Internal Revenue Bulletin 2002-3 (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.
INCOME TAX
T.D. 8971, page 308.
REG–119436–01, page 377.
Temporary and proposed regulations under section 45D of the
Code provide guidance on the new markets tax credit. A tax-
payer making a qualified equity investment in a qualified com-
munity development entity that has received a new markets tax
credit allocation may claim a 5–percent tax credit with respect
to the qualified equity investment on each of the first 3 credit
allowance dates and a 6–percent credit on each of the remain-
ing 4 credit allowance dates. A public hearing on the proposed
regulations is scheduled for March 14, 2002.
T.D. 8974, page 318.
Final regulations under section 6050I of the Code cross refer-
ence section 5331 of Title 31 and concern reporting on the
same form certain currency transactions that are required to
be reported to both IRS and the Financial Crimes Enforcement
Network (FinCEN).
EMPLOYEE PLANS
Rev. Rul. 2002–3, page 316.
Health insurance premiums.This ruling provides guidance
on the application of sections 106(a) and 105(b) of the Code to
reimbursements of employees for salary reduction amounts
previously excluded from gross income under section 106(a).
Rev. Rul. 61–146 distinguished.
EMPLOYMENT TAX
Rev. Rul. 2002–3, page 316.
Health insurance premiums.This ruling provides guidance
on the application of sections 106(a) and 105(b) of the Code to
reimbursements of employees for salary reduction amounts
previously excluded from gross income under section 106(a).
Rev. Rul. 61–146 distinguished.
Notice 2002–5, page 320.
Tax Court review of worker classification and section
530 determinations.This document describes procedures
that the Service has implemented to comply with the amend-
ment to section 7436 of the Code by the Community Renewal
Tax Relief Act of 2000. Notice 98–43 modified and super-
seded.
(Continued on the next page)
Finding Lists begin on page ii.
Bulletin No. 2002–3
January 22, 2002

ADMINISTRATIVE
Notice 2002–6, page 326.
This document clarifies that, although tax return preparers may
be subject to the privacy provisions of the Gramm-Leach-Bliley
Act, those provisions do not supersede, alter, or affect the pre-
existing requirements of section 7216 of the Code restricting
the disclosure or use of tax return information by a tax return
preparer.
Rev. Proc. 2002–9, page 327.
Methods of accounting; automatic consent. Procedures
are provided under which a taxpayer may obtain automatic con-
sent of the Commissioner to change certain methods of
accounting. Rev. Proc. 99−49 modified and superseded.
Rev. Proc. 2002–12, page 374.
Materials and supplies; restaurant smallwares.A safe har-
bor method of accounting for “smallwares” is provided for tax-
payers engaged in the trade or business of operating a restau-
rant or tavern. Under this safe harbor method, such taxpayers
may account for smallwares in the same manner as materials
and supplies that are not incidental under section 1.162–3 of
the regulations.
January 22, 20022002–3 I.R.B.

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.
2002–3 I.R.B.January 22, 2002

Part I. Rulings and Decisions Under the Internal Revenue Code of 1986
Section 45.—New Markets
Tax Credit
26 CFR 1.45D–1T: New markets tax credit.
T.D. 8971
DEPARTMENT OF THE
TREASURY
Internal Revenue Service
26 CFR Parts 1 and 602
New Markets Tax Credit
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Temporary regulations.
SUMMARY: This document contains
temporary regulations that provide guid-
ance for taxpayers claiming the new mar-
kets tax credit under section 45D. A tax-
payer making a qualified equity
investment in a qualified community
development entity that has received a
new markets tax credit allocation may
claim a 5–percent tax credit with respect
to the qualified equity investment on each
of the first 3 credit allowance dates and a
6–percent tax credit with respect to the
qualified equity investment on each of the
remaining 4 credit allowance dates. 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 in REG–
119436–01 on page 377 of this Bulletin.
DATES:Effective Date:These regula-
tions are effective December 26, 2001.
Date of Applicability:For date of
applicability of § 1.45D–1T, see § 1.45D–
1T(h).
FOR FURTHER INFORMATION CON-
TACT: Paul Handleman (202) 622–3040.
