a
member of the consolidated group.
(B)Available losses. Notwithstanding
§1.1502–32(b)(4)(iv), to the extent that
S’s loss carryovers are increased by rea-
son of an election under§1.1502–
20T(i)(2) and such loss carryovers have
not expired and would not have been
properly used to offset income in a tax-
able year for which the refund of an over-
payment is prevented by any law or rule
of law as of the date the group files its
original return for the taxable year in
which S receives the notification
described in§1.1502–20T(i)(3)(iv) and
at all times thereafter, the group may
2002-13 I.R.B.674April 1, 2002

make an election under§1.1502–32(b)(4)
to treat all or a portion of such loss carry-
overs as expiring for all Federal income
tax purposes immediately before S
became a member of the consolidated
group. Such election must be filed with
the group’s original return for the taxable
year in which S receives the notification
described in§1.1502–20T(i)(3)(iv).
(C)Effective date. This paragraph
(b)(4)(v) is applicable on and after March
7, 2002.
(c) through (h)(5)(ii) [Reserved]. For
further guidance, see§1.1502–32(c)
through (h)(5)(ii).
PART 602—OMB CONTROL NUM-
BERS UNDER THE PAPERWORK
REDUCTION ACT
Par. 8 The authority citation for part
602 continues to read as follows:
Authority: 26 U.S.C. 7805***
Par.9.In§602.101, paragraph (b) is
amended by adding entries to the table in
numerical order to read in part as follows:
§602.101 OMB Control numbers.
*****
(b)***
CFR part or section where
identified and described
Current OMB
control No.
*****
1.337(d)–2T..............................................................................................................................................................1545–1774
*****
1.1502–20T ..............................................................................................................................................................1545–1774
*****
1.1502–32T ..............................................................................................................................................................1545–1774
*****
Robert E. Wenzel,
Deputy Commissioner of Internal Revenue.
Approved February 27, 2002.
Mark Weinberger,
Assistant Secretary of the Treasury.
(Filed by the Office of the Federal Register on March 7, 2002, 3:17 p.m., and published in the issue of the Federal Register for March 12, 2002, 67 F.R. 11034)
Section 446.—General Rule
for Methods of Accounting.
26 CFR 1.446–1: General rule for methods of
accounting.
A safe harbor method of accounting (the
“replacement cost method”) is provided for automo-
bile dealers to approximate the cost of their vehicle
parts inventory using the replacement cost of the
parts. Procedures are also provided for automobile
dealers to obtain the automatic consent of the Com-
missioner to change to the replacement cost method.
See Rev. Proc. 2002–17, page 676.
Procedures are provided for Service-imposed
accounting method changes and for accounting
method issues resolved on a nonaccounting-method-
change basis. See Rev. Proc. 2002–18, page 678.
Procedures are provided under which certain
taxpayers under examination or before appeals or a
federal court may obtain consent to change a
method of accounting prospectively without audit
protection. See Rev. Proc. 2002–19, page 696.
Section 471.—General Rule
for Inventories
26 CFR 1.471–3: Inventories at cost.
A safe harbor method of accounting (the
“replacement cost method”) is provided for automo-
bile dealers to approximate the cost of their vehicle
parts inventory using the replacement cost of the
parts. See Rev. Proc. 2002–17, page 676.
Section 481.—Adjustments
Required by Changes in
Method of Accounting
26 CFR 1.481–1: Adjustments in general.
Procedures are provided for automobile dealers
to obtain the automatic consent of the Commis-
sioner to use a safe harbor“replacement cost
method”determining the cost of vehicle parts inven-
tory. This change is made without a§481 (a) adjust-
ment. See Rev. Proc. 2002–17, page 676.
Procedures are provided for Service-imposed
accounting method changes and for accounting
method issues resolved on a nonaccounting-method-
change basis. See Rev. Proc. 2002–18, page 678.
The period for taking into account a net negative
adjustment under section 481(a) of the Code result-
ing from an accounting method change is reduced
from 4 years to 1 year. Certain other conforming
changes are made to Rev. Proc. 97–27 and Rev.
Proc. 2002–9. See Rev. Proc. 2002–19, page 696.
Some of the most significant and prevalent com-
ments received in connection with Notice 98–31,
which proposed procedures for Service-imposed
accounting method changes, and for resolving
accounting method issues on a nonaccounting-
method-change basis, are discussed. See Announce-
ment 2002–37, page 703.
April 1, 20026752002-13 I.R.B.

Part III. Administrative, Procedural, and Miscellaneous
26 CFR 601.204: Changes in accounting periods
and in methods of accounting.
(Also Part I,§§446, 471, 472, 481; 1.446–1, 1.471–
3(d), 1.472–8, 1.481–1.)
Rev. Proc. 2002–17
SECTION 1. PURPOSE
This revenue procedure provides auto-
mobile dealers (as defined in section 3 of
this revenue procedure) with a safe harbor
method of accounting for their vehicle
parts inventory. This safe harbor method
permits automobile dealers to approxi-
mate the cost of their vehicle parts inven-
tory using the replacement cost of the
vehicle parts pursuant to the replacement
cost method described in section 4 of this
revenue procedure. This revenue proce-
dure also provides procedures for auto-
mobile dealers to obtain the automatic
consent of the Commissioner to change to
the replacement cost method.
SECTION 2. BACKGROUND
.01 Section 471 of the Internal Rev-
enue Code provides that inventories must
be taken on such basis as the Secretary
may prescribe as conforming as nearly as
may be to the best accounting practice in
the trade or business and as most clearly
reflecting income.
.02 Section 1.471–3(d) of the Income
Tax Regulations provides that in any
industry in which the usual rules for com-
putation of cost are inapplicable, cost
may be approximated upon such basis as
may be reasonable and in conformity with
established trade practice in the particular
industry.
.03 Section 472(a) provides that a tax-
payer may use the last-in, first-out (LIFO)
inventory method. Under the LIFO inven-
tory method, a taxpayer treats those
goods remaining on hand at the close of
the taxable year as being: First, those
included in the opening inventory of the
taxable year (in the order of acquisition)
to the extent thereof, and second, those
acquired in the taxable year. The change
to, and use of, the LIFO inventory
method must be in accordance with such
regulations as the Secretary may pre-
scribe as necessary in order that the use
of such method may clearly reflect
income.
.04 Section 472(b)(2) provides that a
taxpayer using the LIFO inventory
method must inventory its goods at cost.
.05 Section 1.472–8(a) provides that a
taxpayer may elect to determine the cost
of its LIFO inventories under the dollar-
value LIFO method, provided such
method is used consistently and clearly
reflects the income of the taxpayer in
accordance with the rules of that section.
.05 Section 1.472–8(e)(2)(ii) provides
that the total current-year cost of items
making up a dollar-value LIFO pool may
be determined: (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 during the taxable year in the
order of acquisition; (c) by application of
an average unit cost equal to the aggre-
gate cost of all the goods purchased or
produced throughout the taxable year
divided by the total number of units so
purchased or produced; or (d) pursuant to
any other proper method which, in the
opinion of the Commissioner, clearly
reflects income.
.06 Section 263A generally requires
direct costs and an allocable portion of
indirect costs of certain property pro-
duced or acquired for resale by a taxpayer
to be included in inventory costs, in the
case of property that is inventory, or to be
capitalized, in the case of other property.
Section 1.263A–1(e)(2)(ii) provides that
resellers must capitalize the acquisition
costs of property acquired for resale. In
addition, resellers must capitalize the
indirect costs described in§1.263A–
1(e)(3), which are properly allocable to
property acquired for resale. These indi-
rect costs often include purchasing, han-
dling, and storage costs. See§1.263A–
3(c)(1).
.07 InMountain State Ford v. Commis-
sioner, 112 T.C. 58 (1999), the Tax Court
held that a taxpayer that sold heavy truck
parts and used the dollar-value LIFO
method to account for its parts inventory
was not entitled to determine the current-
year cost of the parts in its ending inven-
tory by reference to their replacement
cost. In so doing, the court found that the
taxpayer’s replacement cost method was
not in accordance with the method elected
on its Form 970,Application to Use LIFO
Inventory Method. The taxpayer’s Form
970 indicated that it would determine the
current-year cost of the items in its end-
ing inventory by reference to the actual
cost of the goods most recently purchased
or produced in accordance with§1.472–
8(e)(2)(ii)(a). The court further concluded
that even if the taxpayer had elected to
useanotherpropermethodunder
§1.472–8(e)(2)(ii)(d), it could not use the
replacement cost of the parts to determine
current-year cost because replacement
cost does not determine current-year cost
on the basis of, or by reference to, actual
cost (or in some instances a reasonable
approximation of actual cost) in accor-
dance with§472(b).
.08 Subsequent to theMountain State
Forddecision, the Service has given care-
ful consideration to the following unique
circumstances surrounding the use of
replacement cost by automobile dealers:
(1)Industry practice. It has been the
long-standing and widespread practice of
automobile dealers to use replacement
cost to determine the cost of their vehicle
parts inventory both for financial
accounting and federal income tax pur-
poses.
(2)Use of replacement cost required
by third party. Automobile dealers are
commonly required by their franchisors
(i.e., the vehicle’s manufacturer) to value
their vehicle parts inventory using
replacement cost, rather than actual cost.
(3)Substantial burden associated with
switching to actual cost. The automobile
dealer industry has represented that auto-
mobile dealers that are presently using
replacement cost to value their vehicle
parts inventory likely would incur sub-
stantial expense if they were required to
modify their existing recordkeeping sys-
tems to determine the cost of such inven-
tory using actual cost.
(4)Replacement cost approximates
actual cost in this industry. The automo-
bile dealer industry has provided data to
demonstrate that, on average, in their
industry, due to relatively low inflation
and high inventory turnover, the replace-
ment cost of vehicle parts approximates
the actual cost of such parts.
2002-13 I.R.B.676April 1, 2002

Consideration of these factors has led the
Service to conclude that, for reasons of
administrative convenience, burden
reduction, and avoidance of further con-
troversy in this area, a safe harbor method
of accounting to determine the cost of
vehicle parts inventory using replacement
cost to approximate actual cost should be
provided to automobile dealers. Accord-
ingly, a safe harbor method is provided in
section 4 of this revenue procedure and is
available to automobile dealers that sat-
isfy the requirements of this revenue pro-
cedure. The Service also is willing to con-
sider requests of other industries for
similar safe harbors if the facts of those
industries are similar to those described
above.
SECTION 3. SCOPE
This revenue procedure applies to any
taxpayer that is engaged in the trade or
business of selling vehicle parts at retail
and that is authorized under an agreement
with one or more vehicle manufacturers
or distributors to sell new automobiles or
new light, medium, or heavy-duty trucks
(“automobile dealer”).
SECTION 4. REPLACEMENT COST
METHOD
.01In General. A taxpayer that is
within the scope of this revenue proce-
dure is permitted to use the replacement
cost method to approximate the actual
cost of its vehicle parts inventory. Under
the replacement cost method, a taxpayer
must determine the cost of the vehicle
parts in its inventory by reference to the
replacement cost of the vehicle parts as
defined in section 4.02 of this revenue
procedure, determine the replacement
cost using a standard price list as defined
in section 4.03 of this revenue procedure,
and satisfy the book conformity require-
ment as described in section 4.04 of this
revenue procedure. Taxpayers within the
scope of this revenue procedure may use
the replacement cost method in conjunc-
tion with either the first-in, first-out
inventory method or the LIFO inventory
method. Taxpayers that use the replace-
ment cost method provided by this sec-
tion 4 and that are subject to the provi-
sions of§263A must include in inventory
costs the additional amounts that are
required by§§1.263A–1 and 1.263A–3
(e.g., freight costs).
.02Replacement Cost. Replacement
cost means the amount provided in a stan-
dard price list at which a vehicle part may
be purchased by the taxpayer on the date
of the inventory. If, on the date of the
inventory, the vehicle part is not provided
in a standard price list, the replacement
cost for the part is equal to the last
amount provided in a standard price list
(i.e., the price at which the part was last
offered for purchase in a standard price
list).
.03Use of Standard Price List.A
“standard price list”is a price list that is
widely recognized and used for business
purposes in the automobile dealer indus-
try and that is used by the taxpayer in the
ordinary course of its business to pur-
chase the vehicle parts for which it is
determining the cost.
.04Book Conformity. A taxpayer satis-
fies the book conformity requirement if it
determines the cost of vehicle parts in its
inventory using the replacement cost of
the vehicle parts as defined in section
4.02 when it ascertains the income, profit,
or loss of its trade or business for pur-
poses of its books, records, and reports
(including financial statements) to its
shareholders, partners, other proprietors,
beneficiaries, and creditors.
SECTION 5. AUDIT PROTECTION
FOR TAXPAYERS CURRENTLY
USING THE REPLACEMENT COST
METHOD
A taxpayer within the scope of this
revenue procedure that is using the
replacement cost method provided in sec-
tion 4 of this revenue procedure on March
12, 2002, may continue to use this safe
harbor method for taxable years ending
on or after March 12, 2002, without filing
a Form 3115,Application for Change in
Accounting Method. Such taxpayer’s
method of using replacement cost to
determine cost for its vehicle parts inven-
tory will not be raised as an issue in a
taxable year that ends before December
31, 2001. Moreover, if such taxpayer’s
method of using replacement cost to
determine cost for its vehicle parts inven-
tory is already an issue under consider-
ation in a taxable year that ends before
December 31, 2001, the issue will not be
further pursued.
SECTION 6. CHANGE IN METHOD
OF ACCOUNTING
.01In General. A change to the
replacement cost method provided by this
revenue procedure is a change in method
of accounting to which the provisions of
§446 and the regulations thereunder
apply. Therefore, a taxpayer within the
scope of this revenue procedure that does
not use the replacement cost method pro-
vided in section 4 of this revenue proce-
dure on March 12, 2002, but wants to use
this safe harbor method for a taxable year
ending on or after December 31, 2001,
must file a Form 3115.
.02Automatic change to the replace-
ment cost method. A taxpayer within the
scope of this revenue procedure that
wants to change its method of determin-
ing cost to the replacement cost method
provided by this revenue procedure must
follow the automatic change in account-
ing method provisions of Rev. Proc.
2002–9 (2002–3 I.R.B. 327) with the fol-
lowing modifications:
(1) The scope limitations in section
4.02 of Rev. Proc. 2002–9 do not apply to
a taxpayer that wants to make the change
for its first or second taxable year ending
on or after December 31, 2001;
(2) A change to the replacement cost
method under the provisions of Rev. Proc.
2002–9 must be effected on a cut-off
method. Thus, the change in method of
accounting is made without a§481(a)
adjustment;
(3) A taxpayer making a change under
this section 6.02 of this revenue proce-
dure for its first taxable year ending on or
after December 31, 2001, that before
April 11, 2002, filed its original federal
income tax return for such year is not
required to comply with the filing
requirement in section 6.02(3)(a) of Rev.
Proc. 2002–9, provided the taxpayer com-
plies with the following filing require-
ment. The taxpayer must complete and
file a Form 3115 in duplicate. The origi-
nal must be attached to an amended fed-
eral income tax return for the taxpayer’s
first taxable year ending on or after
December 31, 2001. This amended return
must be filed no later than September 9,
2002. A copy of the Form 3115 must be
filed with the national office (see section
April 1, 20026772002-13 I.R.B.

6.02(6) of Rev. Proc. 2002–9) no later
than when the taxpayer’s amended return
is filed; and
(4) When filing the Form 3115, tax-
payers must complete all applicable parts
of the form and, in lieu of the label
required by section 6.02(4) of Rev. Proc.
2002–9, are instructed to write“Filed
under Rev. Proc. 2002–17”at the top of
the form.
.03Audit Protection. If a taxpayer
complies with the requirements of this
revenue procedure and changes its
method of determining cost for its vehicle
parts inventory to the replacement cost
method provided in section 4 of this rev-
enue procedure, the taxpayer will receive
audit protection for any taxable year
before the year of change with respect to
the taxpayer’s method of determining cost
for its vehicle parts inventory under§471
or 472. See section 7 of Rev. Proc.
2002–9. However, if this change in
method of accounting is made for the tax-
payer’s first or second taxable year end-
ing on or after December 31, 2001, and
the taxpayer’s method of determining cost
(other than by use of replacement cost)
for its vehicle parts inventory under§471
or 472 is an issue under consideration as
of March 12, 2002, in a taxable year that
ends before December 31, 2001, the tax-
payer will not receive audit protection.
SECTION 7. RECORD KEEPING
Section 6001 provides that every per-
son liable for any tax imposed by the
Code, or for the collection thereof, must
keep such records, render such state-
ments, make such returns, and comply
with such rules and regulations as the
Secretary may from time to time pre-
scribe. The books or records required by
§6001 must be kept at all times available
for inspection by authorized internal rev-
enue officers or employees, and must be
retained so long as the contents thereof
may become material in the administra-
tion of any internal revenue law. Section
1.6001–1(e). In order to satisfy the record
keeping requirements of§6001 and the
regulations thereunder, a taxpayer that
uses the replacement cost method should
maintain records supporting all aspects of
its inventory valuation including, but not
limited to, the price list described in sec-
tion 4 of this revenue procedure.
SECTION 8. EFFECT ON OTHER
DOCUMENTS
Rev. Proc. 2002–9 is modified and
amplified to include this automatic
change in section 10.02 of the APPEN-
DIX.
SECTION 9. EFFECTIVE DATE
This revenue procedure generally is
effective for taxable years ending on or
after December 31, 2001.
DRAFTING INFORMATION
The principal author of this revenue
procedure is Scott Rabinowitz of the
Office of Associate Chief Counsel
(Income Tax & Accounting). For further
information regarding this revenue proce-
dure, contact Mr. Rabinowitz at (202)
622–4970 (not a toll-free number).
26 CFR 601.105: Examination of returns and claims for refund, credit, or abatement; determination of correct tax liability.
(Also Part 1,§§446, 481; 1.446–1, 1.481–1)
Rev. Proc. 2002–18
SECTION 1. PURPOSE.......................................................................................................................................................................680
.01In General................................................................................................................................................................................680
.02Voluntary Compliance..............................................................................................................................................................680
.03Procedures for Examination, Appeals, and Counsel for the Government for Resolving Accounting Method Issues..........680
SECTION 2. BACKGROUND ...........................................................................................................................................................681
.01Change in Method of Accounting Defined..............................................................................................................................681
.02Method Changes Imposed by the Service...............................................................................................................................681
.03No Right to Retroactive Method Change................................................................................................................................681
.04Method Change With a§481(a) Adjustment..........................................................................................................................681
(1)Need for adjustment...........................................................................................................................................................681
(2)Adjustments attributable to pre–1954 years......................................................................................................................682
(3)Adjustment period...............................................................................................................................................................682
.05Method Change Using a Cut-off Method................................................................................................................................682
.06Previous Method Change Without Consent.............................................................................................................................682
.07Penalties...................................................................................................................................................................................682
SECTION 3. DEFINITIONS ..............................................................................................................................................................682
.01Accounting Method Issue.........................................................................................................................................................682
.02Year of Change.........................................................................................................................................................................682
.03Section 481(a) Adjustment Period...........................................................................................................................................682
.04Taxpayer...................................................................................................................................................................................682
SECTION 4. SCOPE ..........................................................................................................................................................................682
SECTION 5. EXAMINATION DISCRETION TO RESOLVE ACCOUNTING METHOD ISSUES ............................................682
.01In General................................................................................................................................................................................682
.02Requirement to Treat an Accounting Method Issue as a Method Change............................................................................683
2002-13 I.R.B.678April 1, 2002

.03Selection of New Method of Accounting.................................................................................................................................683
.04Terms and Conditions of Change............................................................................................................................................683
(1)Year of change....................................................................................................................................................................683
(2)Section 481(a) adjustment..................................................................................................................................................683
(3)Spread of§481(a) adjustment...........................................................................................................................................683
SECTION 6. APPEALS AND COUNSEL FOR THE GOVERNMENT DISCRETION TO RESOLVE ACCOUNTING
METHOD ISSUES ........................................................................................................................................................683
.01Authority to Resolve Accounting Method Issues..................................................................................................................... 683
.02Types of Resolutions.................................................................................................................................................................683
(1)In general............................................................................................................................................................................683
(2)Accounting method changes...............................................................................................................................................683
(a)Treating an accounting method issue as a method change........................................................................................683
(b)Selection of new method of accounting.......................................................................................................................683
(c)Terms and conditions of change...................................................................................................................................683
(i)Year of change...........................................................................................................................................................683
(ii)Section 481(a) adjustment........................................................................................................................................684
(iii)Spread of the§481(a) adjustment..........................................................................................................................684
(3)Alternative timing resolution..............................................................................................................................................684
(4)Time-value of money resolution.........................................................................................................................................684
(a)In general......................................................................................................................................................................684
(b)Computation of specified amount................................................................................................................................684
(i)In general...................................................................................................................................................................684
(ii)Sample computation.................................................................................................................................................684
(A)Hypothetical underpayment (overpayment)........................................................................................................684
(B)Applicable time-value rate...................................................................................................................................684
(C)Applicable period.................................................................................................................................................684
(D)Processing of specified amount...........................................................................................................................684
SECTION 7. PROCEDURES FOR A SERVICE-IMPOSED ACCOUNTING METHOD CHANGE ...........................................685
.01Requirement to Provide Notice to Taxpayer...........................................................................................................................685
(1)In general............................................................................................................................................................................685
(2)Form of notice....................................................................................................................................................................685
(3)Content of notice................................................................................................................................................................685
(4)Method not established without notice..............................................................................................................................685
.02Finalizing a Service-imposed Method Change.......................................................................................................................685
(1)In general............................................................................................................................................................................685
(2)Content of closing agreement.............................................................................................................................................685
.03Implementing a Service-imposed Method Change..................................................................................................................685
(1)Years before the Service.....................................................................................................................................................685
(2)Succeeding years for which returns have been filed.........................................................................................................685
(3)Future years........................................................................................................................................................................686
.04Effect of Final Service-imposed Method Change...................................................................................................................686
(1)New method established.....................................................................................................................................................686
(2)Subsequent examination.....................................................................................................................................................686
(3)Audit protection..................................................................................................................................................................686
(a)In general......................................................................................................................................................................686
(b)Limitations....................................................................................................................................................................686
.05Coordination with Examination...............................................................................................................................................686
.06Deemed Cut-off Method...........................................................................................................................................................686
SECTION 8. PROCEDURES FOR RESOLVING ACCOUNTING METHOD ISSUES ON A
NONACCOUNTING-METHOD-CHANGE BASIS ...................................................................................................686
.01Closing agreement required.....................................................................................................................................................686
.02Content of Closing Agreement.................................................................................................................................................686
.03Implementing Resolution of an Accounting Method Issue on a Nonaccounting-method-change Basis...............................686
(1)Resolution on an alternative-timing basis.........................................................................................................................686
(a)Years before the Service...............................................................................................................................................687
(b)Succeeding years for which returns have been filed...................................................................................................687
(c)Future years..................................................................................................................................................................687
(2)Resolution on a time-value-of-money basis.......................................................................................................................687
April 1, 20026792002-13 I.R.B.