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
collections of information contained in
these regulations have been reviewed and,
pending receipt and evaluation of public
comments, approved by the Office of
Management and Budget under control
number 1545–1765. Responses to these
collections of information are mandatory.
An agency may not conduct or spon-
sor, and a person is not required to
respond to, a collection of information
unless the collection of information dis-
plays a valid OMB control number.
For further information concerning
these collections of information, and
where to submit comments on the collec-
tions of information and the accuracy of
the estimated burden, and suggestions for
reducing this burden, please refer to the
preamble to the cross-referencing notice
of proposed rulemaking published else-
where in this issue of the Bulletin.
Books or records relating to a 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
This document contains temporary
regulations relating to the new markets
tax credit under section 45D of the Inter-
nal Revenue Code (Code). This provision
was added to the Code by section 121(a)
of the Community Renewal Tax Relief
Act of 2000 (Public Law 106–554). The
Secretary has delegated certain adminis-
trative, application, allocation, monitor-
ing, and other programmatic functions
relating to the new markets tax credit pro-
gram to the Under Secretary (Domestic
Finance), who in turn has delegated those
functions to the Community Development
Financial Institutions Fund (CDFI Fund).
On May 1, 2001, the IRS published an
advance notice of proposed rulemaking
(Announcement 2001–49, 2001–20 I.R.B.
1183) in theFederal Register(66 FR
21844) inviting comments relating to tax
issues arising under section 45D. Numer-
ous comments have been received. The
IRS and Treasury Department have
reviewed and considered all the com-
ments in the process of preparing this
Treasury decision. This preamble to the
temporary regulations describes many,
but not all, of the comments received by
the IRS.
Explanation of Provisions
General Overview
Taxpayers may claim a new markets
tax credit on a credit allowance date in an
amount equal to the applicable percentage
of the taxpayer’s qualified equity invest-
ment in a qualified community develop-
ment entity (CDE). The credit allowance
date for any qualified equity investment is
the date on which the investment is ini-
tially made and each of the 6 anniversary
dates thereafter. The applicable percent-
age is 5 percent for the first 3 credit
allowance dates and 6 percent for the
remaining credit allowance dates.
A CDE is any domestic corporation or
partnership if: (1) the primary mission of
the entity is serving or providing invest-
ment capital for low-income communities
or low-income persons; (2) the entity
maintains accountability to residents of
low-income communities through their
representation on any governing board of
the entity or on any advisory board to the
entity; and (3) the entity is certified by
the Secretary for purposes of section 45D
as being a CDE.
The new markets tax credit may be
claimed only for a qualified equity invest-
ment in a CDE. A qualified equity invest-
ment is any equity investment in a CDE
for which the CDE has received an allo-
cation from the Secretary if, among other
things, the CDE uses substantially all of
the cash from the investment to make
qualified low-income community invest-
ments. Under a safe harbor, the
substantially-all requirement is treated as
met if at least 85 percent of the aggregate
gross assets of the CDE are invested in
qualified low-income community invest-
ments.
Qualified low-income community
investments consist of: (1) any capital or
equity investment in, or loan to, any
qualified active low-income community
business; (2) the purchase from another
CDE of any loan made by such entity that
2002–3 I.R.B.308January 22, 2002

is a qualified low-income community
investment; (3) financial counseling and
other services to businesses located in,
and residents of, low-income communi-
ties; and (4) certain equity investments in,
or loans to, a CDE.
In general, a qualified active low-
income community business is a corpora-
tion or a partnership if for the taxable
year: (1) at least 50 percent of the total
gross income of the entity is derived from
the active conduct of a qualified business
within any low-income community; (2) a
substantial portion of the use of the tan-
gible property of the entity is within any
low-income community; (3) a substantial
portion of the services performed for the
entity by its employees is performed in
any low-income community; (4) less than
5 percent of the average of the aggregate
unadjusted bases of the property of the
entity is attributable to certain col-
lectibles; and (5) less than 5 percent of
the average of the aggregate unadjusted
bases of the property of the entity is
attributable to certain nonqualified finan-
cial property.
Substantially All
As indicated above, a CDE must use
substantially all of the cash from a quali-
fied equity investment to make qualified
low-income community investments.
Most commentators suggest that the
substantially-all test should require that at
least 85 percent of the taxpayer’s cash be
committed to, or invested in, qualified
low-income community investments.