.04Effect of Resolving an Accounting Method Issue on a Nonaccounting-method-change Basis.............................................687
(1)No change in method.........................................................................................................................................................687
(2)Subsequent change.............................................................................................................................................................687
(a)Resolution on an alternative-timing basis...................................................................................................................687
(b)Resolution on a time-value-of-money basis.................................................................................................................687
(3)Effect of subsequent change...............................................................................................................................................687
(a)Resolution on an alternative-timing basis...................................................................................................................687
(b)Resolution on a time-value-of-money basis.................................................................................................................687
SECTION 9. DEFAULT PROCEDURES ..........................................................................................................................................687
.01In General................................................................................................................................................................................687
.02Effect of Adjustments................................................................................................................................................................687
(1)No omission or duplication................................................................................................................................................687
(2)No change in method.........................................................................................................................................................688
(3)Subsequent change.............................................................................................................................................................688
(4)Effect of subsequent change...............................................................................................................................................688
SECTION 10. EXAMPLES ................................................................................................................................................................688
.01Examination-imposed Change.................................................................................................................................................688
(1)Facts....................................................................................................................................................................................688
(2)Effect...................................................................................................................................................................................688
.02Appeals Resolution of Accounting Method Issue as a Method Change With Compromise Terms and Conditions.............688
(1)Facts....................................................................................................................................................................................688
(2)Effect...................................................................................................................................................................................688
.03Appeals Resolution of Accounting Method Issue on an Alternative-timing Basis.................................................................689
(1)Facts....................................................................................................................................................................................689
(2)Effect...................................................................................................................................................................................689
.04Appeals Resolution of Accounting Method Issue on Time-value-of-money Basis.................................................................690
(1)Facts....................................................................................................................................................................................690
(2)Computation of specified amount......................................................................................................................................690
(3)Effect...................................................................................................................................................................................690
.05Default Procedures...................................................................................................................................................................691
(1)Facts....................................................................................................................................................................................691
(2)Effect...................................................................................................................................................................................691
SECTION 11. EFFECTIVE DATE ....................................................................................................................................................691
.01In General................................................................................................................................................................................691
.02Transition Rule.........................................................................................................................................................................691
DRAFTING INFORMATION
SECTION 1. PURPOSE
.01In General. This revenue proce-
dure provides the procedures under
§446(b) of the Internal Revenue Code
and§1.446–1(b) of the Income Tax
Regulations for changes in method of
accounting imposed by the Internal Rev-
enue Service (Service). This revenue pro-
cedure also provides the procedures that
the Service will use for accounting
method issues resolved by the Service on
a nonaccounting-method-change basis.
.02Voluntary Compliance. This rev-
enue procedure provides terms and condi-
tions for Service-imposed changes in
method of accounting that are intended to
encourage taxpayers to voluntarily
request a change from an impermissible
method of accounting prior to being con-
tacted for examination. Under this
approach, a taxpayer that is contacted for
examination and required to change its
method of accounting by the Service
(“involuntary change”) generally receives
less favorable terms and conditions when
the change results in a positive§481(a)
adjustment than the taxpayer would have
received if it had filed an application to
change its method of accounting (“volun-
tary change”) before the taxpayer was
contacted for examination. For example,
an involuntary change generally is made
with an earlier year of change and a
shorter§481(a) adjustment period for a
positive adjustment, and a voluntary
change generally is made with a current
year of change and a longer§481(a)
adjustment period for a positive adjust-
ment.SeeRev. Proc. 97–27 (1997–1 C.B.
680) as modified by Rev. Proc. 2002–19
(2002–13 I.R.B. 696) and Rev. Proc.
2002–9 (2002–3 I.R.B. 327) as modified
by Ann. 2002–17 (2002–8 I.R.B. 561),
and Rev. Proc. 2002–19 (2002–13 I.R.B.
696) which provide the procedures for
voluntary requests to change an account-
ing method.
.03Procedures for Examination,
Appeals, and Counsel for the Government
for Resolving Accounting Method Issues.
This revenue procedure sets forth proce-
dures for Examination, Appeals, and
counsel for the government to resolve
accounting method issues. It does not
alter Examination’s authority to examine
the returns of a taxpayer. It provides
parameters for Examination to resolve
accounting method issues, but does not
limit or expand Examination’s authority
to resolve any issues under any applicable
2002-13 I.R.B.680April 1, 2002

Delegation Order (e.g., Delegation Order
No. 236, Application of Appeals Settle-
ment to Coordinated Examination Pro-
gram Taxpayers, and Delegation Order
No. 247, Authority of Examination Case
Managers to Accept Settlement Offers
and Execute Closing Agreements on
Industry Specialization Program and
International Field Assistance Program
Issues). This revenue procedure also does
not alter or limit the authority of Appeals
or counsel for the government to resolve
or settle any issues.
SECTION 2. BACKGROUND
.01Change in Method of Accounting
Defined.
(1) Section 1.446–1(e)(2)(ii)(a) pro-
vides that a change in method of account-
ing includes a change in the overall plan
of accounting for gross income or deduc-
tions, or a change in the treatment of any
material item. A material item is any item
that involves the proper time for the
inclusion of the item in income or the tak-
ing of the item as a deduction. In deter-
mining whether a taxpayer’s accounting
practice for an item involves timing, gen-
erally the relevant question is whether the
practice permanently changes the amount
of the taxpayer’s lifetime income. If the
practice does not permanently affect the
taxpayer’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
income or deductions in two or more con-
secutively filed tax returns (without
regard to any change in status of the
method as permissible or impermissible)
represents 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, the taxpayer has adopted a
method of accounting for that item. 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 returns(s).SeeRev.
Rul. 90–38 (1990–1 C.B. 57). Rather, a
taxpayer that wants to change its method
of accounting must follow either the auto-
matic method change procedures of Rev.
Proc. 2002–9 (or its successor), if appli-
cable, or the advance consent procedures
of Rev. Proc. 97–27 (or its successor).
(3) Section 1.446–1(e)(2)(ii)(b)of
the regulations provides examples of cir-
cumstances that do not constitute changes
in method of accounting, including:
(a) correction of mathematical or
posting errors, or errors in the computa-
tion of tax liability (such as errors in
computation of the foreign tax credit, net
operating loss, percentage depletion, or
investment credit);
(b) adjustment of any item of
income or deduction that does not involve
the proper time for the inclusion of the
item or the taking of a deduction; and
(c) a change in treatment resulting
from a change in underlying facts.
.02Method Changes Imposed by the
Service.
(1) 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 com-
putation of taxable income must be made
in the manner that, in the opinion of the
Commissioner, does clearly reflect
income.
(2) The Commissioner has broad dis-
cretion in determining whether a taxpay-
er’s method of accounting clearly reflects
income, and the Commissioner’s determi-
nation must be upheld unless it is clearly
unlawful.See Thor Power Tool Co. v.
Commissioner, 439 U.S. 522 (1979);RCA
Corp. v. United States, 664 F.2d 881 (2nd
Cir. 1981),cert. denied, 457 U.S. 1133
(1982).
(3) The Commissioner has broad dis-
cretion in selecting a method of account-
ing that the Commissioner believes prop-
erly reflects the income of a taxpayer
once the Commissioner has determined
that the taxpayer’s method of accounting
does not clearly reflect income, and the
Commissioner’s selection may be chal-
lenged only upon showing an abuse of
discretion by the Commissioner.See
Wilkinson-Beane, Inc. v. Commissioner,
420 F.2d 352 (1st Cir. 1970);Standard
Paving Co. v. Commissioner, 190 F.2d
330 (10th Cir.),cert. denied, 342 U.S.
860 (1951).
(4) The Commissioner has the discre-
tion to change a taxpayer’s method of
accounting even though the Commis-
sioner previously changed the taxpayer to
the method if the Commissioner deter-
mines that the method of accounting does
not clearly reflect the taxpayer’s income.
The Commissioner is not precluded from
correcting mistakes of law in determining
a taxpayer’s tax liability, including the
power to retroactively correct rulings or
other determinations on which the tax-
payer may have relied.See Dixon v.
United States, 381 U.S. 68 (1965);Auto-
mobile Club of Michigan v. Commis-
sioner, 353 U.S. 180 (1957);Massaglia v.
Commissioner, 286 F.2d 258 (10th Cir.
1961).
(5) The Commissioner does not have
discretion, however, to require a taxpayer
to change from a method of accounting
that clearly reflects income to a method
that, in the Commissioner’s view, more
clearly reflects income.See Capitol Fed-
eral Savings & Loan v. Commissioner,96
T.C. 204 (1991);W.P. Garth v. Commis-
sioner, 56 T.C. 610 (1971),acq., 1975–1
C.B. 1.
(6) The Commissioner may change
the accounting method of a taxpayer that
is under examination, before an appeals
office, or before a federal court, except as
otherwise provided in published guid-
ance. See, for example, section 9 of Rev.
Proc. 97–27, which generally precludes
the Service from changing a taxpayer’s
method of accounting for an item for
prior taxable years if the taxpayer timely
files a Form 3115,Application to Change
a Method of Accounting, pursuant to Rev.
Proc. 97–27 requesting to change its
method of accounting for the item.
.03No Right to Retroactive Method
Change. Although the Commissioner is
authorized to consent to a retroactive
accounting method change, a taxpayer
does not have a right to a retroactive
change, regardless of whether the change
is from a permissible or impermissible
method.See generally, Rev. Rul. 90–38.
.04Method Change With a§481(a)
Adjustment.
(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
April 1, 20026812002-13 I.R.B.

different from the method used to com-
pute taxable income for the preceding
taxable year. When there is a change in
method of accounting to which§481(a)
is applied, income for the taxable year
preceding the year of change must be
determined under the method of account-
ing that was then used, and income for
the year of change and the following tax-
able years must be determined under the
new method of accounting as if the new
method had always been used.
Example. A taxpayer, although not permitted to
use the cash receipts and disbursements method of
accounting by§448, uses the overall cash method
and changes to an overall accrual method. The tax-
payer has $120,000 of income earned but not yet
received (accounts receivable) and $100,000 of
expenses incurred but not yet paid (accounts pay-
able) as of the end of the taxable year preceding the
year of change. A positive§481(a) adjustment of
$20,000 ($120,000 accounts receivable less
$100,000 accounts payable) is required as a result of
the change.
(2)Adjustments attributable to pre-
1954 years. Section 481(a)(2) and
§1.481–3 provide that if the adjustments
required by§481(a) are attributable to a
change in method of accounting not initi-
ated by the taxpayer, no portion of any
adjustments which is attributable to pre-
1954 taxable years is taken into account
in computing taxable income.
(3)Adjustment period. Section
481(c) and§§1.446–1(e)(3)(i) and
1.481–4 provide that the adjustment
required by§481(a) may be taken into
account 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 in computing
taxable income completely in the year of
change. However,§481(b) may limit the
amount of tax attributable to a substantial
§481(a) adjustment that increases taxable
income.
.05Method Change Using a Cut-off
Method. The Commissioner may deter-
mine that certain changes in method 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 are accounted for
under the new method of accounting. Any
items arising before the year of change
continue to be accounted for under the
taxpayer’s former method of accounting.
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.
.06Previous Method Change Without
Consent. The Commissioner may require
a taxpayer that has changed a method of
accounting without the Commissioner’s
consent to change back to its former
method. The Commissioner may do so
even when the taxpayer changed from an
impermissible to a permissible method.
The change back to the former method
may be made in the taxable year the tax-
payer changed without consent, or if that
year is closed by the running of the
period of limitations, in the earliest open
year.See Commissioner v. O. Liquidating
Corp., 292 F.2d 225 (3rd Cir.),cert.
denied, 368 U.S. 898 (1961);Wright Con-
tracting Co. v. Commissioner, 316 F.2d
249 (5th Cir., 1963),cert. denied375
U.S. 879 (1963),reh’g denied375 U.S.
981 (1964),acq. 1966–2 C.B. 7;Daktron-
ics, Inc. v. Commissioner, T.C. Memo.
1991–60;Handy Andy T.V. and Appli-
ances, Inc. v. Commissioner, T.C. Memo.
1983–713. For example, the Service may
change a taxpayer back to its former
impermissible method of accounting if
the taxpayer changed to a permissible
method of accounting without the Com-
missioner’s consent and miscalculated the
§481(a) adjustment, even where the stat-
ute of limitations has expired for the year
of change.
.07Penalties. Any otherwise appli-
cable penalty for the failure of a taxpayer
to change its method of accounting (for
example, the accuracy-related penalty
under§6662 or the fraud penalty under
§6663) may be imposed if the Service
imposes an accounting method change.
See§446(f). Additionally, the taxpayer’s
return preparer may also be subject to the
preparer penalty under§6694.
SECTION 3. DEFINITIONS
.01Accounting Method Issue. The
term“accounting method issue”means an
issue regarding whether the taxpayer’s
accounting treatment of an item is proper,
but only if changing the taxpayer’s treat-
ment of such item could constitute a
change in method of accounting. See the
definition of change in method of
accounting in§1.446–1(e)(2) and section
2.01 of this revenue procedure.
.02Year 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 used, even if no affected items
are taken into account for that year. The
year of change is also the first taxable
year for complying with all the terms and
conditions accompanying the change.
.03Section 481(a) Adjustment Period.
The§481(a) adjustment period is the
applicable number of taxable years for
taking into account the§481(a) adjust-
ment required as a result of the change in
method of accounting. The year of
change is the first taxable year in the
adjustment period and the§481(a)
adjustment is taken into account ratably
over the number of taxable years in the
adjustment period.
.04Taxpayer. The term“taxpayer”has
the same meaning as the term“person”
defined in§7701(a)(1) (rather than the
meaning of the term“taxpayer”defined
in§7701(a)(14)).
SECTION 4. SCOPE
Except as otherwise provided in pub-
lished guidance, this revenue procedure
applies to any accounting method change
imposed by the Service, and to any
accounting method issue resolved by the
Service on a nonaccounting-method-
change basis.
SECTION 5. EXAMINATION
DISCRETION TO RESOLVE
ACCOUNTING METHOD ISSUES
.01In General. Using professional
judgment in accordance with auditing
standards, an examining agent will make
findings of fact and apply Service posi-
tion on issues of law to determine
whether an issue is an accounting method
issue (as defined by section 3.01 of this
revenue procedure) and whether the tax-
payer’s method of accounting is permis-
sible.SeePolicy Statement P–4–117.
Except as otherwise provided in pub-
lished guidance (for example, Delegation
Order No. 236), the discretion of an
examining agent to resolve an accounting
method issue is set forth in sections 5.02
through 5.06 of this revenue procedure.
2002-13 I.R.B.682April 1, 2002

See section 10.01 of this revenue proce-
dure for an example of the application of
section 5 of this revenue procedure.
.02Requirement to Treat an Account-
ing Method Issue as a Method Change.
An examining agent who determines that
a taxpayer’s method of accounting is
impermissible, or that a taxpayer changed
its method of accounting without obtain-
ing the consent of the Commissioner, may
propose an adjustment with respect to that
method only by changing the taxpayer’s
method of accounting.
.03Selection of New Method of
Accounting. Except as provided in section
2.06 of this revenue procedure, an exam-
ining agent changing a taxpayer’s method
of accounting will select a new method of
accounting by properly applying the law
to the facts determined by the agent. The
method selected must be a proper method
of accounting and will not be a method
contrived to reflect the hazards of litiga-
tion.
Example. A taxpayer held long-term zero cou-
pon bonds during the taxable year under examina-
tion but did not include any original issue discount
(OID) in income for that year. The examining agent
determines that the taxpayer should have included
OID in income for that year under§1272. Accord-
ingly, the examining agent will change the taxpay-
er’s method of accounting to include the OID in
income in accordance with§1272 and the regula-
tions thereunder. The examining agent will not
impose a method of accounting that is designed to
take into account litigation hazards (for example, a
method that only requires the accrual of an arbitrary
percentage of the OID that would otherwise accrue
during the year under§1272 and the regulations
thereunder).
.04Terms and Conditions of Change.
(1)Year of change. An examining
agent changing a taxpayer’s method of
accounting will make the change in a year
under examination. Ordinarily, the change
will be made in the earliest taxable year
under examination, or, if later, the first
taxable year the method is considered to
be impermissible. However, in appropri-
ate circumstances, an examining agent
may defer the year of change to a later
taxable year. For example, an examining
agent may defer the year of change if the
examining agent determines that:
(a) the taxpayer’s books and
records do not contain sufficient informa-
tion to compute a§481(a) adjustment for
the taxable year in which the change
would otherwise be imposed and the
adjustment cannot be reasonably esti-
mated;
(b) the taxpayer’s existing method
of accounting does not have a material
effect for the taxable year in which the
change would otherwise be imposed; or
(c) there are taxable years for which
the statute of limitations has expired fol-
lowing the taxable year in which the
change would otherwise be imposed.
An examining agent will not defer the
year of change in order to reflect the haz-
ards of litigation. Moreover, an examin-
ing agent will not defer the year of
change to later than the most recent year
under examination on the date of the
agreement finalizing the change.
(2)Section 481(a) adjustment.An
examining agent changing a taxpayer’s
method of accounting ordinarily will
impose a§481(a) adjustment, subject to a
computation of tax under§481(b)(if
applicable). However, an examining agent
should use a cut-off method to make a
change (other than a change within the
LIFO inventory method as defined in sec-
tion 3.09 of Revenue Procedure 97–27
(1997–1 C.B. 680), or a change in
method of accounting for intercompany
transactions,see§1.1502–13) when a
statute, regulation, or administrative pro-
nouncement of the Service effective for
the year of change directs that the change
be made using a cut-off method.See, e.g.,
§174. In addition, an examining agent
may use a cut-off method to make a
change in appropriate circumstances. For
example, the examining agent may use a
cut-off method to make a change if the
agent determines that the taxpayer’s
books and records do not contain suffi-
cient information to compute a§481(a)
adjustment and the adjustment cannot be
reasonably estimated. Finally, an examin-
ing agent will not make a change on a
cut-off method in order to reflect the haz-
ards of litigation.
(3)Spread of§481(a) adjustment.
The§481(a) adjustment, whether posi-
tive or negative, will be taken into
account entirely in the year of change.
SECTION 6. APPEALS AND
COUNSEL FOR THE GOVERNMENT
DISCRETION TO RESOLVE
ACCOUNTING METHOD ISSUES
.01Authority to Resolve Accounting
Method Issues. An appeals officer or
counsel for the government may resolve
an accounting method issue (as defined
by section 3.01 of this revenue procedure)
when it is in the interest of the govern-
ment to do so.SeeP–8-47.
.02Types of Resolutions.
(1)In general. An appeals officer or
counsel for the government may resolve
an accounting method issue by using any
of the means described in section 6 of this
revenue procedure, or any other means
deemed appropriate under the circum-
stances, to reflect the hazards of litiga-
tion. See sections 10.02 through 10.04 of
this revenue procedure for examples of
the application of section 6 of this rev-
enue procedure.
(2)Accounting method changes.
(a)Treating an accounting method
issue as a method change. An appeals
officer or counsel for the government
resolving an accounting method issue
may treat the issue as a change in method
of accounting.
(b)Selection of new method of
accounting. Except as provided in section
2.06 of this revenue procedure, an appeals
officer or counsel for the government
changing a taxpayer’s method of account-
ing will select a new method of account-
ing by properly applying the law to the
facts. The appeals officer or counsel for
the government will not put the taxpayer
on an improper method of accounting in
order to reflect the hazards of litigation.
(c)Terms and conditions of change.
An appeals officer or counsel for the gov-
ernment changing a taxpayer’s method of
accounting may agree to terms and condi-
tions that differ from those ordinarily
applicable to an Examination-imposed
accounting method change, including the
following (or any combination thereof):
(i)Year of change. An appeals
officer or counsel for the government
may compromise the year of change (for
example, by agreeing to a later year of
change). However, an appeals officer or
counsel for the government changing a
taxpayer’s method of accounting ordi-
narily will not defer the year of change to
April 1, 20026832002-13 I.R.B.

later than the most recent taxable year
under examination on the date of the
agreement finalizing the change, and, in
no event, will defer the year of change to
later than the taxable year that includes
the date of the agreement finalizing the
change;
(ii)Section 481(a) adjustment.An
appeals officer or counsel for the govern-
ment may make the change using a
§481(a) adjustment or a cut-off method.
If a§481(a) adjustment is used, the
appeals officer or counsel for the govern-
ment may compromise the amount of the
§481(a) adjustment (for example, by
agreeing to a reduced§481(a) adjust-
ment). If the appeals officer or counsel
for the government agrees to compromise
the amount of the§481(a) adjustment,
the agreement must be in writing; and
(iii)Spread of the§481(a) adjust-
ment. An appeals officer or counsel for
the government may compromise the
§481(a) adjustment period (for example,
by agreeing to a longer§481(a) adjust-
ment period).
(3)Alternative-timing resolution.In
lieu of changing a taxpayer’s method of
accounting, an appeals officer or counsel
for the government may resolve an
accounting method issue by agreeing to
alternative timing for all or some of the
items arising during, or prior to and dur-
ing, the taxable years before Appeals or a
federal court. The resolution of an
accounting method issue on an
alternative-timing basis for certain items
will not affect the taxpayer’s method of
accounting for any items not covered by
the resolution.
Example. The Service and the taxpayer agree
that the taxpayer will capitalize the inventoriable
costs incurred during 1999 that were deducted under
the taxpayer’s method of accounting. The taxpayer’s
inventoriable costs covered by the agreement must
be capitalized and accounted for under the taxpay-
er’s inventory method. The inventoriable costs that
are not covered by the agreement (that is, those
costs incurred in taxable years prior and subsequent
to 1999) are not affected by the resolution and thus,
consistent with the taxpayer’s method of account-
ing, must continue to be deducted.
(4)Time-value of money resolution.
(a)In general. In lieu of changing a
taxpayer’s method of accounting, an
appeals officer or counsel for the govern-
ment may resolve an accounting method
issue by agreeing that the taxpayer will
pay the government a“specified amount”
that approximates the time-value-of-
money benefit the taxpayer has derived
from using its method of accounting for
the taxable years before appeals or a fed-
eral court (instead of the method of
accounting determined by the appeals
officer or counsel for the government to
be the proper method of accounting),
reduced by an appropriate factor to reflect
the hazards of litigation. If the sum of the
time-value-of-money benefit (detriment)
computed with respect to each taxable
year is negative, the specified amount
will be zero and no refund will be made
to the taxpayer. The specified amount is
not interest under§163(a), and may not
be deducted or capitalized under any pro-
vision of the Code. In appropriate circum-
stances, however, the computation of the
specified amount may be tax affected to
reflect the approximate effect of a hypo-
thetical tax deduction, as demonstrated in
the sample computation. See section
6.02(4)(b)(ii)(B) of this revenue proce-
dure. The specified amount will be
treated as a miscellaneous payment as
described in the Internal Revenue
Manual.
(b)Computationofspecified
amount.
(i)In general. An appeals officer
or counsel for the government may use
any reasonable manner to compute the
specified amount, including the sample
computation described in section
6.02(4)(b)(ii) of this revenue procedure,
or a computation that takes into account
the taxpayer’s actual tax rates and tax
attributes.
(ii)Sample computation. Under
the sample computation, the specified
amount equals the sum of the time-value-
of-money benefit (detriment) computed
with respect to each taxable year before
Appeals or a federal court. The time-
value-of-money benefit (detriment) with
respect to each taxable year before
Appeals or a federal court equals the
“hypothetical underpayment (overpay-
ment)”(asdefinedinsection
6.02(4)(b)(ii)(A) of this revenue proce-
dure), multiplied by the“applicable time-
value rate”(as defined in section
6.02(4)(b)(ii)(B) of this revenue proce-
dure), compounded daily for the“appli-
cable period”(as defined in section
6.02(4)(b)(ii)(C) of this revenue proce-
dure).
(A)Hypothetical underpayment
(overpayment). The hypothetical under-
payment (overpayment) for each taxable
year before Appeals or a federal court is
equal to the net increase or decrease in
taxable income (including the§481(a)
adjustment) that would have been
reflected on the return for the taxable year
if the Service had changed the taxpayer’s
method of accounting (in the earliest tax-
able year before Appeals or a federal
court, or, if later, the first taxable year the
method is considered impermissible),
multiplied by the applicable tax rate for
the taxable year of the underpayment
(overpayment). For this purpose, only
adjustments associated with the change
are taken into account. The applicable tax
rate is the highest rate of income tax
applicable to the taxpayer (for example,
the highest rate in effect under§1 for
individuals or§11 for corporations).
(B)Applicable time-value rate.
The applicable time-value rate generally
equals an average of the quarterly under-
payment rates in effect under§6621(a)
for the applicable period. However, for a
taxpayer that would be entitled to a
deduction under§163(a) for the specified
amount if the specified amount were
treated as interest arising from the under-
payment of tax, the applicable time-value
rate is computed at a reduced rate equal-
ing an average of the quarterly underpay-
ment rates in effect under§6621(a) for
the applicable period, multiplied by the
excess of 100% over the applicable tax
rate for the taxable year of the underpay-
ment (overpayment).
(C)Applicable period. The
applicable period begins on the due date
(without regard to extensions) of the
return for the taxable year of the under-
payment (overpayment) and ends on the
date on which the specified amount is
paid.
(D)Processingofspecified
amount. The Appeals Officer or govern-
ment counsel resolving the issue should
forward checks in payment of specified
amounts to:
Internal Revenue Service
201 W. Riverside Blvd
Manual Deposit Unit
Stop 31, Unit 21
Covington, KY 41019
Attn: Manager, Manual Deposit Unit.
2002-13 I.R.B.684April 1, 2002

The Manager of the Manual Deposit Unit
should be notified by telephone, at
(859) 292–5790, that the payment will be
sent. The transmittal memorandum should
state that the payment is a“Rev. Proc.
2002–18 Specified Amount”payment and
should specify the name and TIN of the
taxpayer, the type of taxpayer (LMSB,
SBSE, W&I), and the year(s) to which
the payment pertains.
SECTION 7. PROCEDURES FOR A
SERVICE-IMPOSED ACCOUNTING
METHOD CHANGE.
.01Requirement to Provide Notice to
Taxpayer.
(1)In general. An examining agent,
appeals officer, or counsel for the govern-
ment changing a taxpayer’s method of
accounting will provide notice that an
accounting method issue is being treated
as an accounting method change. How-
ever, an appeals officer or counsel for the
government resolving an accounting
method issue as an accounting method
change is not required to provide notice
that the accounting method issue is being
treated as an accounting method change if
such notice has been provided by the
examining agent. In addition, if the exam-
ining agent has provided notice that an
accounting method issue is being treated
as an accounting method change and an
appeals officer or counsel for the govern-
ment subsequently resolves such account-
ing method issue on a nonaccounting-
method-change basis, the appeals officer
or counsel for the government should pro-
vide notice that the accounting method
issue has not been treated as an account-
ing method change.
(2)Form of notice. The notice must
be in writing. If the taxpayer and the Ser-
vice execute a closing agreement finaliz-
ing the change, the notice will be pro-
vided in the closing agreement. If the
taxpayer and the Service do not execute a
closing agreement, the notice ordinarily
will be provided in the examiner’s report
or the Form 870AD (Offer of Waiver of
Restriction on Assessment and Collection
of Deficiency in Tax and of Acceptance
of Overpayment). However, the Service
may also provide the notice in a prelimi-
nary notice of deficiency, a statutory
notice of deficiency, a notice of claim dis-
allowance, a notice of final administrative
adjustment, a pleading (for example, a
petition, complaint, or answer) or amend-
ment thereto, or in any other similar writ-
ing provided to the taxpayer.
(3)Content of notice. The notice
must include:
(a) a statement that the accounting
method issue is being treated as an
accounting method change or a clearly
labeled§481(a) adjustment; and
(b) a description of the new method
of accounting.
(4)Method not established without
notice. The resolution of an accounting
method issue will not establish a new
method of accounting if the Service does
not provide the notice required by section
7.01 of this revenue procedure. See sec-
tion 9 of this revenue procedure for the
procedures applicable if the Service does
not provide this notice.
.02Finalizing a Service-imposed
Method Change.
(1)In general. To implement a
Service-imposed change in method of
accounting, the taxpayer and the Service
should execute a closing agreement under
§7121 in which the taxpayer agrees to
the change and the terms and conditions
of the change. For purposes of this rev-
enue procedure, in the case of accounting
method issues before a federal court, the
term“closing agreement”includes any
other appropriate settlement agreement. If
the taxpayer and the Service execute such
a closing agreement, then the change is
final as of the date of the agreement
(unless otherwise provided by a federal
court). In the absence of such an agree-
ment, a Service-imposed accounting
method change is final only upon the
expiration of the period of limitations for
filing a claim for refund under§6511 for
the year of change or the date of a final
court order requiring the change.
(2)Content of closing agreement.A
closing agreement finalizing a Service-
imposed accounting method change must
comply with the requirements of Rev.
Proc. 68–16 (1968–1 C.B. 770), and
should include the information outlined in
the Model Closing Agreement for Settle-
ment on an Accounting Method Basis
attached as APPENDIX A of this revenue
procedure. A settlement agreement final-
izing a Service-imposed accounting
method change with respect to an
accounting method issue that is pending
before a federal court must conform to
the rules and procedures of the court and
should include the information outlined in
the Model Closing Agreement for Settle-
ment on an Accounting Method Change
Basis attached as APPENDIX A of this
revenue procedure.
.03Implementing a Service-imposed
Method Change.
(1)Years before the Service. The Ser-
vice should make the adjustments neces-
sary to effect a Service-imposed account-
ing method change to the taxpayer’s
returns for the taxable years under exami-
nation, before Appeals, or before a federal
court. These adjustments include the
adjustments to taxable income necessary
to reflect the new method (including the
§481(a) adjustment required as a result
of the change), and any collateral adjust-
ments to taxable income or tax liability
resulting from the change.
(2)Succeeding years for which returns
have been filed. If a Service-imposed
accounting method change is finalized by
a closing agreement, the Service may
require that the taxpayer file amended
returns to reflect the change for any
affected succeeding taxable years for
which a federal income tax return has
been filed as of the date of the agreement.
The amended returns must include the
adjustments to taxable income and any
collateral adjustments to taxable income
or tax liability resulting from the change
necessary to reflect the new method. The
Service may require that the amended
returns be filed prior to execution of the
closing agreement finalizing the change.
If the Service does not require the
amended returns, the taxpayer should file
such amended returns. If the Service does
not require the amended returns and the
taxpayer does not file the amended
returns, the Service should make the
adjustments necessary to reflect the
change for affected succeeding taxable
years if and when it examines the returns
for those years. A taxpayer that files an
amended return using the new method
prior to the date a Service-imposed
change becomes final must continue to
use the new method on all subsequent
returns, unless the taxpayer obtains the
consent of the Commissioner to change
from the new method or the Service
changes the taxpayer from the new
method on subsequent examination.See
Rev. Rul. 90–38. A taxpayer eligible to
April 1, 20026852002-13 I.R.B.

file a“qualified amended return”under
Rev. Proc. 94–69 (1994–2 C.B. 804) may
satisfy any requirement to file an
amended return by filing a“qualified
amended return”in accordance with that
revenue procedure.
(3)Future years. The taxpayer must
use the new method of accounting on all
returns filed after the date that a Service-
imposed accounting method change
becomes final (seesection 7.02 of this
revenue procedure), unless the taxpayer
obtains the consent of the Commissioner
to change from the new method or the
Service changes the taxpayer from the
new method on subsequent examination.
A taxpayer that files a return using the
new method prior to the date a Service-
imposed change becomes final must con-
tinue to use the new method on all subse-
quent returns, unless the taxpayer obtains
the consent of the Commissioner to
change from the new method or the Ser-
vice changes the taxpayer from the new
method on subsequent examination. If the
taxpayer does not use the new method on
any return filed prior to the date a
Service-imposed change becomes final,
and does not file amended returns to
reflect the change, the Service should
make the adjustments necessary to reflect
the change for the affected taxable years
if and when it examines those returns.
.04Effect of Final Service-imposed
Method Change.
(1)New method established.A
Service-imposed change that is final
establishes a new method of accounting
within the meaning of§446(e) and
§1.446–1(e). As a result, the taxpayer is
required to use the new method of
accounting for the year of change and for
all subsequent taxable years, unless the
taxpayer obtains the consent of the Com-
missioner to change from the new method
or the Service changes the taxpayer from
the new method on subsequent examina-
tion.
(2)Subsequent examination. Except
as provided in section 7.04(3) of this rev-
enue procedure, the Service is not pre-
cluded from changing the taxpayer from
the new method of accounting if the Ser-
vice determines that the new method does
not clearly reflect the taxpayer’s income.
(3)Audit protection.
(a)In general. A taxpayer that
executes a closing agreement finalizing a
Service-imposed accounting method
change will not be required to change or
modify the new method for any taxable
year for which a federal income tax return
has been filed as of the date of the clos-
ing agreement, provided that:
(i) the taxpayer has complied with
all the applicable provisions of the clos-
ing agreement;
(ii) there has been no taxpayer
fraud, malfeasance, or misrepresentation
of a material fact;
(iii) there has been no change in
the material facts on which the closing
agreement was based; and
(iv) there has been no change in
the applicable law on which the closing
agreement was based.
(b)Limitations. The Service may
require the taxpayer to change or modify
the new method in the earliest open tax-
able year if the taxpayer fails to comply
with the applicable provisions of the
agreement or upon a showing of the tax-
payer’s fraud, malfeasance, or misrepre-
sentation of a material fact. The Service
may require the taxpayer to change or
modify the new method in the earliest
open taxable year in which the material
facts have changed. The Service also may
require the taxpayer to change or modify
the new method in the earliest open tax-
able year in which the applicable law has
changed. For this purpose, a change in the
applicable law includes: (i) the enactment
of legislation; (ii) a decision of the United
States Supreme Court; (iii) the issuance
of temporary or final regulations; or (iv)
the issuance of a revenue ruling, revenue
procedure, notice, or other guidance pub-
lished in the Internal Revenue Bulletin.
.05Coordination with Examination.
An appeals officer or counsel for the gov-
ernment changing a taxpayer’s method of
accounting will coordinate the resolution
with Examination if the appeals officer or
counsel for the government proposes to
defer the year of change to any taxable
year not before appeals or a federal court.
Examination will advise the appeals
officer or counsel for the government of
any changes in material fact in any tax-
able year under examination.
.06Deemed Cut-off Method.Ifthe
Service does not impose a§481(a)
adjustment but otherwise provides the
notice required by section 7.01 of this
revenue procedure, the Service-imposed
change will be treated as being made
using a cut-off method, unless the Service
and the taxpayer specifically have agreed
in writing to compromise the amount of
the§481(a) adjustment.
SECTION 8. PROCEDURES FOR
RESOLVING ACCOUNTING
METHOD ISSUES ON A
NONACCOUNTING-METHOD-
CHANGE BASIS
.01Closing agreement required.To
resolve an accounting method issue raised
by the Service on a nonaccounting-
method-change basis, the Service and the
taxpayer will execute a closing agreement
under§7121. For purposes of this rev-
enue procedure, in the case of accounting
method issues before a federal court, the
term“closing agreement”includes any
other appropriate settlement agreement. If
the accounting method issue is being
resolved on an alternative-timing basis as
described in section 6.02(3) of this rev-
enue procedure, the taxpayer must agree
to pay the government any taxes and
interest due as a result of the resolution. If
the accounting method issue is being
resolved on a time-value-of-money basis
as described in section 6.02(4) of this rev-
enue procedure, the taxpayer must agree
to pay the government the specified
amount as a result of the resolution.
.02Content of Closing Agreement.A
closing agreement finalizing the resolu-
tion of an accounting method issue on a
nonaccounting-method-change basis must
comply with the requirements of Rev.
Proc. 68–16, and should include the infor-
mation outlined in the Model Closing
Agreement for Settlement on a
Nonaccounting-method-change Basis
attached as APPENDIX B of this revenue
procedure. A closing agreement resolving
an accounting method issue that is pend-
ing before a federal court on a
nonaccounting-method-basis must con-
form to the rules and procedures of the
court and should include the information
outlined in the Model Closing Agreement
for Settlement on a Nonaccounting-
method-change Basis attached as
APPENDIX B of this revenue procedure.
.03Implementing Resolution of an
Accounting Method Issue on a
Nonaccounting-method-change Basis.
(1)Resolution on an alternative-
timing basis.
2002-13 I.R.B.686April 1, 2002

(a)Years before the Service. The
Service should make the adjustments nec-
essary to effect an alternative-timing reso-
lution for the taxable years before appeals
or before a federal court. These adjust-
ments include the adjustments to taxable
income necessary to reflect the resolution
and any collateral adjustments to taxable
income or tax liability resulting from the
resolution.
(b)Succeeding years for which
returns have been filed. The Service may
require that the taxpayer file amended
returns to reflect an alternative-timing
resolution for any affected succeeding
taxable years for which a federal income
tax return has been filed as of the date of
the closing agreement. The amended
returns must include the adjustments to
taxable income and any collateral adjust-
ments to taxable income or tax liability
resulting from the resolution necessary to
reflect the resolution. The Service may
require that the amended returns be filed
prior to execution of the closing agree-
ment finalizing the resolution. If the Ser-
vice does not require the amended
returns, the taxpayer should file such
amended returns. If the Service does not
require amended returns and the taxpayer
does not file amended returns, the Service
should make the adjustments necessary to
reflect the resolution for affected succeed-
ing taxable years if and when it examines
the returns for those years. A taxpayer eli-
gible to file a“qualified amended return”
under Rev. Proc. 94–69 may satisfy any
requirement to file an amended return by
filing a“qualified amended return”in
accordance with that revenue procedure.
(c)Future years. The taxpayer must
reflect the alternative-timing resolution
on the returns for any affected succeeding
taxable years for which a return has not
been filed as of the date of the closing
agreement. The taxpayer must continue to
file its returns on its current method of
accounting for all items not covered by
the closing agreement, unless the tax-
payer obtains the consent of the Commis-
sioner to change from its current method
or the Service changes the taxpayer from
its current method on subsequent exami-
nation.
(2)Resolution on a time-value-of-
money basis. The taxpayer must pay the
specified amount required by the time-
value-of-money resolution. The Service
will not change or otherwise propose
adjustments to taxable income with
respect to the taxpayer’s method of
accounting for the taxable years covered
by a closing agreement. The taxpayer
must continue to file its returns on its cur-
rent method of accounting, unless the tax-
payer obtains the consent of the Commis-
sioner to change from its current method
or the Service changes the taxpayer from
its current method on subsequent exami-
nation.
.04Effect of Resolving an Accounting
Method Issue on a Nonaccounting-
method-change Basis.
(1)No change in method. If the Ser-
vice resolves an accounting method issue
on a nonaccounting-method-change basis,
the resolution does not constitute a
change in method of accounting. If the
accounting method issue is resolved on an
alternative-timing basis, the taxpayer is
required to use its current method of
accounting for all items not covered by
the closing agreement, unless the tax-
payer obtains the consent of the Commis-
sioner to change from its current method
or the Service changes the taxpayer from
its current method on subsequent exami-
nation. If the accounting method issue is
resolved on a time-value-of-money basis,
the taxpayer is required to continue to use
its current method of accounting on all
returns for taxable years subsequent to the
years covered by the closing agreement,
unless the taxpayer obtains the consent of
the Commissioner to change from its cur-
rent method or the Service changes the
taxpayer from its current method on sub-
sequent examination.
(2)Subsequent change.
(a)Resolution on an alternative-
timing basis. If an accounting method
issue is resolved on an alternative-timing
basis, the Service is not precluded from
changing the taxpayer’s method of
accounting in any open taxable year for
any item not covered by the closing
agreement.
(b)Resolution on a time-value-of-
money basis. If an accounting method
issue is resolved on a time-value-of-
money basis, the Service is not precluded
from changing the taxpayer’s method of
accounting in any open taxable year not
covered by the closing agreement.
(3)Effect of subsequent change.
(a)Resolution on an alternative-
timing basis. If an accounting method
issue is resolved on an alternative-timing
basis and the taxpayer’s method of
accounting subsequently is changed (vol-
untarily or involuntarily) in any open tax-
able year, the§481(a) adjustment (if any)
will be determined by reference to all
items arising prior to the year of change,
except those items covered by the closing
agreement (that is, those items for which
the closing agreement specifically pro-
vides the manner in which the items are
to be accounted for).
(b)Resolution on a time-value-of-
money basis. If an accounting method
issue is resolved on a time-value-of-
money basis and the taxpayer’s method of
accounting subsequently is changed (vol-
untarily or involuntarily) in any open tax-
able year not covered by the closing
agreement, the§481(a) adjustment (if
any) will be determined by reference to
all items arising prior to the year of
change. If the Service subsequently
changes the taxpayer’s method of
accounting and imposes a§481(a) adjust-
ment, the interest that is assessed on any
underpayment, or the interest that is due
on any overpayment, for the year of
change will be treated as paid to the
extent necessary to prevent duplicate pay-
ment of the time-value-of-money benefit
relating to the§481(a) adjustment.
SECTION 9. DEFAULT PROCEDURES
.01In General. Section 9 of this rev-
enue procedure applies to the resolution
of any accounting method issue if the
Service changes the taxpayer’s method of
accounting and fails to provide the notice
required by section 7.01 of this revenue
procedure, or if the Service resolves the
accounting method issue on a
nonaccounting-method-change basis and
the Service and the taxpayer do not
execute a closing agreement as required
by section 8.01 of this revenue procedure.
See section 10.05 of this revenue proce-
dure for an example of the application of
section 9 of this revenue procedure.
.02Effect of Adjustments. For account-
ing method issues resolved under section
9 of this revenue procedure:
(1)No omission or duplication. The
Service and the taxpayer are required to
treat all items in a manner that prevents
April 1, 20026872002-13 I.R.B.

the duplication or omission of items of
income or deduction;
(2)No change in method. The resolu-
tion does not constitute a change in
method of accounting. The taxpayer is
required to continue to use its current
method of accounting for all items not
affected by the adjustments made by the
Service, unless the taxpayer obtains the
consent of the Commissioner to change
from its current method or the Service
changes the taxpayer from its current
method on subsequent examination;
(3)Subsequent change. The Service
is not precluded from changing the tax-
payer’s method of accounting in any open
taxable year; and
(4)Effect of subsequent change.If
the taxpayer’s method of accounting sub-
sequently is changed (voluntarily or
involuntarily) in any open taxable year,
the§481(a) adjustment (if any) will be
determined by reference to all items aris-
ing prior to the year of change, including
the items affected by the adjustment made
by the Service.
SECTION 10. EXAMPLES.
The following examples illustrate how
the provisions of this revenue procedure
apply to the resolution of accounting
method issues in various circumstances.
These examples include explanations of
the resolution of an accounting method
issue previously resolved by Appeals on a
nonaccounting-method-change basis in
the event that Examination resolves such
issue in a subsequent taxable year by
changing the taxpayer’s method of
accounting. Note, however, that where the
resolution of an accounting method issue
is imposed by Appeals, an examining
agent addressing such issue in a subse-
quent taxable year may resolve it consis-
tently with the prior resolution by
Appeals (seeDelegation Order 236).
.01Examination-imposed Change.
(1)Facts. A taxpayer that is a corpo-
ration deducted costs that the Service
determines should have been capitalized
to real property that was placed in service
in 2000. The taxpayer incurred and
deducted $1,000,000 of the costs in 1996,
$2,000,000 in each of 1997 and 1998, and
$5,000,000 in each of 1999 and 2000.
The taxpayer is examined for the 1997
and 1998 taxable years (1997 is the earli-
est open year). The examining agent
determines that the treatment of the costs
is an accounting method issue, and that
the taxpayer’s deduction of the costs is an
impermissible method of accounting. The
examining agent therefore proposes an
adjustment.
(2)Effect. Under section 5 of this
revenue procedure, the examining agent
is required to properly apply the law to
the facts and change the taxpayer to the
capitalization method of accounting for
the costs. The examining agent imposes
the change in 1997, the earliest open tax-
able year. The examining agent will pro-
vide the notice required by section 7.01
of this revenue procedure. The examining
agent imposes a§481(a) adjustment of
$1,000,000 (representing the $1,000,000
of the costs deducted in 1996), the entire
amount of which will be taken into
account in computing taxable income in
1997. The examining agent also disallows
the deductions of $2,000,000 in each of
1997 and 1998. The taxpayer’s basis in
the property as of the beginning of 1998
is increased by $5,000,000 (representing
the $1,000,000§481(a) adjustment and
the disallowance of the $2,000,000 of
deductions in each of 1997 and 1998).
The method change (once final) is effec-
tive for 1997. Thus, the taxpayer is
required to capitalize the costs in 1997
and all subsequent taxable years, unless
the taxpayer obtains the consent of the
Commissioner to change the method or
the Service changes the taxpayer from the
method on subsequent examination.
.02Appeals Resolution of Accounting
Method Issue as a Method Change With
Compromise Terms and Conditions.
(1)Facts. The facts are the same as
in section 10.01 of this revenue proce-
dure, except that the issue of whether the
costs should be capitalized is referred to
Appeals. The appeals officer believes that
hazards of litigation exist with respect to
the Service’s position. The appeals officer
and the taxpayer agree to resolve the
accounting method issue by changing the
taxpayer’s method of accounting for the
costs, but with compromise terms and
conditions to reflect the hazards of litiga-
tion.
(2)Effect. Under section 6.02(2) of
this revenue procedure, when the appeals
officer changes the taxpayer’s method of
accounting, the appeals officer is required
to properly apply the law to the facts and
change the taxpayer to the capitalization
method of accounting for the costs. The
appeals officer should provide the notice
required by section 7.01 of this revenue
procedure.
The appeals officer may make the
change using the cut-off method. If the
appeals officer makes the change in 1997
using the cut-off method, the appeals
officer will disallow the deductions of
$2,000,000 in each of 1997 and 1998.
The taxpayer’s basis in the property as of
the beginning of 1998 will be increased
by $4,000,000 (representing the disallow-
ance of the $2,000,000 of deductions in
each of 1997 and 1998). The method
change (once final) is effective for 1997.
Thus, the taxpayer is required to capital-
ize the costs in 1997 and all subsequent
taxable years, unless the taxpayer obtains
the consent of the Commissioner to
change the method or the Service changes
the taxpayer from the method on subse-
quent examination.
Alternatively, the appeals officer may
compromise the amount of the§481(a)
adjustment. If the appeals officer makes
the change in 1997 and agrees to reduce
the§481(a) adjustment by 25%, the
appeals officer will impose a§481(a)
adjustment of $750,000 (representing
75% of the amount of the costs deducted
in 1996), the entire amount of which will
be taken into account in computing tax-
able income in 1997. The appeals officer
will disallow the deductions of
$2,000,000 in each of 1997 and 1998.
The taxpayer and the appeals officer
agree in a closing agreement that basis in
the property as of the beginning of 1998
will be increased by $4,750,000 (repre-
senting the reduced§481(a) adjustment
of $750,000 and the disallowance of the
$2,000,000 of deductions in each of 1997
and 1998). The method change (once
final) is effective for 1997. Thus, the tax-
payer is required to capitalize the costs in
1997 and all subsequent taxable years,
unless the taxpayer obtains the consent of
the Commissioner to change the method
or the Service changes the taxpayer from
the method on subsequent examination.
As another alternative, the appeals
officer may compromise the year of
change and/or the§481(a) adjustment
period. For example, the appeals officer
may agree to make the change in 1998
with a two-year§481(a) adjustment
2002-13 I.R.B.688April 1, 2002