Some commentators propose that in order
to provide CDEs with financial flexibility
in managing their investments, the per-
centage should be reduced for the later
years of the 7–year credit period. The
temporary regulations adopt the sugges-
tion to definesubstantially allas 85 per-
cent or more and reduce the substantially-
all percentage to 75 percent for the
seventh year of the 7–year credit period.
Some commentators suggest that a
CDE’s costs of obtaining equity invest-
ments in the CDE (such as underwriters’
fees and broker fees) and the CDE’s over-
head expenses (such as staff salaries)
should count toward satisfying the
substantially-all requirement. Some com-
mentators suggest that reserves main-
tained by the CDE of up to 10 percent of
the taxpayer’s cash investment in the
CDE should count toward satisfying the
substantially-all requirement. The tempo-
rary regulations do not include issuance
costs or CDE overhead expenses as
counting toward the substantially-all
requirement. However, the temporary
regulations provide that reserves (but not
in excess of 5 percent of the taxpayer’s
cash investment) for loan losses and for
additional investments in existing quali-
fied low-income community investments
are treated as invested in a qualified low-
income community investment.
Several commentators suggest that, for
purposes of the“85 percent of the aggre-
gate gross assets”safe harbor, aggregate
gross assets should be determined accord-
ing to cost basis and not, for example, fair
market value. The temporary regulations
adopt this suggestion. Cost basis is
defined under the temporary regulations
as cost basis under section 1012.
Commentators propose that a CDE
should have from 12 months to 5 years to
invest the cash from a qualified equity
investment in a qualified low-income
community investment, depending upon
the type of investment. The temporary
regulations adopt a 12–month period for
investing the taxpayer’s cash investment.
Commentators propose that repay-
ments to a CDE of equity or principal
from qualified low-income community
investments should have to be reinvested
by the CDE within 12 months, but that no
reinvestment should be required in the
sixth and seventh years of the 7–year
credit period. One commentator proposes
that reinvestment should be encouraged,
but not required. Another commentator
would limit the time period to 45 days for
identifying the investment and 180 days
for making the investment. The tempo-
rary regulations adopt the suggestion that
repayment amounts reinvested within 12
months are treated as continuously
invested in qualified low-income commu-
nity investments. In addition, repayments
received in the seventh year of the 7–year
credit period are not required to be rein-
vested.
Qualified Active Low-Income Community
Businesses
As indicated above, qualified low-
income community investments include
any capital or equity investment in, or
loan to, any qualified active low-income
community business. A business is a
qualified active low-income community
business only if, among other things: (1)
at least 50 percent of the total gross
income of the business is derived from
the active conduct of a qualified business
within any low-income community; (2) a
substantial portion of the use of the tan-
gible property of the business is within
any low-income community; and (3) a
substantial portion of the services per-
formed for the business by its employees
is performed in any low-income commu-
nity.
Commentators propose that, to satisfy
the“50 percent of the total gross income
derived from the active conduct”require-
ment (50–percent requirement) in the
case of a manufacturing business, 50 per-
cent of production, but not sales, should
have to occur within a low-income com-
munity. For a services business, commen-
tators recommend a requirement that at
least 50 percent of the services be pro-
vided by employees of offices in low-
income communities even if the services
are provided elsewhere. One commenta-
tor suggests that the 50–percent require-
ment should be deemed met if the busi-
ness is located in the low-income
community and most of the employees
are residents of the low-income commu-
nity. Another commentator suggests that
the requirement should be satisfied if 50
percent of the total gross income is
derived from: (1) the operation of, or pro-
duction at, a facility located in a low-
income community; (2) most of the
employees are based at such a facility;
and (3) the management is located within
the low-income community.
For purposes of the tangible property
and services performed requirements, rec-
ommendations for the percentage that
should constitute a substantial portion
range from 20 percent to 50 percent.
Alternatively, some commentators pro-
pose that the tangible property and ser-
vices performed requirements should be
satisfied if the business satisfies one of
the following: (1) the business is located
in a qualified area; (2) the business oper-
ates a major facility in a qualified area;
(3) the business’primary business activity
takes place in a qualified area; or (4) the
business’primary mission is working
with people in qualified areas.