period. The appeals officer will impose a
§481(a) adjustment of $3,000,000 (repre-
senting the $1,000,000 of costs deducted
in 1996 and the $2,000,000 of costs
deducted in 1997), one-half of which will
be taken into account in computing tax-
able income in each of 1998 and 1999.
The appeals officer will disallow the
deduction of $2,000,000 in 1998. The
taxpayer’s basis in the property as of the
beginning of 1998 will be increased by
$5,000,000 (representing the $3,000,000
§481(a) adjustment and the disallowance
of the $2,000,000 of deductions in 1998).
The method change (once final) is effec-
tive for 1998. Thus, the taxpayer is
required to capitalize the costs in 1998
and all subsequent taxable years, unless
the taxpayer obtains the consent of the
Commissioner to change the method or
the Service changes the taxpayer from the
method on subsequent examination.
.03Appeals Resolution of Accounting
Method Issue on an Alternative-timing
Basis.
(1)Facts. The facts are the same as
in section 10.02 of this revenue proce-
dure, except that the appeals officer and
the taxpayer agree to resolve the issue on
an alternative-timing basis as described in
section 6.02(3) of this revenue procedure
and they enter into a closing agreement as
required by section 8.01 of this revenue
procedure. The accounting method issue
is resolved by providing in the closing
agreement that the taxpayer will deduct
50% of the costs incurred in 1997 and
1998 and capitalize the other 50% of the
costs incurred in those years.
(2)Effect. The appeals officer will
disallow $1,000,000 of the deductions in
each of 1997 and 1998. The taxpayer’s
basis in the property as of the beginning
of 1998 is increased by $2,000,000 (rep-
resenting the disallowance of the
$1,000,000 of deductions in each of 1997
and 1998). The taxpayer’s current method
of accounting for the costs is not
changed. Thus, the taxpayer is required to
continue to deduct the costs not covered
by the agreement (that is, the costs
incurred in 1996 and the costs incurred in
1999 and all subsequent taxable years),
unless the taxpayer obtains the consent of
the Commissioner to change the method
or the Service changes the taxpayer from
the method on subsequent examination. If
the Service changes the taxpayer’s
method in 1999, the Service will compute
a§481(a) adjustment of $1,000,000
(including the amount of the costs
deducted in 1996, which are not covered
by the agreement, and excluding the
amount of those costs deducted in 1997
and 1998 because the costs are covered
by the agreement). The Service will also
disallow the deduction of $5,000,000 in
1999. The taxpayer’s basis in the property
as of the beginning of 1999 will be
increased by an additional $6,000,000
(representing the $1,000,000§481(a)
adjustment and the disallowance of the
$5,000,000 deduction in 1999). The
method change (once final) is effective
for 1999. Thus, the taxpayer is required to
capitalize the costs in 1999 and all subse-
quent taxable years, unless the taxpayer
obtains the consent of the Commissioner
to change the method or the Service
changes the taxpayer from the method on
subsequent examination.
Alternatively, the accounting method
issue may be resolved by providing in the
closing agreement that the taxpayer will
capitalize $1,000,000 of the costs
incurred in each of 1997 and 1998 (and
the agreement is silent as to the manner in
which the other $1,000,000 of costs
incurred in each of 1997 and 1998 are to
be accounted for). The results for 1997
and 1998 will be the same as under the
closing agreement in the original facts
described in section 10.03(1) of this rev-
enue procedure. That is, the appeals
officer will disallow $1,000,000 of the
deduction in each of 1997 and 1998. The
taxpayer’s basis in the property as of the
beginning of 1998 is increased by
$2,000,000 (representing the disallow-
ance of the $1,000,000 of deductions in
each of 1997 and 1998). Because the tax-
payer’s current method of accounting for
the costs is not changed, the taxpayer is
required to continue to deduct the costs
not covered by the closing agreement
(that is, the costs incurred in 1996, the
remaining $1,000,000 of costs incurred in
each of 1997 and 1998, and the costs
incurred in 1999 and all subsequent tax-
able years). However, if the Service
changes the taxpayer’s method in 1999,
the Service will compute a§481(a)
adjustment of $3,000,000 (including the
$1,000,000 of the costs deducted in 1996
and the remaining $2,000,000 of the costs
deducted in 1997 and 1998, because those
costs are not items covered by the closing
agreement). The Service also will disal-
low the deduction of $5,000,000 in 1999.
The taxpayer’s basis in the property as of
the beginning of 1999 will be increased
by an additional $8,000,000 (representing
the $3,000,000§481(a) adjustment and
the disallowance of the $5,000,000
deduction in 1999). The method change
(once final) is effective for 1999. Thus,
the taxpayer is required to capitalize the
costs in 1999 and all subsequent taxable
years, unless the taxpayer obtains the
consent of the Commissioner to change
the method or the Service changes the
taxpayer from the method on subsequent
examination.
Assuming, in the alternative, that the
accounting method issue is resolved by
providing in the closing agreement that,
for the costs incurred in 1996 through
1998, the taxpayer will deduct 50% of the
costs and capitalize the other 50% of the
costs, and will increase taxable income by
$500,000 in 1997 (representing the disal-
lowance of $500,000 of costs in 1996).
The appeals officer will disallow
$1,000,000 of the deductions in each of
1997 and 1998. The taxpayer’s basis in
the property as of the beginning of 1998
is increased by $2,500,000 (representing
the disallowance of the $500,000 of
deductions in 1996 and the $1,000,000 of
deductions in each of 1997 and 1998).
The taxpayer’s current method of
accounting for the costs is not changed.
Thus, the taxpayer is required to continue
to deduct the costs not covered by the
closing agreement (that is, the costs
incurred in 1999 and all subsequent tax-
able years), unless the taxpayer obtains
the consent of the Commissioner to
change the method or the Service changes
the taxpayer from the method on subse-
quent examination. If the Service changes
the taxpayer’s method in 1999, the Ser-
vice will compute a§481(a) adjustment
of $0 (excluding the amount of the costs
deducted in 1996 through 1998, because
the manner in which those costs are to be
accounted for is specifically covered by
the closing agreement). The Service also
will disallow the deduction of $5,000,000
in 1999. The taxpayer’s basis in the prop-
erty as of the beginning of 1999 will be
increased by an additional $5,000,000
(representing the disallowance of the
$5,000,000 deduction in 1999). The
April 1, 20026892002-13 I.R.B.

method change (once final) is effective
for 1999. Thus, the taxpayer is required to
capitalize the costs in 1999 and all subse-
quent taxable years, unless the taxpayer
obtains the consent of the Commissioner
to change the method or the Service
changes the taxpayer from the method on
subsequent examination.
.04Appeals Resolution of Accounting
Method Issue on Time-value-of-money
Basis.
(1)Facts. The facts are the same as
section 10.02 of this revenue procedure,
except that the appeals officer and the
taxpayer agree to settle the issue on a
time-value-of-money basis as described
in section 6.02(4) of this revenue proce-
dure. The taxpayer files its return on a
calendar year basis. The appeals officer
and the taxpayer agree to compute the
specified amount using the sample com-
putationdescribedinsection
6.02(4)(b)(ii) of the revenue procedure.
The appeals officer believes that an
appropriate factor to reflect the hazards of
litigation is 25%. The taxpayer pays the
specified amount on May 15, 2000. The
highest marginal tax rate applicable to the
taxpayer for 1997 and 1998 is 35% and
the quarterly large corporation underpay-
ment rates in effect for January 1, 1998,
through June 30, 2000, are: 11%, 10%,
10%, 10%, 9%, 10%, 10%, 10%, 10%,
and 11%. The specified amount under
section 6.02(4) of this revenue procedure
would be deductible under§163(a) by
the taxpayer if it were treated as interest
expense arising from an underpayment of
tax.
(2)Computation of specified amount.
The hypothetical underpayment of tax for
1997 is $1,050,000, computed as follows:
the net increase in taxable income of
$3,000,000 (representing the§481(a)
adjustment of $1,000,000 and the disal-
lowance of the deduction of $2,000,000
computed as if Examination had changed
the taxpayer’s method in 1997) multiplied
by the applicable tax rate of 35%. The
hypothetical underpayment of tax for
1998 is $700,000, computed as follows:
the net increase in taxable income of
$2,000,000 (representing the disallow-
ance of the deduction of $2,000,000 com-
puted as if Examination had changed the
taxpayer’s method in 1997) multiplied by
the applicable tax rate of 35%.
The applicable time-value rate for
1997 is 6.565%, which is computed as
follows: The applicable period for 1997 is
March 15, 1998 (the due date of the
return) to May 15, 2000 (the date the
specified amount is paid). The underpay-
ment rates in effect for the applicable
period are 11%, 10%, 10%, 10%, 9%,
10%, 10%, 10%, 10%, and 11%. The
average underpayment rate in effect for
the applicable period is 10.1%
[(11+10+10+10+9+10+10+10+10+11)/
10]. The applicable after-tax time-value
rate is 6.565%, computed by multiplying
the average underpayment rate by one
minus the applicable tax rate [10.1% *
(1-.35)].
The applicable time-value rate for
1998 is 6.5%, which is computed as fol-
lows: The applicable period for 1998 is
March 15, 1999 (the due date of the
return) to May 15, 2000 (the date the
specified amount is paid). The underpay-
ment rates in effect for the applicable
period are 9%, 10%, 10%, 10%, 10%,
and 11%. The average underpayment rate
in effect for the applicable period is
10.00% [(9+10+10+10+10+11)/6]. The
applicable after-tax time-value rate is
6.5%, computed by multiplying the aver-
age underpayment rate by one minus the
applicable tax rate [10.00% * (1-.35)].
The time-value-of-money benefit for
each taxable year is computed by using
the following formula:
U * {[1+(r/365)]
n
-1}
where U = hypothetical underpay-
ment for the taxable year
r = the applicable time-value
rate
n = the number of days in the
applicable period
The time-value-of-money benefit for
1997 is $160,519, computed as follows:
$1,050,000 * {[1+(.06565/365)]
791
-1. The
time-value-of-money benefit for 1998 is
$55,165, computed as follows: $700,000
* [1+(.065/365)]
426
-1{ }.
The specified amount is the sum of the
time-value-of-money benefit for 1997 and
1998 reduced by 25% to reflect the haz-
ards of litigation. The specified amount is
$161,763 computed as follows:
($160,519+$55,165)*(1-.25).
(3)Effect. The Service will not pro-
pose any adjustments to taxable income
with respect to the taxpayer’s method of
accounting for the costs for 1997 and
1998. The taxpayer’s basis in the property
as of the beginning of 1998 is not
changed. The taxpayer’s current method
of accounting for the costs is not
changed. Thus, the taxpayer is required to
continue to deduct the costs in 1999 and
all subsequent taxable years, unless the
taxpayer obtains the consent of the Com-
missioner to change the method or the
Service changes the taxpayer from the
method on subsequent examination. If the
Service changes the taxpayer’s method in
1999, the Service will compute a§481(a)
adjustment of $5,000,000 (representing
the $1,000,000 of the costs deducted in
1996 and the $2,000,000 of costs
deducted in each of 1997 and 1998). The
Service will also disallow the deduction
of $5,000,000 in 1999. The taxpayer’s
basis in the property as of the beginning
of 1999 will be increased by $10,000,000
(representing the $5,000,000§481(a)
adjustment and the disallowance of the
$5,000,000 deduction in 1999). The
method change (once final) is effective
for 1999. Thus, the taxpayer is required to
capitalize the costs in 1999 and all subse-
quent taxable years, unless the taxpayer
obtains the consent of the Commissioner
to change the method or the Service
changes the taxpayer from the method on
subsequent examination.
The interest on the taxpayer’s defi-
ciency (which reflects the inclusion of the
$5,000,000§481(a) adjustment in taxable
income) for 1999 is $100,000. A portion
of the $100,000 of interest will be treated
as paid to the extent necessary to prevent
duplicate payment of the time-value-of-
money benefit relating to the§481(a)
adjustment. The interest on the deficiency
for 1999 includes the time-value-of-
money benefit attributable to the§481(a)
adjustment for the period March 15,
2000, through the date of payment of the
deficiency. The taxpayer previously paid
the Service the time-value-of-money ben-
efit attributable to $3,000,000 of the
§481(a) adjustment for the period March
15, 1998, through May 15, 2000, and
$2,000,000 of disallowed deduction for
the period March 15, 1999, through May
15, 2000. The interest on the deficiency
for 1999 attributable to the overlap period
of March 15, 2000, through May 15,
2000, is $19,112, computed as follows:
2002-13 I.R.B.690April 1, 2002

A * t * {[1+(r/365)]
n
-1}
where A = the§481(a) adjustment
t = highest marginal tax rate
applicable to the taxpayer
r = the applicable time-value
rate (computed for the
overlap period)
n = the number of days in the
overlap period
$5,000,000*.35*{[1+(.065/
365)]
61
-1}
The $19,112 is reduced by 25% (the
factor used by the appeals officer to
reflect the hazards of litigation) to arrive
at the interest credit of $14,334. The Ser-
vice will treat the $14,334 as a payment
toward the $100,000 of interest on the
taxpayer’s deficiency for 1999.
.05Default Procedures.
(1)Facts. The facts are the same as
section 10.01 of this revenue procedure,
except that the examining agent does not
provide the notice required by section
7.01 of this revenue procedure. Specifi-
cally, the examining agent disallows the
deductions of $2,000,000 in each of 1997
and 1998, but does not compute the
§481(a) adjustment of $1,000,000 or oth-
erwise provide notice that the accounting
method issue is being treated as an
accounting method change.
(2)Effect. The taxpayer’s basis in the
property as of the beginning of 1998 is
increased by $4,000,000 (representing the
disallowance of the $2,000,000 of deduc-
tions in each of 1997 and 1998). The tax-
payer’s current method of accounting for
the costs is not changed. Thus, the tax-
payer is required to continue to deduct the
costs in 1999 and all subsequent taxable
years, unless the taxpayer obtains the
consent of the Commissioner to change
the method or the Service changes the
taxpayer from the method on subsequent
examination. If the Service changes the
taxpayer’s method in 1999, the Service
will compute a§481(a) adjustment of
$1,000,000 (representing the $1,000,000
of the costs deducted in 1996). The Ser-
vice will also disallow the deduction of
$5,000,000 in 1999. The taxpayer’s basis
in the property as of the beginning of
1999 will be increased by an additional
$6,000,000 (representing the $1,000,000
§481(a) adjustment and the disallowance
of the $5,000,000 deduction in 1999).
The method change (once final) is effec-
tive for 1999. Thus, the taxpayer is
required to capitalize the costs in 1999
and all subsequent taxable years, unless
the taxpayer obtains the consent of the
Commissioner to change the method or
the Service changes the taxpayer from the
method on subsequent examination.
Assume that the examining agent dis-
allows the deductions of $2,000,000 in
each of 1997 and 1998 and computes the
§481(a) adjustment of $1,000,000, but
does not label the§481(a) adjustment or
otherwise provide notice that the account-
ing method issue is being treated as an
accounting method change. The taxpay-
er’s basis in the property as of the begin-
ning of 1998 is increased by $5,000,000
(representing the $1,000,000 adjustment
and the disallowance of the $2,000,000 of
deductions in each of 1997 and 1998).
The taxpayer’s current method of
accounting for the costs is not changed.
Thus, the taxpayer is required to continue
to deduct the costs in 1999 and all subse-
quent taxable years, unless the taxpayer
obtains the consent of the Commissioner
to change the method or the Service
changes the taxpayer from the method on
subsequent examination. If the Service
changes the taxpayer’s method in 1999,
the Service will compute a§481(a)
adjustment of $0 (excluding the
$1,000,000 of the costs deducted in 1998
and the $2,000,000 of the costs deducted
in each of 1997 and 1998 because the
costs were accounted for in the prior
adjustments). The Service will also disal-
low the deduction of $5,000,000 in 1999.
The taxpayer’s basis in the property as of
the beginning of 1999 will be increased
by an additional $5,000,000 (representing
the disallowance of the $5,000,000
deduction in 1999). The method change
(once final) is effective for 1999. Thus,
the taxpayer is required to capitalize the
costs in 1999 and all subsequent taxable
years, unless the taxpayer obtains the
consent of the Commissioner to change
the method or the Service changes the
taxpayer from the method on subsequent
examination.
SECTION 11. EFFECTIVE DATE
.01In General. Except as provided in
section 11.02 of this revenue procedure,
this revenue procedure is effective for:
(1) examiner’s reports issued on or
after July 1, 2002; and
(2) Forms 870AD and agreements
executed on or after July 1, 2002 (regard-
less of when the underlying examiner’s
report was issued).
.02Transition Rule. The Service and
the taxpayer may agree to apply this rev-
enue procedure to agreements executed
on or after March 14, 2002.
DRAFTING INFORMATION
The principal author of this revenue
procedure is Grant Anderson of the Office
of Associate Chief Counsel (Income Tax
and Accounting). For further information
regarding this revenue procedure, contact
Mr. Anderson at (202) 622–4970 (not a
toll-free call).
April 1, 20026912002-13 I.R.B.

APPENDIX A
MODEL CLOSING AGREEMENT FOR SETTLEMENT
ON ACCOUNTING METHOD CHANGE BASIS
Department of the Treasury Internal Revenue Service
Closing Agreement on Final Determination Covering Specific Matters
Under§7121 of the Internal Revenue Code, [Insert taxpayer’s name, address, telephone number, and identifying number](“the
taxpayer”) and the Commissioner of Internal Revenue (“the Commissioner”) make the following closing agreement:
WHEREAS:
1. The accounting method issue covered by this agreement is the taxpayer’s method of accounting for [identify subject: for
example:“credit sales”];
2. The taxable year(s) covered by this closing agreement are [insert taxable year(s) covered by the agreement];
3. The taxpayer and the Commissioner relied on the following facts and representations in making this closing agreement:
[insert any relevant facts];
4. Under the taxpayer’s present method of accounting for [identify subject: for example,“credit sales”], the taxpayer [describe
in detail the method of accounting being changed: for example,“includes income from credit sales in gross income when payment
is received”];
5. [If applicable, insert:] The taxpayer has filed an amended return(s) for the taxable year(s) ended [insert applicable affected
succeeding taxable year(s) for which a federal income tax return has been filed as of the date of the closing agreement] to reflect
the change in method of accounting for [insert subject: for example,“credit sales”] described in this closing agreement;
6. [If applicable, insert:] A stipulated decision has been entered by the [insert name of federal court] with respect to the tax-
able year(s) ended [insert date(s)] that reflects taxable income for such year(s) computed using the new method of accounting for
[insert subject: for example,“credit sales”].
NOW IT IS HEREBY DETERMINED AND AGREED for federal income tax purposes that:
1. The Service is changing the taxpayer’s method of accounting for [insert subject: for example,“credit sales”] to the method
of [describe the method of accounting to which the taxpayer is being changed: for example,“including income from credit sales
in gross income when all the events have occurred that fix the right to receive such income and the amount thereof can be deter-
mined with reasonable accuracy (an accrual method)”];
2. The change in method of accounting for [insert subject: for example,“credit sales”] is to be effected for the taxable year
ended [insert date] (the year of change);
3. [Insert if applicable] An adjustment to income is required under§481(a) of the Internal Revenue Code in the amount of $
[insert amount in numbers]([insert amount in words] dollars), [if applicable, insertcomputed by taking into account the limitations
under§481(b),] as of the beginning of the year of change ([insert date]), for [describe the adjustment: for example,“credit sales”],
which amount previously has not been included in the taxpayer’s gross income. [Alternatively, insert] The change in method of
accounting for [insert subject: for example,“credit sales”] is to made on a cut-off basis;
4. [Insert if applicable] The§481(a) adjustment will be taken into account [insert§481(a) adjustment spread period: for
example,“entirely in the year of change.”]
5. [Insert if applicable] The adjustment(s) to tax attributable to the adjustment(s) to taxable income resulting from the change
in the method of accounting for [insert subject: for example,“credit sales”] (including the§481(a) adjustment, current year adjust-
ment(s), and any collateral adjustments to taxable income or tax liability resulting fom the change) for each taxable year covered
by the closing agreement are as follows: [insert the adjustments to each taxable year covered by the closing agreement in table
form], and;
6. The change in method of accounting for [insert subject: for example,“credit sales”] is a change in method of accounting
within the meaning of Rev. Proc. 2002–18. As such, the provisions of section 446 of the Code, and the regulations thereunder, apply
to the new method of accounting for [insert subject: for example,“credit sales.”];
7. The Service is not precluded from changing the taxpayer’s method of accounting for [insert subject: for example,“credit
sales”] from the new method of accounting if the Service determines that the new method does not clearly reflect the taxpayer’s
income. However, under section 7.04(3) of Rev. Proc. 2002–18, the Service will not require the taxpayer to change its method of
accounting for [insert subject: for example,“credit sales”] from the new method for [insert taxable year(s) for which a federal
income tax return has been filed as of the date of this closing agreement], provided that:
(a) the taxpayer has complied with all the applicable provisions of this closing agreement;
2002-13 I.R.B.692April 1, 2002

(b) there has been no taxpayer fraud, malfeasance, or misrepresentation of a material fact;
(c) there has been no change in the material facts on which this closing agreement was based; and
(d) there has been no change in the applicable law on which this closing agreement was based;
8. [Insert if applicable:] The following additional conditions also apply: [insert, for example, conditions with respect to waiv-
ing restrictions on assessment and collection, paying any tax, abating any overassessment, or refunding or crediting any tax over-
payment];
9. The taxpayer accepts this settlement and agrees to the applicable terms of Rev. Proc. 2002–18.
This agreement is final and conclusive except:
(1) The matter it relates to may be reopened in the event of fraud, malfeasance, or misrepresentation of a material fact;
(2) It is subject to the Internal Revenue Code sections that expressly provide that effect be given to their provisions (including
any stated exception for§7122) notwithstanding any law or rule of law; and
(3) If it relates to a tax period ending after the date of this agreement, it is subject to any law enacted after the agreement date,
that applies to the tax period.
By signing, the parties certify that they have read and agreed to the terms of this document.
Your signature
Date:
Spouse’s signature if joint return:Date:
Taxpayer’s representative:Date:
Taxpayer (other than an individual):Date:
Title:
Commissioner of Internal Revenue:
By:
Date:
Title:
Instructions
This agreement must be signed and filed in triplicate. (All copies must have original signatures.) The original and copies of the
agreement must be identical. The name of the taxpayer must be stated accurately. The agreement may relate to one or more years.
If an attorney or agent signs the agreement for the taxpayer, the power of attorney (or a copy) authorizing that person to sign
must be attached to the agreement.
If the taxpayer is a corporation, the agreement must be dated and signed with the name of the corporation, the signature and title
of an authorized officer or officers, or the signature of an authorized attorney or agent. It is not necessary that a copy of an enabling
corporate resolution be attached.
Use additional pages if necessary and identify them as part of this agreement.
Please see Rev. Proc. 68–16 (1968–1 C.B. 770) for a detailed description of practices and procedures applicable to most closing
agreements.
April 1, 20026932002-13 I.R.B.

APPENDIX B
MODEL CLOSING AGREEMENT FOR SETTLEMENT
ON NONACCOUNTING-METHOD-CHANGE BASIS
Department of the Treasury Internal Revenue Service
Closing Agreement on Final Determination Covering Specific Matters
Under§7121 of the Internal Revenue Code, [Insert taxpayer’s name, address, telephone number, and identifying number](“the
taxpayer”) and the Commissioner of Internal Revenue (“the Commissioner”) make the following closing agreement:
WHEREAS:
1. The accounting method issue covered by this closing agreement is [identify subject: for example:“costs of acquiring non-
depreciable asset X”];
2. [Insert if alternative-timing resolution] The item(s) covered by this closing agreement are [identify items subject to the clos-
ing agreement: for example,“the costs incurred in connection with the acquisition of nondepreciable asset X in 1997 and 1998”].
[Alternatively, insert if time-value-of-money resolution] The taxable year(s) covered by this closing agreement are [insert taxable
year(s) covered by the agreement];
3. The taxpayer and the Commissioner relied on the following facts and representations in making this closing agreement:
[insert any relevant facts];
4. Under the taxpayer’s present method of accounting for [identify subject: for example,“costs of acquiring nondepreciable
asset X”], the taxpayer [describe in detail the accounting method issue: for example,“deducts the costs as an ordinary and neces-
sary business expense”];
5. [If applicable, insert:] The taxpayer has filed an amended return(s) for the taxable year(s) ended [insert applicable affected
succeeding taxable years for which a federal income tax return has been filed as of the date of the closing agreement] to reflect
the alternative-timing resolution for [insert subject: for example,“costs of acquiring nondepreciable asset X”] described in this
closing agreement;
6. [If applicable, insert:] A stipulated decision has been entered by the [insert name of federal court] with respect to the tax-
able years ended [insert date(s)] that reflects the nonaccounting-method-change resolution set forth in this agreement for [insert
subject: for example,“costs of acquiring nondepreciable asset X”].
NOW IT IS HEREBY DETERMINED AND AGREED for federal income tax purposes that:
1. The Service is not changing the taxpayer’s method of accounting for [insert subject: for example,“costs of acquiring non-
depreciable asset X”].
2. The accounting method issue covered by this agreement ([identify subject: for example:“costs of acquiring nondepreciable
asset X”]) is being resolved on [insert basis for resolution: for example,“an alternative-timing basis”or“a time-value-of-money
basis”].
[If alternative-timing resolution, insert the following paragraphs 3–9 as applicable]
3. The items covered by the closing agreement are to be accounted for in the affected taxable years as follows: [insert a
description of the manner in which the items are to be accounted for, for example,“Fifty percent of the costs incurred in each of
1997 and 1998 ($1,000,000) will be deductible and the remaining fifty percent ($1,000,000) will be capitalized”];
4. As a result of this treatment, [Insert a description of any collateral effects of thie alternative-timing treatment: for example,
“the taxpayer’s basis in asset X is increased by $2,000,000”];
5. Any items not specifically covered by this closing agreement are not affected by this agreement;
6. The adjustment(s) to tax attributable to the adjustment to taxable income resulting from the resolution of [insert subject: for
example,“costs of acquiring nondepreciable asset X”] by this agreement (including the current year adjustment and any collateral
adjustments for each taxable year affected by this closing agreement) is [insert taxable year(s)],$[insert amount in numbers]
([insert amount in words] dollars);
7. The Service is not precluded from changing the taxpayer’s method of accounting for [insert subject: for example,“costs of
acquiring nondepreciable asset X”] upon subsequent examination for any open taxable year for items not covered by this agree-
ment;
8. If the taxpayer’s method of accounting for [insert subject: for example,“costs of acquiring nondepreciable asset X”] subse-
quently is changed (voluntarily or involuntarily) in any open taxable year, the adjustment under§481(a) (if any) will be determined
by reference to all items arising prior to the year of change except for those items specifically covered by this closing agreement;
and
9. [Insert if applicable:] The following additional conditions also apply: [insert, for example, conditions with respect to waiv-
ing restrictions on assessment and collection, paying any tax, abating any overassessment, or refunding or crediting any tax over-
payment];
2002-13 I.R.B.694April 1, 2002

[Alternatively, if a time-value-of-money resolution, insert the following paragraphs 3–10 as applicable]
3. The computation of the specified amount as provided in section 6.02(4)(b) of Rev. Proc. 2002–18 has been made as follows:
[insert computation].
4. The specified amount is not interest under§163(a) of the Code and may not be deducted or capitalized under any provision
of the Code.
5. [Insert if the computation of the specified amount takes into account the taxpayer’s actual tax attributes] The tax attributes
that may affect the computation of the taxpayer’s tax liability in subsequent taxable years [insert“are”or“are not”] adjusted to
reflect their effect on the specified amount;
6. The Service is not precluded from changing the taxpayer’s method of accounting for [insert subject: for example,“costs of
acquiring nondepreciable asset X”] upon subsequent examination for any open taxable year not covered by the agreement;
8. If the taxpayer’s method of accounting for [insert subject: for example,“costs of acquiring nondepreciable asset X”] subse-
quently is changed (voluntarily or involuntarily) in any open taxable year not covered by this agreement, the adjustment under
§481(a) (if any) will be determined by reference to all items arising prior to the year of change;
9. If the Service changes the taxpayer’s method of accounting in an open taxable year not covered by this agreement and
imposes a§481(a) adjustment, the interest that is assessed on any underpayment, or the interest that is due on any overpayment,
for the year of change will be treated as paid to the extent necessary to prevent duplicate payment of the time-value-of-money ben-
efit relating to the§481(a) adjustment;
10. [Insert if applicable:] The following additional conditions also apply: [insert, for example,conditions with respect to waiv-
ing restrictions on assessment and collection, paying any tax, abating any overassessment, or refunding or crediting any tax over-
payment];
The taxpayer accepts this settlement and agrees to the applicable terms of Rev. Proc. 2002–18.
This agreement is final and conclusive except:
(1) The matter it relates to may be reopened in the event of fraud, malfeasance, or misrepresentation of a material fact;
(2) It is subject to the Internal Revenue Code sections that expressly provide that effect be given to their provisions (including
any stated exception for§7122) notwithstanding any law or rule of law; and
(3) If it relates to a tax period ending after the date of this agreement, it is subject to any law enacted after the agreement date,
that applies to the tax period.
By signing, the parties certify that they have read and agreed to the terms of this document.
Your signature
Date:
Spouse’s signature if joint return:Date:
Taxpayer’s representative:Date:
Taxpayer (other than an individual):Date:
Title:
Commissioner of Internal Revenue:
By:
Date:
Title:
Instructions
This agreement must be signed and filed in triplicate. (All copies must have original signatures.) The original and copies of the
agreement must be identical. The name of the taxpayer must be stated accurately. The agreement may relate to one or more years.
If an attorney or agent signs the agreement for the taxpayer, the power of attorney (or a copy) authorizing that person to sign
must be attached to the agreement.
If the taxpayer is a corporation, the agreement must be dated and signed with the name of the corporation, the signature and title
of an authorized officer or officers, or the signature of an authorized attorney or agent. It is not necessary that a copy of an enabling
corporate resolution be attached.
Use additional pages if necessary and identify them as part of this agreement.
Please see Rev. Proc. 68–16 (1968–1 C.B. 770) for a detailed description of practices and procedures applicable to most closing
agreements.
April 1, 20026952002-13 I.R.B.

26 CFR 601.204: Changes in accounting periods
and methods of accounting.
(Also Part I,§§446, 481; 1.446–1, 1.481–1, 1.481–
4.)
Rev. Proc. 2002–19
SECTION 1. PURPOSE
This revenue procedure modifies Rev.
Proc. 97–27 (1997–1 C.B. 680) which
provides procedures under which taxpay-
ers may obtain the advance consent of the
Commissioner of Internal Revenue to
change a method of accounting. In addi-
tion, this revenue procedure modifies
Rev. Proc. 2002–9 (2002–3 I.R.B. 327)
which provides procedures for taxpayers
within the scope of that revenue proce-
dure to obtain automatic consent to
change a method of accounting.
The changes to Rev. Proc. 97–27 and
Rev. Proc. 2002–9 include:
(1) allowing a taxpayer to change its
method of accounting prospectively, with-
out audit protection, if the method to be
changed is an issue pending for a taxable
year under examination or an issue under
consideration by either an appeals office
or a federal court;
(2) providing that, in the case of
changes in method of accounting that
result in a negative (i.e., taxpayer-
favorable)§481(a) adjustment, the entire
amount of the adjustment will be taken
into account in the year of change; and
(3) certain other conforming and clari-
fying changes.
For a discussion of the policy reasons
for certain of the modifications provided
by this revenue procedure, see Announce-
ment 2002–37 (2002–13 I.R.B. 703)
SECTION 2. CHANGES
.01Changes to BACKGROUND Sec-
tions. Section 2.01(3) in each of Rev.
Proc. 97–27 and Rev. Proc. 2002–9is
deleted.
.02Changes to§481(a) Spread
Period for Negative§481(a) Adjust-
ments.
(1) Section 5.02(3)(a) of Rev. Proc.
97–27 is modified to read as follows:
“(a)In general. Except as other-
wise provided in sections 5.02(3)(b) and
7.03 of this revenue procedure, the
§481(a) adjustment period is four taxable
years for a net positive adjustment for an
accounting method change, and one tax-
able year for a net negative adjustment
for an accounting method change.”
(2) Section 5.04(1) of Rev. Proc.
2002–9 is modified to read as follows:
“(1)In general. Except as otherwise
provided in section 5.04(3) or the
APPENDIX of this revenue procedure,
the§481(a) adjustment period is four
taxable years for a net positive adjustment
for an accounting method change, and
one taxable year for a net negative adjust-
ment for an accounting method change.”
(3) The second sentence in both
Example 1 and Example 2 in section 7.02
of Rev. Proc. 97–27 and section 5.04(2)
of Rev. Proc. 2002–9 is modified to read
as follows:
“The net§481(a) adjustment for this
method change is a positive adjustment of
$30,000 and the adjustment period is four
taxable years.”
(4) Section 7.03(1) of Rev. Proc.
97–27 and section 5.04(3)(a) of Rev.
Proc. 2002–9 are each modified to read as
follows:
“De minimisrule. A taxpayer may
elect to use a one-year adjustment period
in lieu of the§481(a) adjustment period
otherwise provided by this revenue proce-
dure for positive adjustments if the net
§481(a) adjustment for the change is less
than $25,000. The taxpayer must com-
plete the appropriate line on the Form
3115 to elect thisde minimisrule.”
(5) Section 4.01(3) of the APPEN-
DIX of Rev. Proc. 2002–9 (relating to the
§481(a) adjustment for certain uniform
capitalization methods used by resellers
and reseller-producers) is modified to
read as follows:
“(3)Section 481(a) adjustment. Begin-
ning with the year of change, a taxpayer
changing its method of accounting for
costs pursuant to sections 4.01(a)(1)(i),
4.01(1)(a)(iii), or 4.01(1)(a)(iv) of this
APPENDIX generally must take any
applicable net positive§481(a) adjust-
ment for such change into account ratably
over the same number of taxable years,
not to exceed four, that the taxpayer used
its former method of accounting. A tax-
payer changing its method of accounting
for costs pursuant to sections
4.01(1)(a)(ii),4.01(1)(a)(v),or
4.01(1)(a)(vi) of this APPENDIX gener-
ally must take any applicable net positive
§adjustment for such change into account
ratably over four taxable years. See sec-
tion 5.04(3) of this revenue procedure for
exceptions to this general rule.”
(6) Section 4.01(5) of the APPEN-
DIX of Rev. Proc. 2002–9, which pro-
vides an example illustrating the change
to and from a UNICAP method of
accounting for small resellers and for-
merly small resellers is modified to read
as follows:
“(5)Example.
***
Because X satisfies the small reseller
exception for 1997, X may change volun-
tarily from the UNICAP method to a per-
missible non-UNICAP inventory capitali-
zation method under section 4.01 of this
APPENDIX. To reflect the removal of the
additional§263A costs 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). The entire
amount of this negative§481(a) adjust-
ment is included in the computation of
X’s taxable income for 1997. In addition,
X must include $20,000 of the unamor-
tized 1995§481(a) adjustment in 1997
taxable income.
X’s 1997 Ending Inventory:
Beginning Inventory (With UNICAP costs)$1,300,000
1997 Increment100,000
1997§481(a) Adjustment <Negative><100,000>
Total 1997 Ending Inventory$1,300,000
2002-13 I.R.B.696April 1, 2002

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 Income100,000
Unamortized 1997§481(a) Adjustment—12/31/97$0
X also satisfies the small reseller exception for 1998 and, therefore, is not required to return to the UNICAP method for 1998.
X, however, must include $20,000 of the unamortized 1995 positive§481(a) adjustment in its 1998 taxable income.
X’s 1998 Ending Inventory:
Beginning Inventory (Without UNICAP costs)$1,300,000
1998 Increment100,000
Total 1998 Ending Inventory$1,400,000
X’s Unamortized 1995§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
In 1999, X fails to satisfy the small reseller exception and, therefore, must return to the UNICAP method as provided under
section 4.01 of this APPENDIX. X changes to the simplified resale method without a historic absorption ratio election under
§1.263A–3(d)(3). Assume that X must capitalize $120,000 of additional§263A costs to the cost of its 1999 beginning inventory
because of this change in inventory method. Because X used a non-UNICAP for two taxable years prior to 1999, the§481 spread
period for the positive§481(a) adjustment is two years. Therefore, X must include one-half of the§481(a) adjustment ($60,000)
when computing taxable income for 1999 and 2000. Assume that X must add $10,000 of additional§263A costs to the cost of its
1999 ending inventory because of the $100,000 increment for 1999.
X’s 1999 Ending Inventory:
Beginning Inventory (Without UNICAP costs)$1,400,000
1999 Increment100,000
Additional§263A costs in Beginning Inventory120,000
Additional§263A costs in 1999 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
April 1, 20026972002-13 I.R.B.

Because X fails to satisfy the small reseller exception for 2000, X must continue using the UNICAP method for its inventory
costs. Furthermore, X is required to include $60,000 of the unamortized 1999 positive§481(a) adjustment in 2000 taxable income.
Assume that X is required to add $10,000 of additional§263A costs to the cost of its 2000 ending inventory because of the
$100,000 increment for 2000.
X’s 2000 Ending Inventory:
Beginning Inventory (With UNICAP costs)$1,630,000
2000 Increment100,000
Additional§263A Costs in 2000 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
.03Changes to Scope Restrictions for
Taxpayers Under Examination, or Before
an Area Appeals Office or a Federal
Court.
(1)Taxpayers under examination.
(a) Section 4.02(2) of Rev. Proc.
97–27 (relating to the situations in which
Rev. Proc. 97–27 does not apply) is modi-
fied to read as follows:
“(2)Under examination. If the tax-
payer is under examination, except as
provided in sections 6.01(2) (90-day win-
dow), 6.01(3) (120-day window), 6.01(4)
(director consent), and 6.01(5) (issue
pending) of this revenue procedure.”
(b) Section 6.01 of Rev. Proc.
97–27 (relating to procedures for taxpay-
ers under examination) is modified as fol-
lows:
“(1)In general. A taxpayer that is
under examination may not file a Form
3115 to request a change in accounting
method under this revenue procedure
except as provided in sections 6.01(2)
(90-day window), 6.01(3) (120-day win-
dow), 6.01(4) (director consent), and
6.01(5) (issue pending). A taxpayer that
files a Form 3115 beyond the time peri-
ods 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 compelling circum-
stances.”
***
“(5)Issue Pending. (a) A taxpayer
that is under examination with respect to
any income tax issue may request to
change a method of accounting if the
method of accounting to be changed is an
issue pending for any taxable year under
examination. However, the audit protec-
tion provisions of section 9.01 of this rev-
enue procedure do not apply to a taxpayer
changing its method of accounting under
this section 6.01(5). For this purpose, an
issue is pending for taxable years under
examination if the Service has given the
taxpayer written notification indicating an
adjustment is being made or will be pro-
posed with respect to the taxpayer’s
method of accounting. This notification
normally will occur after the Service has
gathered information sufficient to deter-
mine that an adjustment is appropriate
and justified, although the exact amount
of the adjustment may not yet be deter-
mined.
(b) A taxpayer that requests to
change a method of accounting under this
section 6.01(5) must provide a copy of
the Form 3115 to the examining agent(s)
at the same time it files the original Form
3115 with the national office. The Form
3115 must contain the name(s) and tele-
phone number(s) of the examining
agent(s). In order to assist in processing
an application under this section 6.01(5),
the taxpayer should type or legibly write
“Issue pending”on the Form 3115.”
(c) Section 4.02(1) of Rev. Proc.
2002–9 (relating to situations in which
Rev. Proc. 2002–9 does not apply) is
modified to read as follows:
“(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), 6.03(4) (direc-
tor consent), 6.03(5) (changes lacking
audit protection), and 6.03(6) (issue pend-
ing) of this revenue procedure.”
(d) Section 6.03 of Rev. Proc.
2002–9 (relating to procedures for tax-
payers under examination) is modified as
follows:
“(1)In general. Except as otherwise
provided in the APPENDIX of this rev-
enue procedure (see, for example, section
1.01 of the APPENDIX of this revenue
procedure), a taxpayer that is under
examination may file an application to
change a method of accounting under sec-
tion 6 of this revenue procedure only if
the taxpayer is within the provisions of
section 6.03(2) (90-day window), 6.03(3)
(120-day window), 6.03(4) (director con-
sent), 6.03(5) (changes lacking audit pro-
tection), or 6.03(6) (issue pending) of this
revenue procedure. A taxpayer that files
an application beyond the time periods
provided in the 90-day and 120-day win-
dows is not eligible for the automatic
extension of time and will not be granted
an extension of time to file under
§301.9100, except in unusual and com-
pelling circumstances.”
***
2002-13 I.R.B.698April 1, 2002

“(6)Issue Pending. (a) A taxpayer
that is under examination with respect to
any income tax issue may request to
change a method of accounting if the
method of accounting to be changed is an
issue pending for any taxable year under
examination. However, the audit protec-
tion provisions of section 7.01 of this rev-
enue procedure do not apply to a taxpayer
changing its method of accounting under
this section 6.03(6). For this purpose, an
issue is pending for taxable years under
examination if the Service has given the
taxpayer written notification indicating an
adjustment is being made or will be pro-
posed with respect to the taxpayer’s
method of accounting. This notification
normally will occur after the Service has
gathered information sufficient to deter-
mine that an adjustment is appropriate
and justified, although the exact amount
of the adjustment may not yet be deter-
mined.
(b) A taxpayer that requests to
change a method of accounting under this
section 6.03(6) must provide a copy of
the Form 3115 to the examining agent(s)
at the same time it files the original Form
3115 with the national office. The Form
3115 must contain the name(s) and tele-
phone number(s) of the examining
agent(s). In order to assist in processing
an application under this section 6.03(6),
the taxpayer should type or legibly write
“Issue pending”on the Form 3115.”
(2)Taxpayers before an appeals
office.
(a) Section 4.02(3) of Rev. Proc.
97–27 (relating to the situations in which
Rev. Proc. 97–27 does not apply) is
deleted.
(b) Section 6.02 of Rev. Proc.
97–27 (relating to procedures for taxpay-
ers before an appeals office) is modified
as follows:
“.02Taxpayer before an appeals
office. A taxpayer otherwise within the
scope of this revenue procedure that is
before an appeals office with respect to
any income tax issue may request a
change in accounting method. However,
the audit protection provisions of section
9.01 of this revenue procedure do not
apply if the accounting method to be
changed is an issue under consideration
by the appeals office. A taxpayer that
requests to change a method of account-
ing under this section 6.02 must provide a
copy of the Form 3115 to the appeals
officer at the time it files the original
Form 3115 with the national office. The
Form 3115 must contain the name(s) and
telephone number(s) of the appeals offic-
er(s). In order to assist in processing an
application under this section 6.02, the
taxpayer should type or legibly write
“Issue under consideration”on the Form
3115.”
(c) Section 4.02(2) of Rev. Proc.
2002–9 (relating to situations to which
Rev. Proc. 2002–9 does not apply) is
deleted.
(d) Section 6.04 of Rev. Proc.
2002–9 (relating to procedures for tax-
payers before an appeals office) is modi-
fied to read as follows:
“.04Taxpayer before an appeals
office. A taxpayer otherwise within the
scope of this revenue procedure that is
before an appeals office with respect to
any income tax issue may request a
change in accounting method. However,
the audit protection provisions of section
7.01 of this revenue procedure do not
apply if the accounting method to be
changed is an issue under consideration
by the appeals office. A taxpayer that
requests to change a method of account-
ing under this section 6.04 must provide a
copy of the Form 3115 to the appeals
officer at the time it files the original
Form 3115 with the national office. The
Form 3115 must contain the name(s) and
telephone number(s) of the appeals offic-
er(s). In order to assist in processing an
application under this section 6.04, the
taxpayer should type or legibly write
“Issue under consideration”on the Form
3115.”
(3)Taxpayers before a federal court.
(a) Section 4.02(4) of Rev. Proc.
97–27 (relating to the situations in which
Rev. Proc. 97–27 does not apply) is
deleted.
(b) Section 6.03 of Rev. Proc.
97–27 (relating to procedures for taxpay-
ers before a federal court) is modified to
read as follows:
“.03Taxpayer before a federal court.
A taxpayer otherwise within the scope of
this revenue procedure that is before a
federal court with respect to any income
tax issue may request a change in
accounting method. However, the audit
protection provisions of section 9.01 of
this revenue procedure do not apply if the
accounting method to be changed is an
issue under consideration by the federal
court. A taxpayer that requests to change
a method of accounting under this section
6.03 must provide a copy of the Form
3115 to the counsel(s) for the government
at the time it files the original Form 3115
with the national office. The Form 3115
must contain the name(s) and telephone
number(s) of the counsel(s) for the gov-
ernment. In order to assist in processing
an application under this section 6.03, the
taxpayer should type or legibly write
“Issue under consideration”on the Form
3115.”
(c) Section 4.02(3) of Rev. Proc.
2002–9 (relating to situations to which
Rev. Proc. 2002–9 does not apply) is
deleted.
(d) Section 6.05 of Rev. Proc.
2002–9 (relating to procedures for tax-
payers before a federal court) is modified
to read as follows:
.05Taxpayer before a federal court.A
taxpayer otherwise within the scope of
this revenue procedure that is before a
federal court with respect to any income
tax issue may request a change in
accounting method. However, the audit
protection provisions of section 7.01 of
this revenue procedure do not apply if the
accounting method to be changed is an
issue under consideration by the federal
court. A taxpayer that requests to change
a method of accounting under this section
6.05 must provide a copy of the Form
3115 to the counsel(s) for the government
at the time it files the original Form 3115
with the national office. The Form 3115
must contain the name(s) and telephone
number(s) of the counsel(s) for the gov-
ernment. In order to assist in processing
an application under this section 6.05, the
taxpayer should type or legibly write
“Issue under consideration”on the Form
3115.”
.04Notional Principal Contracts. Sec-
tion 14.02 of Rev. Proc. 97–27 (relating
to Designated A treatment for changes in
method of accounting for notional princi-
pal contracts) is deleted.
SECTION 3. EFFECT ON OTHER
DOCUMENTS
Rev. Proc. 97–27 and Rev. Proc.
2002–9 are modified and amplified.
April 1, 20026992002-13 I.R.B.