January 22, 20023092002–3 I.R.B.

For purposes of the tangible property
and services performed requirements, the
temporary regulations define a substantial
portion as 40 percent. In addition, the
temporary regulations provide that the
50–percent requirement is deemed to be
satisfied if the entity meets the require-
ments of either the tangible property test
or the services performed test, if 50 per-
cent is substituted for 40 percent. Further,
the entity may satisfy the 50-percent
requirement based on all the facts and cir-
cumstances.
Commentators propose that for pur-
poses of determining when a trade or
business constitutes a qualified active
low-income community business, an
entity should qualify as a qualified active
low-income community business if the
CDE reasonably expects, at the time the
CDE makes the capital or equity invest-
ment in, or loan to, the entity, that the
entity will satisfy the requirements to be a
qualified active low-income community
business throughout the entire period of
the investment or loan. This proposal has
been adopted in the temporary regula-
tions, except in the case where the CDE
controls the entity.
If the CDE controls the entity at any
time during the 7-year credit period, the
reasonable expectation test does not apply
and the entity must be a qualified active
low-income community business during
the entire period the CDE controls the
entity. Commentators suggest that control
for this purpose should be defined as at
least 50 percent of voting power. Some
commentators suggest that control should
be determined based on whether the CDE
is related to the entity within the meaning
of sections 267(b) or 707(b)(1). The tem-
porary regulations define control with
respect to an entity as direct or indirect
ownership (based on value) or control
(based on voting or management rights)
of 33 percent or more of the entity. How-
ever, a CDE does not control an entity if
an unrelated person possesses greater
control over the entity than the CDE.
Financial Counseling and Other Services
Commentators suggest that the defini-
tion of financial counseling and other ser-
vices should include services for identify-
ing CDE investment opportunities;
preparing business owners to use finan-
cial products; underwriting loans and
investments; helping business owners cre-
ate viable business plans; and, after loans
and investments are made, enhancing
business planning, marketing, manage-
ment, and financial skills of business
owners and serving on their boards of
directors. The temporary regulations
definefinancial counseling and other ser-
vicesas advice provided by the CDE
relating to the organization or operation
of a trade or business that is provided to
a qualified active low-income community
business or to residents of a low-income
community.
Investments in Other CDEs
Commentators propose that, for pur-
poses of the substantially-all requirement,
tracing should not be required when a
CDE invests in another CDE, but other
mechanisms should be required (for
example, decertifying the recipient CDE
if it does not use funds properly). Alterna-
tively, commentators propose tracing at
the recipient CDE level, but minimizing
the reporting and recapture burdens for
the recipient CDEs. Some commentators
suggest that the recipient CDE should
have the same restrictions placed on it as
the investing CDE. The temporary regula-
tions provide that an equity investment in,
or loan to, another CDE is a qualified
low-income community investment only
to the extent that the recipient CDE uses
the proceeds: (1) for either an investment
in, or a loan to, a qualified active low-
income community business, or financial
counseling and other services; and (2) in
a manner that would constitute a qualified
low-income community investment if it
were made directly by the CDE making
the equity investment or loan.
Recapture
A recapture event requiring an investor
to recapture credits previously taken may
occur for an equity investment in a CDE
if the CDE: (1) ceases to be a CDE; (2)
ceases to use substantially all of the pro-
ceeds of the equity investment for quali-
fied low-income community investments;
or (3) redeems the investor’s equity
investment. Commentators suggest that a
CDE should be permitted to take remedial
actions to avoid recapture. The temporary
regulations adopt this suggestion by pro-
viding a CDE the opportunity to request a
waiver of a requirement or an extension
of time to meet a deadline contained in
the temporary regulations if such waiver
or extension does not materially frustrate
the purposes of section 45D and the regu-
lations thereunder. A CDE that believes it
has good cause for a waiver or an exten-
sion may request relief from the Commis-
sioner in a ruling request. In considering
such a ruling request, the Commissioner
may consult with the CDFI Fund in a
manner consistent with section 6103. The
granting of a waiver or an extension may
require adjustments of the CDE’s require-
ments under section 45D and the regula-
tions thereunder as may be appropriate.