SECTION 4. EFFECTIVE DATE
.01In General. Except as otherwise
provided in sections 4.02 and 4.03 of this
revenue procedure, this revenue proce-
dure is effective for taxable years ending
on or after December 31, 2001.
.02Changes to Scope Restrictions of
Rev. Proc. 97–27. Notwithstanding sec-
tion 4.01 of this revenue procedure, the
changes to the scope restrictions of Rev.
Proc. 97–27 provided in section
2.03(1)(a) and (b), 2.03(2)(a) and (b), and
2.03(3)(a) and (b) of this revenue proce-
dure are effective for taxable years ending
on or after March 14, 2002.
.03Notional Principal Contracts. Not-
withstanding section 4.01 of this revenue
procedure, the deletion of section 14.02
of Rev. Proc. 97–27 is effective for Forms
3115 pending with the national office on
March 14, 2002.
.04Transition Rules.
(1)Applications Under Rev. Proc.
2002–9.
(a) If a taxpayer has filed its fed-
eral income tax return on or before April
15, 2002, for a taxable year ending on or
after December 31, 2001, and wants to
change a method of accounting for such
taxable year under Rev. Proc. 2002–9 for
an issue pending at examination, or an
issue under consideration by an area
office or by a federal court, without audit
protection, as permitted under this rev-
enue procedure, then the taxpayer must
comply with the requirements of this sec-
tion 4.04(1)(a). The taxpayer must com-
plete and file a Form 3115 in duplicate.
The original must be attached to the tax-
payer’s amended federal income tax
return for the year of change. The
amended return must be filed no later
than September 10, 2002. A copy of the
Form 3115 must be filed with the national
office (see section 6.02(6) of Rev. Proc.
2002–9 for the address) no later than
when the taxpayer’s amended return is
filed.
(b) If a taxpayer has applied to
change a method of accounting under
Rev. Proc. 2002–9 for a taxable year end-
ing on or after December 31, 2001, by
filing an application with its federal
income tax return on or before April 15,
2002, such change in method of account-
ing results in a net negative§481(a)
adjustment, and the taxpayer wants to
apply the one-year§481(a) adjustment
period of this revenue procedure to the
change, then the taxpayer must comply
with the requirements of this section
4.04(1)(b). The taxpayer must complete
and file a revised Form 3115 in duplicate,
reflecting the one-year§481(a) adjust-
ment period. The original must be
attached to the taxpayer’s amended fed-
eral income tax return for the year of
change. The amended return must be filed
no later than September 10, 2002. A copy
of the revised Form 3115 must be filed
with the national office (see section
6.02(6) of Rev. Proc. 2002–9 for the
address) no later than when the taxpayer’s
amended return is filed. Both the original
and the copy of the application filed with
the national office should be labeled
“Substitute Application under Rev. Proc.
2002–19.”
(c) If a taxpayer has filed a copy
of an application to change a method of
accounting under Rev. Proc. 2002–9 for a
taxable year ending on or after December
31, 2001, with the national office on or
before April 15, 2002, but has not filed its
federal income tax return with the origi-
nal application attached by April 15,
2002, such change in method of account-
ing results in a net negative§481(a)
adjustment, and the taxpayer wants to
apply the one-year§481(a) adjustment
period of this revenue procedure to the
change, then the taxpayer must comply
with the requirements of this section
4.04(1)(c). The taxpayer must complete
and file a revised Form 3115 in duplicate,
reflecting the one-year§481(a) adjust-
ment period. The revised original Form
3115 must be attached to the taxpayer’s
timely filed federal income tax return for
the year of change. The revised copy of
the Form 3115 must be filed with the
national office (see section 6.02(6) of
Rev. Proc. 2002–9 for the address) no
later than when the taxpayer’s original
federal income tax return is filed. The
copy of the application filed with the
national office should be labeled“Substi-
tute Application under Rev. Proc. 2002–
19.”
(d) If a taxpayer has filed an origi-
nal application and/or a copy of an appli-
cation to change a method of accounting
under Rev. Proc. 2002–9 for a taxable
year ending on or after December 31,
2001, with the national office on or
before April 15, 2002, such change in
method of accounting results in a net
negative§481(a) adjustment, and the tax-
payer does not file revised applications
under either section 4.04(1)(b) or (c) of
this revenue procedure (whichever
applies), then the four-year§481(a)
adjustment period of Rev. Proc. 2002–9
(prior to its modification by this revenue
procedure) will apply to the change.
(2)Applications Under Rev. Proc.
97–27. In the case of an application to
change a method of accounting for a tax-
able year ending on or after December
31, 2001, filed under Rev. Proc. 97–27,
and pending with the national office on
March 14, 2002, the§481(a) adjustment
period for a net negative§481(a) adjust-
ment for the change will be one taxable
year. In such a case, the national office
will require the taxpayer to make appro-
priate modifications to the application or
ruling request to comply with the appli-
cable provisions of this revenue proce-
dure. However, if such a taxpayer does
not want a one-year§481(a) adjustment
period to apply, the taxpayer must notify
the national office prior to the later of
April 30, 2002, or the issuance of the let-
ter ruling granting or denying consent to
the change. In such a case, the§481(a)
adjustment period rules of Rev. Proc.
97–27, prior to its modification by this
revenue procedure, will apply.
DRAFTING INFORMATION
The principal author of this revenue
procedure is Grant D. Anderson of the
Office of Associate Chief Counsel
(Income Tax and Accounting). For further
information concerning this revenue pro-
cedure, please contact Mr. Anderson at
(202) 622–4970 (not a toll-free call).
2002-13 I.R.B.700April 1, 2002

Part IV. Items of General Interest
Notice of Proposed
Rulemaking by Cross-
Reference to Temporary
Regulations and Notice of
Public Hearing
Loss Limitation Rules
REG–102740–02
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Notice of proposed rulemaking
by cross-reference to temporary regula-
tions and notice of public hearing.
SUMMARY: This document contains
proposed regulations under sections
337(d) and 1502 of the Internal Revenue
Code. These regulations permit certain
losses recognized on sales of subsidiary
stock by members of a consolidated
group. The regulations apply to corpora-
tions filing consolidated returns, both dur-
ing and after the period of affiliation, and
also affect purchasers of the stock of
members of a consolidated group. The
text of the temporary regulations pub-
lished in T.D. 8984, in this issue of the
Bulletin also serves as the text of these
proposed regulations. This document also
provides notice of a public hearing on
these proposed regulations.
DATES: Written or electronic comments
must be received by July 10, 2002.
Requests to speak (with outlines of oral
comments to be discussed) at the public
hearing scheduled for July 17, 2002, at 10
a.m., must be received by June 26, 2002.
ADDRESSES: Send submissions to:
CC:ITA:RU (REG–102740–02), room
5226, Internal Revenue Service, POB
7604, Ben Franklin Station, Washington,
DC 20044. Submissions may be hand
delivered Monday through Friday
between the hours of 8 a.m. and 6 p.m. to
CC:ITA:RU (REG–102740–02), Couri-
er’s Desk, Internal Revenue Service,1111
Constitution Avenue, NW, Washington,
DC. Alternatively, taxpayers may submit
electronic comments directly to the IRS
Internet site atwww.irs.gov/regs. The
public hearing will be held in the Internal
Revenue Service Auditorium, in the Inter-
nal Revenue Service Building,1111Con-
stitution Avenue, NW, Washington, DC.
FOR FURTHER INFORMATION CON-
TACT: Concerning the proposed regula-
tions, Sean P. Duffley (202) 622–7530, or
Lola L. Johnson (202) 622–7550; con-
cerning submissions of comments, the
hearing, and/or to be placed on the build-
ing access list to attend the hearing,
LaNita VanDyke (202) 622–7180 (not
toll-free numbers).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collection of information in this
notice of proposed rulemaking has been
submitted to the Office of Management
and Budget for review in accordance with
the Paperwork Reduction Act of 1995 (44
U.S.C. 3507(d)). Comments on the col-
lection of information should be sent to
the Office of Management and Budget,
Attn: Desk Officer for the Department of
the Treasury, Office of Information and
Regulatory Affairs, Washington, DC
20503, with copies to theInternal Rev-
enue Service, Attn: IRS Reports Clear-
ance Officer, W:CAR:MP:FP:S, Washing-
ton, DC 20224. Comments on the
collection of information should be
received by May 6, 2002. Comments are
specifically requested concerning:
Whether the proposed collection of
information is necessary for the proper
performance of the functions of the Inter-
nal Revenue Service, including whether
the information will have practical utility;
The accuracy of the estimated burden
associated with the proposed collection of
information (see below);
How the quality, utility, and clarity of
the information to be collected may be
enhanced;
How the burden of complying with the
proposed collection of information may
be minimized, including through the
application of automated collection tech-
niques or other forms of information tech-
nology; and
Estimates of capital or start up-costs
and the costs of operation, maintenance,
and purchase of services to provide infor-
mation.
The collection of information in this
proposed regulation is in§§1.337(d)–2T,
1.1502–20T, and 1.1502–32T. The collec-
tion of information is required to allow
the taxpayer to make certain elections to
determine the amount of allowable loss
under§1.337(d)–2T,§1.1502–20 as cur-
rently in effect, or under§1.1502–20
modified so that the amount of allowable
loss determined pursuant to§1.1502–
20(c)(1) is computed by taking into
account only the amounts computed
under§1.1502–20(c)(1)(i) and (ii); to
allow the taxpayer to reapportion a sec-
tion 382 limitation in certain cases; to
allow the taxpayer to waive certain loss
carryovers; and to ensure that loss is not
disallowed under§1.337(d)–2T and basis
is not reduced under§1.337(d)–2T to the
extent the taxpayer establishes that the
loss or basis is not attributable to the rec-
ognition of built-in gain on the disposi-
tion of an asset. The collection of infor-
mation is required to obtain a benefit. The
likely respondents are corporations that
file consolidated income tax returns.
Estimated total annual reporting bur-
den: 30,000 hours.
Estimated average annual burden
hours per respondent: 2 hours.
Estimated number of respondents:
15,000.
Estimated annual frequency of
responses: once.
An agency may not conduct or spon-
sor, and a person is not required to
respond to, a collection of information
unless it displays a valid control number
assigned by the Office of Management
and Budget.
Books or records relating to the collec-
tion of information must be retained as
long as their contents may become mate-
rial 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.
Background
Temporary regulations in this issue of
the Bulletin amend the Income Tax Regu-
lations (26 CFR part 1) relating to sec-
tions 337(d) and 1502. The text of those
regulations also serves as the text of these
proposed regulations. The preamble to the
April 1, 20027012002-13 I.R.B.

temporary regulations contains a full
explanation of the reasons underlying the
issuance of the proposed regulations.
Special Analyses
It has been determined that this notice
of proposed rulemaking is not a signifi-
cant regulatory action as defined in
Executive Order 12866. Therefore, a
regulatory assessment is not required. It is
hereby certified that these regulations do
not have a significant economic impact
on a substantial number of small entities.
This certification is based on the fact that
these regulations will primarily affect
affiliated groups of corporations that have
elected to file consolidated returns, which
tend to be larger businesses, and, more-
over, that any burden on taxpayers is
minimal. Therefore, a Regulatory Flex-
ibility Analysis under the Regulatory
Flexibility Act (5 U.S.C. chapter 6) is not
required. Pursuant to section 7805(f) of
the Internal Revenue Code, these regula-
tions will be submitted to the Chief Coun-
sel for Advocacy of the Small Business
Administration for comment on their
impact on small business.
Comments and Public Hearing
The IRS and Treasury are undertaking
a study of the various approaches that
could be implemented to give full effect
to section 337(d) and to reflect the single
entity principles of the consolidated
return rules. Among the approaches the
IRS and Treasury are studying is one that
would deny positive investment adjust-
ments for gain recognized and income
attributable to the disposition or con-
sumption of built-in gain assets held by
the subsidiary at the time it joined the
consolidated group. In addition, the IRS
and Treasury are considering allowing
selling groups to deduct subsidiary stock
losses that would otherwise reflect dupli-
cated loss, if the subsidiary reduces its
attributes (including net operating loss
carryovers and asset basis) immediately
prior to the disposition. Comments are
requested concerning any approaches that
may be employed to allow appropriate
losses in a manner that is administrable
for both taxpayers and the government.
Before these proposed regulations are
adopted as final regulations, consideration
will be given to any electronic and writ-
ten comments (a signed original and eight
(8) copies) that are submitted timely to
the IRS. All comments will be available
for public inspection and copying. A pub-
lic hearing has been scheduled for July
17, 2002, at 10 a.m., in the IRS Audito-
rium, IRS Building,1111Constitution,
NW, Washington, DC. Because of access
restrictions, visitors will not be admitted
beyond the building lobby more than 15
minutes before the hearing starts.
Drafting Information
The principal authors of these regula-
tions are Sean P. Duffley and Lola L.
Johnson, Office of Associate Chief Coun-
sel (Corporate). However, other personnel
from the IRS and Treasury participated in
their development.
Proposed Amendments to the
Regulations
Accordingly, 26 CFR parts 1 and 602 are
proposed to be amended as follows:
PA RT 1—INCOME TAXES
Paragraph 1. The authority citation for
part 1 continues to read in part as follows:
Authority: 26 U.S.C. 7805***
Par. 2. Section 1.337(d)–2 is added to
read as follows:
§1.337(d)–2 Loss limitation window
period.
[The text of this proposed section is
the same as the text of§1.337(d)–2T
published elsewhere in this issue of the
Federal Register].
Par.3.In§1.1502–20, paragraph (i) is
added to read as follows:
§1.1502–20 Disposition or deconsolida-
tion of subsidiary stock.
[The text of this proposed section is
the same as the text of§1.1502–20T(i)
published elsewhere in this issue of the
Federal Register].
Par.4.In§1.1502–32, paragraph
(b)(4)(v) is added to read as follows:
§1.1502–32 Investment adjustment.
[The text of this proposed section is
the same as the text of§1.1502–
32T(b)(4)(v) published elsewhere in this
issue of theFederal Register].
Robert E. Wenzel,
Deputy Commissioner of
Internal Revenue.
(Filed by the Office of the Federal Register on
March 7, 2002, 3:17 p.m., and published in the issue
of the Federal Register for March 12, 2002, 67 F.R.
11070)
Extension of Time to File
Form(s) 1042–S
Announcement 2002–34
The IRS has received inquiries regard-
ing the implementation of the new with-
holding and reporting requirements under
§§1.1441 and 1.1461 of the Income Tax
Regulations (T.D. 8734, 1997–2 C.B. 109
and T.D. 8881, 2000–23 I.R.B. 1158).
Specifically, the IRS has recently become
aware that some taxpayers (including, in
particular, small taxpayers) are experienc-
ing difficulty implementing the changes
to the Form 1042–S reporting require-
ments (which require the filing of infor-
mation returns to report certain payments
to nonresident aliens). Under the regula-
tions, a withholding agent must file
Form(s) 1042–S with the IRS on or
before March 15 of the calendar year fol-
lowing the year in which the amount sub-
ject to reporting was paid. See§1.1461–
1(c).
The IRS believes that ensuring the
successful implementation of these new
withholding and reporting procedures is
in the best interests of sound tax adminis-
tration. Accordingly, the IRS is extending
the due date for filing 2001 Forms
1042–S from March 15, 2002, to May 15,
2002.
The principal author of this announce-
ment is Laurie Hatten-Boyd of the Office
of Associate Chief Counsel (Interna-
tional). For further information regarding
this announcement, contact Ms. Hatten-
Boyd at (202) 622–3840 (not a toll-free
call).
2002-13 I.R.B.702April 1, 2002

Extension of Comment Period
on White Paper on Future of
Employee Plans
Determination Letter Program
Announcement 2002–36
The Service is extending the comment
period on its white paper on the long-term
future of the Employee Plans (EP) deter-
mination letter program.
In Announcement 2001–83 (2001–35
I.R.B. 205), the Service invited the public
to participate in a dialogue on the future
of the EP determination letter program by
submitting comments on a white paper
that it had published on the Internet in
August 2001. The white paper is entitled
The Future of the Employee Plans Deter-
mination Letter Program: Some Possible
Optionsand it may be downloaded from
the Internet at the following site:http://
www.irs.gov/ep. Announcement 2001–83
asked for written comments on the white
paper to be submitted by March 31, 2002.
In order to provide an opportunity to
those who wish to comment but are
unable to do so by March 31, 2002, the
Service is extending the comment period
under Announcement 2001–83 to July 1,
2002. Commentators are also asked to
comment on whether the Service should
hold a series of nationwide town meetings
to permit furtherance of dialogue on the
future of the EP determination letter pro-
gram. Comments should be submitted in
duplicate and reference Announcement
2001–83. Comments should be sent to the
following address:
CC:M&SP:RU
(Announcement 2001–83), room 5626
Internal Revenue Service
POB 7604, Ben Franklin Station
Washington, DC 20044
Alternatively, comments may be hand
delivered between the hours of 8:30 a.m.
and 4:30 p.m. to:
CC:M&SP:RU
(Announcement 2001–83)
Courier’s Desk
Internal Revenue Service
1111Constitution Avenue, NW
Washington, DC
All written comments will be open to
public inspection.
DRAFTING INFORMATION
The principal author of this announce-
ment is James Flannery of the Employee
Plans, Tax Exempt and Government Enti-
ties Division. For further information
regarding this announcement, please con-
tact Mr. Flannery at 1–202–283–9888
(not a toll-free number).
Changes in Method of
Accounting
Announcement 2002–37
PURPOSE
In 1998, the Service published Notice
98–31 (1998–1 C.B. 1165), which pro-
posed procedures for changes in method
of accounting imposed by the Service
under§446(b) of the Internal Revenue
Code and§1.446–1(b) of the Income Tax
Regulations (“involuntary changes”), and
for accounting method issues resolved by
the Service on a nonaccounting-method-
change basis. Notice 98–31 also
requested comments from the public in
connection with these proposed proce-
dures. The final involuntary change pro-
cedures appear concurrently in this Bulle-
tin as Rev. Proc. 2002–18. The purpose of
this announcement is to discuss some of
the most significant and prevalent issues
raised in the comments to Notice 98–31,
and the manner in which those issues are
addressed in the final guidance.
Along with Rev. Proc. 2002–18, this
Bulletin contains Rev. Proc. 2002–19,
which modifies the procedures contained
in Rev. Proc. 97–27 (1997–1 C.B. 680)
and Rev. Proc. 2002–9 (2002–3 I.R.B.
327) for taxpayers within the scope of
those revenue procedures to obtain
advance consent of the Commissioner, or
automatic consent, respectively, to change
a method of accounting (“voluntary
changes”). Together, these three revenue
procedures are intended to provide a more
efficient use of Service and taxpayer
resources with respect to accounting
method issues and facilitate greater uni-
formity in the Service’s resolution of
accounting method issues.
CHANGES TO NOTICE 98–31
The Service received a number of
comments in connection with Notice
98–31, which were considered carefully
in revising and finalizing the proposed
procedures in Rev. Proc. 2002–18. The
following discussion describes some of
the most significant comments and the
manner in which the final guidance
addresses them.
Commentators expressed concern that
use of the term“timing issue”to describe
the scope of the proposed procedures, and
in particular an examining agent’s discre-
tion, inappropriately expanded the scope
of the procedures to issues that affect tim-
ing but that should not be treated as
changes in method of accounting, such as
where the issue is an isolated occurrence
or results from a change in underlying
facts. The Service and Treasury Depart-
ment did not intend to alter the definition
of a change in method of accounting or to
expand the scope of the proposed revenue
procedure beyond issues concerning
changes in method of accounting. To
address the commentators’concerns, the
final revenue procedure uses the term
“accounting method issue”rather than
“timing issue,”clarifies the definition of
an accounting method issue, and changes
the reference for the definition of a
change in method of accounting to
§1.446–1(e)(2).
Commentators expressed concern that
the procedures set forth in Notice 98–31
would deprive examining agents of the
authority to exercise discretion and pro-
fessional judgment in resolving account-
ing method issues. Specifically, the com-
mentators believed that the procedures
would limit the existing authority of an
examining agent to make findings of fact
and to apply the law to those facts in
determining whether an issue is an
accounting method issue and whether the
taxpayer’s method of accounting is per-
missible. Rev. Proc. 2002–18 makes clear
that these procedures do not limit or
expand an examining agent’s authority
under existing delegation orders. Under
Rev. Proc. 2002–18, an examining agent’s
ability to exercise professional judgment
in accordance with existing auditing stan-
dards to make findings of fact, and to
apply the law to the facts as found by the
agent is preserved. Rev. Proc. 2002–18
April 1, 20027032002-13 I.R.B.

also clarifies that although accounting
method changes ordinarily will be imple-
mented in the earliest open year under
examination, and with a§481(a) adjust-
ment, there may be instances in which it
is appropriate for an examining agent to
consider deferring the year of change to a
later year under examination, or to
impose the change on a cut-off basis.
Similarly, some commentators
believed that the procedures set forth in
Notice 98–31 would limit the existing
authority of Appeals and counsel for the
government to resolve accounting method
issues. Rev. Proc. 2002–18 clarifies that
an appeals officer or counsel for the gov-
ernment may resolve an accounting
method issue as an accounting method
change (with or without compromise
terms and conditions), using one of the
nonaccounting-method change procedures
provided in Rev. Proc. 2002–18, or using
any other means deemed appropriate
under the circumstances, consistent with
existing delegation orders.
The background section of the pro-
posed revenue procedure provides that
the Service ordinarily will not initiate an
accounting method change if the change
will place the taxpayer in a position more
favorable than if the taxpayer had not
been contacted for examination
(taxpayer-favorable change). Some com-
mentators thought that this statement was
out of place in a document intended to
provide the procedures for how the Ser-
vice will resolve accounting method
issues that are raised on examination. The
Service and Treasury Department agree
that this statement does not belong in the
background of the involuntary method
change revenue procedure and thus have
deleted it from Rev. Proc. 2002–18.
Consistent with Rev. Proc. 97–27 and
Rev. Proc. 2002–9, the background sec-
tion of the proposed revenue procedure
provides that a change in the characteriza-
tion of an item may constitute a change in
method of accounting if the change has
the effect of shifting income from one
period to another. Some commentators
objected to the inclusion of this state-
ment, questioning whether a change in
characterization of an item is properly
considered a change in method of
accounting and, in any event, whether
such a rule belongs in the revenue proce-
dures. Consistent with the purpose of
these documents to provide procedural,
rather than substantive, rules governing
changes in method of accounting, the Ser-
vice and the Treasury Department have
not included section 2.01(3) of Notice
98–31 in Rev. Proc. 2002–18. Further,
similar paragraphs have been removed
from Rev. Proc. 97–27 and Rev. Proc.
2002–9 by Rev. Proc. 2002–19. The Ser-
vice and Treasury Department are consid-
ering issuing separate guidance to address
the issue of characterization in the context
of a guidance project regarding the defi-
nition of a change in method of account-
ing.
The Service and Treasury Department
were considering including guidance
regarding the effect of closed years fol-
lowing the year of change (closed inter-
vening years) in the final revenue proce-
dure. In response to a specific request to
opine as to the effect of closed interven-
ing years, commentators suggested that
substantive guidance addressing this issue
should not be set forth in the final rev-
enue procedure. Upon further consider-
ation, the Service and Treasury Depart-
ment agree that the resolution of this legal
issue should not be set forth in Rev. Proc.
2002–18 and are considering issuing
separate guidance to address this issue.
Finally, some commentators objected
to the fact that, under Notice 98–31, the
specified amount payable in the case of
accounting method issues resolved by
Appeals or counsel for the government on
a time-value-of-money (TVM) basis is
not treated as interest under§163, and is
not deductible under any provision of the
Code. The commentators argued that this
limitation was effectively punitive, and
made the TVM alternative less attractive.
In fact, as the sample computation con-
tained in Notice 98–31 illustrates, the
computation of the specified amount
should be based on a tax-effected tax rate
for taxpayers that would otherwise be
entitled to a deduction if the specified
amount were treated as interest under the
Code. The use of a tax-effected rate effec-
tively allows a deduction for the specified
amount. A sentence is included in the
final revenue procedure to clarify the use
of tax-effected rates.
The Service and Treasury Department
recognize that the TVM resolution has
not been widely tested in practice, and
that as the Service and taxpayers gain
experience with this alternative, issues
may arise that will require further clarify-
ing guidance. The Service and Treasury
Department anticipate that the TVM reso-
lution will be most attractive in situations
where it would be unnecessary to perform
the complex interest credit calculation
upon a subsequent change in method,
such as when the resolution includes all
years preceding a point at which a statu-
torily prescribed method becomes effec-
tive, a safe harbor method becomes avail-
able and is elected, or the issue of the
proper method is otherwise resolved.
RELATED GUIDANCE
In addition to the proposed revenue
procedure, Notice 98–31 outlined other
guidance that the Service intended to pub-
lish as part of a comprehensive, and inter-
related, set of procedures for resolving
accounting method issues raised on audit.
First, Notice 98–31 announced that the
Service intended to publish guidance
making the Coordinated Examination
Program (CEP) early referral process pro-
vided in Rev. Proc. 96–9 (1996–1 C.B.
575) available to non-CEP taxpayers for
the resolution of accounting method
issues. This guidance has been published
as Rev. Proc. 99–28 (1999–2 C.B. 109).
By expanding the early referral proce-
dures to include all taxpayers with respect
to accounting method issues, the Service
intends to provide a mechanism for expe-
diting the resolution of those issues,
which otherwise might be delayed pend-
ing the resolution of other (non-
accounting-method) issues raised in the
course of the audit.
Second, the Service announced that it
intended to publish guidance that would
permit taxpayers under examination who
otherwise cannot request a voluntary
change in method of accounting under the
advance consent revenue procedure (Rev.
Proc. 97–27) or the automatic consent
revenue procedure (Rev. Proc. 2002–9) to
do so prospectively without audit protec-
tion. That guidance is contained in Rev.
Proc. 2002–19. The modification is
intended to provide a means for taxpayers
under examination with an accounting
method issue pending, as well as taxpay-
ers before an area appeals office or a fed-
eral court with an accounting method
issue under consideration, to change their
method of accounting on a going forward
2002-13 I.R.B.704April 1, 2002

basis while the issue is in the process of
being resolved for prior taxable years.
This new procedure set forth in Rev.
Proc. 2002–19 does not limit or extend
the existing authority of an examining
agent, appeals officer, or counsel for the
government to resolve accounting method
issues raised on examination.
Also in connection with finalizing
Notice 98–31 and the related guidance,
the Service and Treasury Department
have reconsidered the appropriateness of
a 4-year§481(a) adjustment period for
voluntary accounting method changes
that result in a negative adjustment. The
Service and Treasury Department have
concluded that the objectives of prompt
voluntary compliance are enhanced by
reducing the§481(a) adjustment period
for such changes from 4 years to 1 year.
This new 1-year§481(a) adjustment
period, reflected in Rev. Proc. 2002–19, is
effective for taxable years ending on or
after December 31, 2001.
Third, Notice 98–31 provided that the
Service intended to publish a model clos-
ing agreement for Service-initiated
accounting method changes in order to
provide greater uniformity in the Ser-
vice’s resolution of accounting method
issues. Appendices A and B of Rev. Proc.
2002–18 provide model closing agree-
ments for use in finalizing accounting
method changes imposed by the Service,
and for finalizing accounting method
issues resolved by the Service on a
nonaccounting-method-change basis,
respectively. Closing agreements are
encouraged, but not required, in the case
of accounting method issues resolved as
accounting method changes. Closing
agreements are required for accounting
methodissuesresolvedona
nonaccounting-method-change basis. In
response to comments, the Service is con-
sidering whether it would be appropriate
to change the existing delegation orders
to authorize approval of closing agree-
ments for accounting method change
issues at lower levels.
Fourth, Notice 98–31 referred to cer-
tain other anticipated guidance projects
(i.e., guidance that would delegate limited
discretionary authority to Examination to
resolve certain accounting method issues,
and guidance to expand the accelerated
issue resolution procedures of Rev. Proc.
94–67 (1994–2 C.B. 800) to non-CEP
taxpayers to allow these taxpayers and the
Service to resolve accounting method
issues for taxable years beyond the years
under examination, before appeals, or
before a federal court). The Service is
interested in receiving comments from
taxpayers and practitioners on the extent
to which there is a need for this guidance.
April 1, 20027052002-13 I.R.B.

Definition of Terms
Revenue rulings and revenue procedures
(hereinafter referred to as“rulings”) that
have an effect on previous rulings use the
following defined terms to describe the
effect:
Amplifieddescribes 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
withmodified, below).
Clarifiedis 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.
Modifiedis used where the substance
of a previously published position is
being changed. Thus, if a prior ruling
held that a principle applied to A but not
to B, and the new ruling holds that it
applies to both A and B, the prior ruling
is modified because it corrects a pub-
lished position. (Compare withamplified
andclarified, above).
Obsoleteddescribes a previously pub-
lished ruling that is not considered deter-
minative with respect to future transac-
tions. This term is most commonly used
in a ruling that lists previously published
rulings that are obsoleted because of
changes in law or regulations. A ruling
may also be obsoleted because the sub-
stance has been included in regulations
subsequently adopted.
Revokeddescribes situations where the
position in the previously published rul-
ing is not correct and the correct position
is being stated in the new ruling.
Supersededdescribes a situation where
the new ruling does nothing more than
restate the substance and situation of a
previously published ruling (or rulings).
Thus, the term is used to republish under
the 1986 Code and regulations the same
position published under the 1939 Code
and regulations. The term is also used
when it is desired to republish in a single
ruling a series of situations, names, etc.,
that were previously published over a
period of time in separate rulings. If the
new ruling does more than restate the
substance of a prior ruling, a combination
of terms is used. For example,modified
andsupersededdescribes 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.
Supplementedis used in situations in
which a list, such as a list of the names of
countries, is published in a ruling and that
list is expanded by adding further names
in subsequent rulings. After the original
ruling has been supplemented several
times, a new ruling may be published that
includes the list in the original ruling and
the additions, and supersedes all prior rul-
ings in the series.
Suspendedis 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 formerly used will appear in
material published in the Bulletin.
A—Individual.
Acq.—Acquiescence.
B—Individual.
BE—Beneficiary.
BK—Bank.
B.T.A.—Board of Tax Appeals.
C—Individual.
C.B.—Cumulative Bulletin.
CFR—Code of Federal Regulations.
CI—City.
COOP—Cooperative.
Ct.D.—Court Decision.
CY—County.
D—Decedent.
DC—Dummy Corporation.
DE—Donee.
Del. Order—Delegation Order.
DISC—Domestic International Sales Corporation.
DR—Donor.
E—Estate.
EE—Employee.
E.O.—Executive Order.
ER—Employer.
ERISA—Employee Retirement Income Security Act.
EX—Executor.
F—Fiduciary.
FC—Foreign Country.
FICA—Federal Insurance Contributions Act.
FISC—Foreign International Sales Company.
FPH—Foreign Personal Holding Company.
F.R.—Federal Register.
FUTA—Federal Unemployment Tax Act.
FX—Foreign Corporation.
G.C.M.—Chief Counsel’s Memorandum.
GE—Grantee.
GP—General Partner.
GR—Grantor.
IC—Insurance Company.
I.R.B.—Intemal 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 Procedural Rules.
Stat.—Statutes at Large.
T—Target Corporation.
T.C.—Tax Court.
T.D.—Treasury Decision.
TFE—Transferee.
TFR—Transferor.
T.I.R.—Technical Information Release.
TP—Taxpayer.
TR—Trust.
TT—Trustee.
U.S.C.—United States Code.
X—Corporation.
Y—Corporation.
Z—Corporation.
2002-13 I.R.B.iApril 1, 2002

Numerical Finding List
1
Bulletins 2002–1 through 2002–12
Announcements:
2002–1, 2002–2 I.R.B.304
2002–2, 2002–2 I.R.B.304
2002–3, 2002–2 I.R.B.305
2002–4, 2002–2 I.R.B.306
2002–5, 2002–4 I.R.B.420
2002–6, 2002–5 I.R.B.458
2002–7, 2002–5 I.R.B.459
2002–8, 2002–6 I.R.B.494
2002–9, 2002–7 I.R.B.536
2002–10, 2002–7 I.R.B.539
2002–11, 2002–6 I.R.B.494
2002–12, 2002–8 I.R.B.553
2002–13, 2002–7 I.R.B.540
2002–14, 2002–7 I.R.B.540
2002–15, 2002–7 I.R.B.540
2002–16, 2002–7 I.R.B.541
2002–17, 2002–8 I.R.B.561
2002–18, 2002–10 I.R.B.621
2002–19, 2002–8 I.R.B.561
2002–20, 2002–8 I.R.B.561
2002–21, 2002–8 I.R.B.562
2002–22, 2002–8 I.R.B.562
2002–23, 2002–8 I.R.B.563
2002–24, 2002–9 I.R.B.606
2002–25, 2002–10 I.R.B.621
2002–26, 2002–11 I.R.B.629
2002–27, 2002–11 I.R.B.629
2002–28, 2002–11 I.R.B.630
2002–29, 2002–11 I.R.B.631
2002–30, 2002–11 I.R.B.632
2002–32, 2002–12 I.R.B.664
2002–33, 2002–12 I.R.B.666
2002–35, 2002–12 I.R.B.667
Notices:
2002–1, 2002–2 I.R.B.283
2002–2, 2002–2 I.R.B.285
2002–3, 2002–2 I.R.B.289
2002–4, 2002–2 I.R.B.298
2002–5, 2002–3 I.R.B.320
2002–6, 2002–3 I.R.B.326
2002–7, 2002–6 I.R.B.489
2002–8, 2002–4 I.R.B.398
2002–9, 2002–5 I.R.B.450
2002–10, 2002–6 I.R.B.490
2002–11, 2002–7 I.R.B.526
2002–12, 2002–7 I.R.B.526
2002–13, 2002–8 I.R.B.547
2002–14, 2002–8 I.R.B.548
2002–15, 2002–8 I.R.B.548
2002–16, 2002–9 I.R.B.567
2002–17, 2002–9 I.R.B.567
2002–18, 2002–12 I.R.B.644
2002–19, 2002–10 I.R.B.619
Proposed Regulations:
REG–209135–88, 2002–4 I.R.B.418
REG–209114–90, 2002–9 I.R.B.576
REG–107100–00, 2002–7 I.R.B.529
REG–107366–00, 2002–12 I.R.B.645
REG–118861–00, 2002–12 I.R.B.651
REG–105344–01, 2002–2 I.R.B.302
REG–112991–01, 2002–4 I.R.B.404
REG–115054–01, 2002–7 I.R.B.530
REG–119436–01, 2002–3 I.R.B.376
REG–120135–01, 2002–8 I.R.B.552
REG–125450–01, 2002–5 I.R.B.457
REG–125626–01, 2002–9 I.R.B.604
REG–142299–01, 2002–4 I.R.B.418
REG–159079–01, 2002–6 I.R.B.493
Revenue Procedures:
2002–1, 2002–1 I.R.B.1
2002–2, 2002–1 I.R.B.82
2002–3, 2002–1 I.R.B.117
2002–4, 2002–1 I.R.B.127
2002–5, 2002–1 I.R.B.173
2002–6, 2002–1 I.R.B.203
2002–7, 2002–1 I.R.B.249
2002–8, 2002–1 I.R.B.252
2002–9, 2002–3 I.R.B.327
2002–10, 2002–4 I.R.B.400
2002–11, 2002–7 I.R.B.526
2002–12, 2002–3 I.R.B.374
2002–13, 2002–8 I.R.B.549
2002–14, 2002–5 I.R.B.450
2002–15, 2002–6 I.R.B.490
2002–16, 2002–9 I.R.B.572
Revenue Rulings:
2002–1, 2002–2 I.R.B.268
2002–2, 2002–2 I.R.B.271
2002–3, 2002–3 I.R.B.316
2002–4, 2002–4 I.R.B.389
2002–5, 2002–6 I.R.B.461
2002–6, 2002–6 I.R.B.460
2002–7, 2002–8 I.R.B.543
2002–8, 2002–9 I.R.B.564
2002–9, 2002–10 I.R.B.614
2002–10, 2002–10 I.R.B.616
2002–11, 2002–10 I.R.B.608
2002–12, 2002–11 I.R.B.624
2002–13, 2002–12 I.R.B.637
2002–14, 2002–12 I.R.B.636
Treasury Decisions:
8968, 2002–2 I.R.B.274
8969, 2002–2 I.R.B.276
8970, 2002–2 I.R.B.281
8971, 2002–3 I.R.B.308
8972, 2002–5 I.R.B.443
8973, 2002–4 I.R.B.391
8974, 2002–3 I.R.B.318
8975, 2002–4 I.R.B.379
8976, 2002–5 I.R.B.421
8977, 2002–6 I.R.B.463
8978, 2002–7 I.R.B.500
8979, 2002–6 I.R.B.466
8980, 2002–6 I.R.B.477
8981, 2002–7 I.R.B.496
8982, 2002–8 I.R.B.544
8983, 2002–9 I.R.B.565
1
A cumulative list of all revenue rulings, revenue
procedures, Treasury decisions, etc., published in
Internal Revenue Bulletins 2001–27 through 2001–53 is
in Internal Revenue Bulletin 2002–1, dated January 7, 2002.
April 1, 2002ii2002-13 I.R.B.

Finding List of Current Actions
on Previously Published Items
2
Bulletins 2002–1 through 2002–12
Announcements:
2002–9
Corrected by
Ann. 2002–30, 2002–11 I.R.B.632
Ann. 2002–35, 2002–12 I.R.B.667
Notices:
98–43
Modified and superseded by
Notice 2002–5, 2002–3 I.R.B.320
2000–11
Obsoleted by
Notice 2002–3, 2002–2 I.R.B.289
2001–10
Revoked by
Notice 2002–8, 2002–4 I.R.B.398
2001–61
Supplemented by
Notice 2002–15, 2002–8 I.R.B.548
2001–68
Supplemented by
Notice 2002–15, 2002–8 I.R.B.548
Proposed Regulations:
REG–209135–88
Corrected by
Ann. 2002–15, 2002–7 I.R.B.540
Ann. 2002–30, 2002–11 I.R.B.632
REG–251502–96
Withdrawn by
Ann. 2002–33, 2002–12 I.R.B.666
REG–105344–01
Corrected by
Ann. 2002–7, 2002–5 I.R.B.459
REG–107100–00
Corrected by
Ann. 2002–30, 2002–11 I.R.B.632
REG–112991–01
Corrected by
Ann. 2002–30, 2002–11 I.R.B.632
REG–115054–01
Corrected by
Ann. 2002–30, 2002–11 I.R.B.632
REG–119436–01
Corrected by
Ann. 2002–30, 2002–11 I.R.B.632
REG–120135–01
Corrected by
Ann. 2002–30, 2002–11 I.R.B.632
Proposed Regulations:—Continued
REG–125450–01
Corrected by
Ann. 2002–30, 2002–11 I.R.B.632
REG–125626–01
Corrected by
Ann. 2002–30, 2002–11 I.R.B.632
REG–126485–01
Corrected by
Ann. 2002–30, 2002–11 I.R.B.632
REG–137519–01
Corrected by
Ann. 2002–30, 2002–11 I.R.B.632
REG–142299–01
Corrected by
Ann. 2002–15, 2002–7 I.R.B.540
Ann. 2002–30, 2002–11 I.R.B.632
REG–142686–01
Corrected by
Ann. 2002–30, 2002–11 I.R.B.632
REG–159079–01
Corrected by
Ann. 2002–30, 2002–11 I.R.B.632
Revenue Procedures:
84–37
Modified by
Rev. Proc. 2002–1, 2002–1 I.R.B.1
84–57
Obsoleted by
T.D. 8976, 2002–5 I.R.B.421
87–50
Modified by
Rev. Proc. 2002–10, 2002–4 I.R.B.400
96–13
Modified by
Rev. Proc. 2002–1, 2002–1 I.R.B.1
98–49
Obsoleted by
T.D. 8976, 2002–5 I.R.B.421
99–49
Modified and superseded by
Rev. Proc. 2002–9, 2002–3 I.R.B.327
2001–16
Modified by
Ann. 2002–26, 2002–11 I.R.B.629
2002–6
Modified by
Notice 2002–1, 2002–2 I.R.B.283
Revenue Procedures:—Continued
2002–8
Modified by
Notice 2002–1, 2002–2 I.R.B.283
2002–9
Modified and clarified by
Ann. 2002–17, 2002–8 I.R.B.561
Modified and amplified by
Rev. Rul. 2002–9, 2002–10 I.R.B.614
2000–20
Modified by
Rev. Proc. 2002–6, 2002–1 I.R.B.203
2001–1
Superseded by
Rev. Proc. 2002–1, 2002–1 I.R.B.1
2001–2
Superseded by
Rev. Proc. 2002–2, 2002–1 I.R.B.82
2001–3
Superseded by
Rev. Proc. 2002–3, 2002–1 I.R.B.117
2001–4
Superseded by
Rev. Proc. 2002–4, 2002–1 I.R.B.127
2001–5
Superseded by
Rev. Proc. 2002–5, 2002–1 I.R.B.173
2001–6
Superseded by
Rev. Proc. 2002–6, 2002–1 I.R.B.203
2001–7
Superseded by
Rev. Proc. 2002–7, 2002–1 I.R.B.249
2001–8
Superseded by
Rev. Proc. 2002–8, 2002–1 I.R.B.252
2001–13
Corrected by
Ann. 2002–5, 2002–4 I.R.B.420
2001–36
Superseded by
Rev. Proc. 2002–3, 2002–1 I.R.B.117
2001–41
Superseded by
Rev. Proc. 2002–2, 2002–1 I.R.B.82
2001–51
Superseded by
Rev. Proc. 2002–3, 2002–1 I.R.B.117
2
A cumulative list of current actions on previously published
items in Internal Revenue Bulletins 2001–27 through 2001–53 is
in Internal Revenue Bulletin 2002–1, dated January 7, 2002.
2002-13 I.R.B.iiiApril 1, 2002

Revenue Rulings:
55–747
Revoked by
Notice 2002–8, 2002–4 I.R.B.398
61–146
Distinguished by
Rev. Rul. 2002–3, 2002–3 I.R.B.316
64–328
Modified by
Notice 2002–8, 2002–4 I.R.B.398
66–110
Modified by
Notice 2002–8, 2002–4 I.R.B.398
89–29
Obsoleted by
T.D. 8976, 2002–5 I.R.B.421
92–19
Supplemented in part by
Rev. Rul. 2002–12, 2002–11 I.R.B.624
2002–7
Corrected by
Ann. 2002–13, 2002–7 I.R.B.540
Treasury Decisions:
8971
Corrected by
Ann. 2002–20, 2002–8 I.R.B.561
8972
Corrected by
Ann. 2002–23, 2002–8 I.R.B.563
8973
Corrected by
Ann. 2002–14, 2002–7 I.R.B.540
8975
Corrected by
Ann. 2002–21, 2002–8 I.R.B.562
8976
Corrected by
Ann. 2002–21, 2002–8 I.R.B.562
April 1, 2002iv2002-13 I.R.B.

INDEX
Internal Revenue Bulletins
2002–1 through 2002–12
The abbreviation and number in paren-
thesis following the index entry refer to
the specific item; numbers in roman and
italic type following the parenthesis refer
to the Internal Revenue Bulletin in which
the item may be found and the page num-
ber on which it appears.
Key to Abbreviations:
AnnAnnouncement
CDCourt Decision
DODelegation Order
EOExecutive Order
PLPublic Law
PTEProhibited Transaction
Exemption
RPRevenue Procedure
RRRevenue Ruling
SPRStatement of Procedural
Rules
TCTax Convention
TDTreasury Decision
TDOTreasury Department Order
EMPLOYEE PLANS
Advance letter rulings and determination
letters, areas which will not be issued
from:
Associates Chief Counsel and Division
Counsel/Associate Chief Counsel
(TE/GE) (RP 3) 1,117
Associate Chief Counsel (Interna-
tional) (RP 7) 1,249
Contributions by employer to accident
and health plans (RR 3) 3,316
Determination letters:
Issuing procedures (RP 6) 1,203
Temporary use of draft Form 8717
(Ann 1) 2,304
User fees (Notice 1) 2,283
EGTRRA, section 401(k) hardship distri-
butions; section 414(v) catch-up contri-
butions (Notice 4) 2,298
Eligible rollover distributions, safe harbor
explanation (Notice 3) 2,289
Employee stock ownership plans, divi-
dend elections (Notice 2) 2,285
EMPLOYEE PLANS—
Cont.
Family and Medical Leave Act and caf-
eteria plans (Ann 4) 2,306
Full funding limitations:
Weighted average interest rate for:
January 2002 (Notice 9) 5,450
February 2002 (Notice 16) 9,567
Individual retirement arrangements, sim-
plified employee pension plans, etc.,
opinion letters (RP 10) 4,401
Letter rulings:
Determination letters and information
letters issued by Associates Chief
Counsel and Division Counsel/
Associate Chief Counsel (TE/GE)
(RP 1) 1,1
Information letters, etc. (RP 4) 1,127
Minimum funding standards, terrorist
attack relief (Notice 7) 6,489
Nonbank trustees and custodians,
approval list (Ann 12) 8,553
Qualified retirement plans:
Catch-up contributions, change of date
of public hearing for REG–
142499–01 (Ann 24) 9,606
Regulations:
26 CFR 1.125–3; effect of the Family
and Medical Leave Act on the
operation of cafeteria plans; correc-
tion (Ann 4) 2,306
Technical advice to:
Directors and chiefs, appeals offices,
from Associates Chief Counsel and
Division Counsel/Associate Chief
Counsel (TEGE) (RP 2) 1,82
IRS employees (RP 5) 1,173
User fees, request for letter rulings
(RP 8) 1,252
EMPLOYMENT TAX
Contributions by employer to accident
and health plans (RR 3) 3,316
Disclosure of return information, author-
ity for other agencies to redisclose (TD
8968) 2,274; (REG–105344–01)
2,302; correction (Ann 7) 5,459
Form W-2, extension of time for employ-
ers to furnish to household employees
(Ann 19) 8,561
Frequent flyer miles attributable to busi-
ness or official travel (Ann 18)
10,621
Notice of Determination of Worker Clas-
sification, procedures (Notice 5) 3,320
EMPLOYMENT TAX—
Cont.
Proposed Regulations:
26 CFR 301.6103(p)(2)(B)–1,
removed; 301.6103(p)(2)(B)–1T,
added; 602.101(b), amended; disclo-
sure of returns and return informa-
tion by other agencies (REG–
105344–01) 2,302; correction (Ann
7) 5,459
26 CFR 301.7433–1(a), (d), (e), and
(f), revised; civil cause of action for
certain unauthorized collection
actions; withdrawn (Ann 33)
12,666
Regulations:
26 CFR 301.6103(p)(2)(B)–1,
removed; 301.6103(p)(2)(B)–1T,
added; 602.101(b), amended; disclo-
sure of returns and return informa-
tion by other agencies (TD 8968)
2,274
Statutory stock options:
Change in hearing date for REG–
142686–01 (Ann 11) 6,494
Extension of deadline for comments to
Notices 2001–72 and 2001–73 (Ann
8) 6,494
Unauthorized collection actions, civil
cause of action (Ann 33) 12,666
ESTATE TAX
Disclosure of return information, author-
ity for other agencies to redisclose (TD
8968) 2,274; (REG–105344–01)
2,302; correction (Ann 7) 5,459
Proposed Regulations:
26 CFR 301.6103(p)(2)(B)–1,
removed; 301.6103(p)(2)(B)–1T,
added; 602.101(b), amended; disclo-
sure of returns and return informa-
tion by other agencies (REG–
105344–01) 2,302; correction (Ann
7) 5,459
26 CFR 301.7433–1(a), (d), (e), and
(f), revised; civil cause of action for
certain unauthorized collection
actions; withdrawn (Ann 33)
12,666
Regulations:
26 CFR 301.6103(p)(2)(B)–1,
removed; 301.6103(p)(2)(B)–1T,
added; 602.101(b), amended; disclo-
sure of returns and return informa-
tion by other agencies (TD 8968)
2,274
2002-13 I.R.B.vApril 1, 2002

ESTATE TAX—
Cont.
Unauthorized collection actions, civil
cause of action (Ann 33) 12,666
EXCISE TAX
Amended quarterly federal excise tax
return, new Form 720X (Ann 10)
7,539
Disclosure of return information, author-
ity for other agencies to redisclose (TD
8968) 2,274; (REG–105344–01) 2,
302; correction (Ann 7) 5,459
Excise taxes on excess benefit transac-
tions (TD 8978) 7,500
Forms:
720, time for filing by eligible air car-
riers (TD 8983) 9,565
720X, Amended Quarterly Federal
Excise Tax Return, new (Ann 10)
7,539
Golden parachute payments (REG–
209114–90) 9,576
Liability for the foreign insurer or rein-
surer excise tax (REG–125450–01)
5,457
Proposed Regulations:
26 CFR 1.280G–1, added; golden
parachute payments (REG–209114–
90) 9,576
26 CFR 46.4374–1, revised; liability
for insurance premium excise tax
(REG–125450–01) 5,457
26 CFR 301.6103(p)(2)(B)–1,
removed; 301.6103(p)(2)(B)–1T,
added; 602.101(b), amended; disclo-
sure of returns and return informa-
tion by other agencies (REG–
105344–01) 2,302; correction (Ann
7) 5,459
26 CFR 301.7433–1(a), (d), (e), and
(f), revised; civil cause of action for
certain unauthorized collection
actions; withdrawn (Ann 33)
12,666
Regulations:
26 CFR 40.6071(a)–3, added; time for
eligible air carriers to file the third
calendar quarter 2001 Form 720 (TD
8983) 9,565
26 CFR 53.4958–0 through 8, added;
53.4958–0T through 8T, removed;
301.7611–1, revised; 602.101,
amended; excise taxes on excess
benefit transactions (TD 8978)
7,500
EXCISE TAX—
Cont.
26 CFR 301.6103(p)(2)(B)–1,
removed; 301.6103(p)(2)(B)–1T,
added; 602.101(b), amended; disclo-
sure of returns and return informa-
tion by other agencies (TD 8968)
2,274
Unauthorized collection actions, civil
cause of action (Ann 33) 12,666
Valuation of stock options for golden
parachute payments (RP 13) 8,549
EXEMPT
ORGANIZATIONS
Advance letter rulings and determination
letters, areas which will not be issued
from:
Associates Chief Counsel and Division
Counsel/Associate Chief Counsel
(TE/GE) (RP 3) 1,117
Electronic filing system for exempt orga-
nization returns, development (Ann 27)
11,629
Excise taxes on excess benefit transac-
tions (TD 8978) 7,500
Letter rulings:
Determination letters and information
letters issued by Associates Chief
Counsel and Division Counsel/
Associate Chief Counsel (TE/GE)
(RP 1) 1,1
Information letters, etc. (RP 4) 1,127
List of organizations classified as private
foundations (Ann 16) 7,541; (Ann 25)
10,621;(Ann 28) 11,630; (Ann 32)
12,664
Qualified 501(c)(3) bonds, gross proceeds
(Notice 10) 6,490
Regulations:
26 CFR 53.4958–0 through 8, added;
53.4958–0T through 8T, removed;
301.7611–1, revised; 602.101,
amended; excise taxes on excess
benefit transactions (TD 8978)
7,500
Revocations (Ann 29) 11,631
Technical advice to:
Directors and chiefs, appeals offices,
from Associates Chief Counsel and
Division Counsel/Associate Chief
Counsel (TEGE) (RP 2) 1,82
IRS employees (RP 5) 1,173
EXEMPT
ORGANIZATIONS—
Cont.
User fees, request for letter rulings (RP 8)
1,252
GIFT TAX
Disclosure of return information, author-
ity for other agencies to redisclose (TD
8968) 2,274; (REG–105344–01)
2,302; correction (Ann 7) 5,459
Proposed Regulations:
26 CFR 301.6103(p)(2)(B)–1,
removed; 301.6103(p)(2)(B)–1T,
added; 602.101(b), amended; disclo-
sure of returns and return informa-
tion by other agencies (REG–
105344–01) 2,302; correction (Ann
7) 5,459
26 CFR 301.7433–1(a), (d), (e), and
(f), revised; civil cause of action for
certain unauthorized collection
actions; withdrawn (Ann 33) 12,
666
Regulations:
26 CFR 301.6103(p)(2)(B)–1,
removed; 301.6103(p)(2)(B)–1T,
added; 602.101(b), amended; disclo-
sure of returns and return informa-
tion by other agencies (TD 8968)
2,274
Unauthorized collection actions, civil
cause of action (Ann 33) 12,666
INCOME TAX
Accounting, unit livestock price method
(REG–125626–01) 9,604
Advance letter rulings and determination
letters, areas which will not be issued
from:
Associates Chief Counsel and Division
Counsel/Associate Chief Counsel
(TE/GE) (RP 3) 1,117
Associate Chief Counsel (Interna-
tional) (RP 7) 1,249
Agent, definition for certain purposes
(REG–120135–01) 8,552
Allocation of loss with respect to stock
and other personal property (TD 8973)
4,391; correction (Ann 14) 7,540
April 1, 2002vi2002-13 I.R.B.

INCOME TAX—
Cont.
Automobile owners and lessees, determi-
nation of correct tax liability, 2002
inflation adjustment (RP 14) 5,450
Averaging of farm income (TD 8972) 5,
443; correction (Ann 23) 8,563
Capitalized costs, impact fees (RR 9) 10,
614
Classification of certain business entities,
check-the-box regulations (TD 8970)
2,281
Combat zone personnel, tax relief (Notice
17) 9,567
Consolidated returns, loss disallowance,
duplicated loss (Notice 11) 7,526;
(Notice 18) 12,644
Contributions by employer to accident
and health plans (RR 3) 3,316
Credits:
Low-income housing credit:
Resident population estimates, 2002
(Notice 13) 8,547
Satisfactory bond,“bond factor”
amounts for the period: January
through March 2002 (RR 8)
9,564
New markets tax credit (TD 8971)
3,308; correction (Ann 20) 8,561;
(REG–119436–01) 3,377
Damage actions for unlawful collections
(REG–107366–00) 12,645
Dealers in securities futures contracts, let-
ter rulings (RP 11) 7,526
Deduction and capitalization of expendi-
tures, rules and standards, public com-
ment (Ann 9) 7,536; correction (Ann
35) 12,667
Deemed sale or acquisition of an insur-
ance company’s assets, application of
section 338 (REG–118861–00) 12,651
Disallowance of deductions and credits
for failure to file timely return (TD
8981) 7496; (REG–107100–00)
7,529
Disaster relief for September 11, 2001,
terrorist attack for:
Tentative carryback adjustments; post-
ponement of time to apply (Notice
15) 8,548
Disclosure of return information, author-
ity for other agencies to redisclose (TD
8968) 2,274; (REG–105344–01) 2,
302; correction (Ann 7) 5,459
INCOME TAX—
Cont.
Electronic and magnetic filing, specifica-
tions for questionable Forms W-4,
updated information (Ann 26) 11,629
Entity classification election, relief (RP
15) 6,490
Frequent flyer miles attributable to busi-
ness or official travel (Ann 18) 10,621
Golden parachute payments (REG–
209114–90) 9,576
Inflation-adjusted items for 2001, expa-
triation, correction (Ann 5) 4,420
Insurance companies:
Computation of life insurance reserves
for annuity contracts using NAIC
Actuarial Guideline 33, changes
basis subject to section 807(f) (RR 6)
6,460
Interest rate tables (RR 12) 11,624
Tentative differential earnings rate and
tentative recomputed differential
earnings rate (Notice 19) 10,619
Interest:
Investment:
Federal short-term, mid-term, and
long-term rates for:
January 2002 (RR 2),271;
correction (Ann 13) 7,540
February 2002 (RR 5) 6,461
March 2002 (RR 10) 10,616
Rates:
Underpayments and overpayments,
quarter beginning:
April 1, 2002 (RR 13) 12,367
Inventory:
Dollar-value LIFO and inventory price
index computation (IPIC) methods
(TD 8976) 5,421; correction (Ann
22) 8,562
LIFO:
Price indexes used by department
stores for:
November 2001 (RR 4) 4,389
December 2001 (RR 7) 8,543
January 2002 (RR 14) 12,636
Letter rulings; Determination letters, and
information letters issued by Associates
Chief Counsel and Division Counsel/
Associate Chief Counsel (TE/GE) (RP
1) 1,1
Like-kind exchanges, definition of dis-
qualified person (TD 8982) 8,544
Major disaster and emergency areas list-
ing (RR 11) 10,608
Materials and supplies, restaurant small-
wares (RP 12) 3,374
INCOME TAX—
Cont.
Methods of accounting:
Automatic consent to change:
Certain methods of accounting (RP
9) 3,327; correction (Ann 17)
8,561
To the cash method and the materi-
als and supplies method (Notice
14) 8,547
Miscellaneous federal tax matters, correc-
tion of language referring taxpayers to
the IRS Internet site for several pro-
posed regulations (Ann 30) 11,632
Notice and opportunity for hearing:
Before levy (TD 8980) 6,477
Upon filing of notice of federal tax
lien (TD 8979) 6,466
Partnerships:
Form 1065 electronic filing waiver
request (Ann 3) 2,305
Optional election to make monthly
section 706(a) computations (RP 16)
9,572
Patriots’Day, filing date (Notice 12)
7,526
Payment of internal revenue taxes by
credit card and debit card (TD 8969)
2,276
Private foundations, organizations now
classified as (Ann 16) 7,541; (Ann 25)
10,621; (Ann 28) 11,630; (Ann 32)
12,664
Proposed Regulations:
26 CFR Parts 1, 31, 46, and 301; mis-
cellaneous federal tax matters; cor-
rection of language referring taxpay-
ers to the IRS Internet site for
several proposed regulations (Ann
30) 11,632
26 CFR 1.41–0,–3,–8, amended;
1.41–4, revised; credit for increasing
research activities (REG–112991–
01) 4,404
26 CFR 1.45D–1, added; new markets
tax credit (REG–119436–01) 3,377
26 CFR 1.66–1 through–5, added;
treatment of community income for
certain individuals not filing joint
returns (REG–115054–01) 7,530
26 CFR 1.197–0, revised; 1.197–2,
amended; 1.338–0,–1, amended;
1.338–11, added; 1.381(c)(22)–1,
amended; 1.1060–1, amended;
application of section 338 to insur-
ance companies (REG–118861–00)
12,651
2002-13 I.R.B.viiApril 1, 2002

INCOME TAX—
Cont.
26 CFR 1.280G–1, added; golden
parachute payments (REG–209114–
90) 9,576
26 CFR 1.337(d)–6,–7, added; certain
transfers of property to regulated
investment companies (RICs) and
real estate investment trusts (REITs)
(REG–142299–01, REG–209135–
88) 4,418; notice of public hearing
(Ann 6) 5,458; correction (Ann 15)
7,540
26 CFR 1.471–6, amended; unit live-
stock price method (REG–125626–
01) 9,604
26 CFR 1.874–1, amended; 1.882–4,
amended; disallowance of deduc-
tions and credits for failure to file
timely return (REG–107100–00)
7,529
26 CFR 1.1441–1, amended;
301.6109–1, amended; taxpayer
identification number rule where
taxpayer claims treaty rate and is
entitled to an unexpected payment
(REG–159079–01) 6,493
26 CFR 301.6103(1)–1, added;
301.6103(m)–1, added; definition of
agent for certain purposes (REG–
120135–01) 8,552
26 CFR 301.6103(p)(2)(B)–1,
removed; 301.6103(p)(2)(B)–1T,
added; 602.101(b), amended; disclo-
sure of returns and return informa-
tion by other agencies (REG–
105344–01) 2,302; correction (Ann
7) 5,459
26CFR301.7426–2,added;
301.7430–1,–2,–3,–6, amended;
301.7430–8, added; 301.7433–1,
amended; 301.7433–2, added; civil
cause of action for damages caused
by unlawful tax collection actions,
including actions taken in violation
of section 362 or section 524 of the
bankruptcy code (REG–107366–00),
12,645
26 CFR 301.7433–1(a), (d), (e), and
(f), revised; civil cause of action for
certain unauthorized collection
actions; withdrawn (Ann 33)
12,666
INCOME TAX—
Cont.
Publication 1245, Specifications for Fil-
ing Form W-4, Employee’s Withhold-
ing Allowance Certificate, Magneti-
cally or Electronically, updated
information for questionable Forms
W-4 (Ann 26) 11,629
Qualified 501(c)(3) bonds, gross proceeds
(Notice 10) 6,490
Qualified research, credit computation
(REG–112991–01) 4,404
Regulations:
26 CFR 1.45D–1T, added; 602.101(b),
amended; new markets tax credit
(TD 8971) 3,308; correction (Ann
20) 8,561
26 CFR 1.337(d)–5T, amended;
1.337(d)–6T,–7T, added; 602.101,
amended; certain transfers of prop-
erty to regulated investment compa-
nies (RICs) and real estate invest-
ment trusts (REITs) (TD 8975) 4,
379; correction (Ann 21) 8,562
26 CFR 1.472–8, amended; 602.101,
revised; dollar-value LIFO regula-
tions; inventory price index compu-
tation (IPIC) method (TD 8976) 5,
421; correction (Ann 22) 8,562
26 CFR 1.861–8,–8T, amended;
1.865–1, added; 1.865–1T,–2T,
removed; 1.865–2, amended;
1.904–4, amended; allocation of loss
with respect to stock and other per-
sonal property (TD 8973) 4,391;
correction (Ann 14) 7,540
26 CFR 1.874–1, amended; 1.874–1T,
added; 1.882–4, amended; 1.882–
4T, added; disallowance of deduc-
tions and credits for failure to file
timely return (TD 8981) 7,496
26 CFR 1.1031(k)–1, revised; defini-
tion of disqualified person (TD
8982) 8,544
26 CFR 1.1301–1, added; 602.101,
amended; averaging of farm income
(TD 8972) 5,443; correction (Ann
23) 8,563
26 CFR 1.1441–6, amended; 1.1441–
1T,–6T, added; 301.6109–1,
revised; 301.6109–1T, added; tax-
payer identification number rule
where taxpayer claims treaty rate
and is entitled to an unexpected pay-
ment (TD 8977) 6,463
INCOME TAX—
Cont.
26 CFR 1.6050I–0,–1, amended; cross
referencing section 5331 of title 31
relating to reporting of certain cur-
rency transactions by nonfinancial
trades or businesses under the Bank
Secrecy Act (TD 8974) 3,318
26 CFR 301.6103(k)(9)–1, added;
301.6103(k)(9)–1T, removed;
301.6311–1, revised; 301.6311–2,
added; 301.6311–2T, removed; pay-
ment by credit card and debit card
(TD 8969) 2,276
26 CFR 301.6103(p)(2)(B)–1,
removed; 301.6103(p)(2)(B)–1T,
added; 602.101(b), amended; disclo-
sure of returns and return informa-
tion by other agencies (TD 8968)
2,274
26CFR301.6320–1,added;
301.6320–1T, removed; notice and
opportunity for hearing upon filing
of notice of federal tax lien (TD
8979) 6,466
26CFR301.6330–1,added;
301.6330–1T, removed; notice and
opportunity for hearing before levy
(TD 8980) 6,477
26 CFR 301.7701–3, amended; classi-
fication of certain business entities,
check-the-box regulations (TD
8970) 2,281
Reporting of certain currency transactions
by nonfinancial trades or businesses to
the IRS and FinCEN (TD 8974) 3,318
Restrictions on disclosure and use of tax
return information by tax return prepar-
ers (Notice 6) 3,326
Revocations, exempt organizations (Ann
29) 11,631
Spin-offs, employee stock options and
restricted stock (RR 1) 2,268
Split-dollar life insurance arrangements
(Notice 8) 4,398
Taxpayer identifying number, rule for cer-
tain foreign individuals claiming treaty
benefits (TD 8977) 6,463; (REG–
159079–01) 6,493
Technical advice to:
Directors and chiefs, appeals offices,
from Associates Chief Counsel and
Division Counsel/Associate Chief
Counsel (TEGE)(RP 2) 1,82
IRS employees (RP 5) 1,173
April 1, 2002viii2002-13 I.R.B.

INCOME TAX—
Cont.
Transfers of property to RICs and REITs
(TD 8975) 4,379; (REG–142299–01,
REG–209135–88) 4,418; notice of
public hearing (Ann 6) 5,458; correc-
tion (Ann 15) 7,540; correction (Ann
21) 8,562
Treatment of community income for cer-
tain individuals not filing joint returns
(REG–115054–01) 7,530
Unauthorized collection actions, civil
cause of action (Ann 33) 12,666
Valuation of stock options for golden
parachute payments (RP 13) 8,549
Waiver of accuracy-related penalty for
disclosure of tax shelter treatment (Ann
2) 2,304
2002-13 I.R.B.ixApril 1, 2002

This page is reserved for missing children Dean Pyle Peters and Kemberly Ramer
April 1, 20022002-13 I.R.B.