Other Federal Tax Benefits
The Treasury Department is authorized
to prescribe regulations that limit the new
markets tax credit for investments that are
directly or indirectly subsidized by other
Federal tax benefits (including the low-
income housing tax credit under section
42 and the exclusion from gross income
under section 103). Commentators sug-
gest that a CDE should not be permitted
to use the proceeds of a qualified equity
investment to purchase tax-exempt bonds.
However, the same commentators state
that there should be no restriction on the
receipt of tax-exempt bond proceeds by a
qualified active low-income community
business. The temporary regulations do
not prohibit a CDE from purchasing tax-
exempt bonds because tax-exempt financ-
ing provides a subsidy to borrowers and
not bondholders. Moreover, a loan by a
CDE directly to a qualified active low-
income community business cannot be a
tax-exempt bond because the loan is not
an obligation of a state or local govern-
ment. Because the rental to others of resi-
dential rental property cannot be a quali-
fied active low-income community
business, a taxpayer cannot receive the
low-income housing tax credit and new
markets tax credit on the same invest-
ment. Although the temporary regulations
do not provide specific rules on double
tax benefit issues, the IRS and the Trea-
sury Department request additional com-
ments on what Federal tax benefits should
limit the new markets tax credit.
2002–3 I.R.B.310January 22, 2002

Reporting Requirements
The Treasury Department is authorized
to prescribe regulations that impose
appropriate reporting requirements for the
new markets tax credit. Commentators
suggest that the information reporting to
the Treasury Department should be under-
taken on an annual basis and that CDEs
should be required to provide the follow-
ing information: financial statements, a
list of investors and closing and commit-
ment dates, a list of eligible investments,
terms of investments and location of
investments, information on loan loss or
investments reserves, and information on
financial counseling and other services.
The reporting requirements in the tem-
porary regulations require a CDE to pro-
vide notice: (1) to any taxpayer who
acquires a qualified equity investment in
the CDE at its original issue that the
equity investment is a qualified equity
investment entitling the taxpayer to claim
the new markets tax credit; and (2) in the
case of a recapture event, to each holder
of an equity investment, including all
prior holders of that investment, that a
recapture event has occurred. CDEs must
comply with such reporting requirements
to the Secretary as the Secretary may pre-
scribe. Taxpayers may claim the new
markets tax credit by completing Form
8874,“New Markets Credit,”and by fil-
ing the form with the taxpayer’s Federal
income tax return.
Special Analyses
It has been determined that this Trea-
sury decision is not a significant regula-
tory action as defined in Executive Order
12866. Therefore, a regulatory assess-
ment is not required. It is hereby certified
that the collection of information in these
regulations will not have a significant
economic impact on a substantial number
of small entities. This certification is
based upon the fact that any burden on
taxpayers is minimal. Accordingly, a
Regulatory Flexibility Analysis under the
Regulatory Flexibility Act (5 U.S.C.
chapter 6) is not required. Pursuant to
section 7805(f) of the Code, these tempo-
rary regulations will be submitted to the
Chief Counsel for Advocacy of the Small
Business Administration for comment on
their impact on small business.
Drafting Information
The principal author of these regula-
tions is Paul F. Handleman, Office of the
Associate Chief Counsel (Passthroughs
and Special Industries), IRS. However,
other personnel from the IRS and Trea-
sury 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 an entry in
numerical order to read as follows:
Authority: 26 U.S.C. 7805***
Section 1.45D–1T also issued under 26
U.S.C. 45D(i); * * *
Par. 2. Section 1.45D–1T is added to
read as follows:
§1.45D–1T New markets tax credit.
(a)Table of contents. This paragraph
lists the headings that appear in§1.45D–
1T.
(a) Table of contents.
(b) Allowance of credit
(1) In general.
(2) Credit allowance date.
(3) Applicable percentage.
(4) Amount paid at original issue.
(c) Qualified equity investment.
(1) In general.
(2) Equity investment.
(3) Equity investments made prior to
allocation.
(i) In general.
(ii) Exception.
(iii) Initial investment date.
(4) Limitations.
(i) In general.
(ii) Allocation limitation.
(5) Substantially all.
(i) In general.
(ii) Direct-tracing calculation.
(iii) Safe harbor calculation.
(iv) Time limit for making invest-
ments.
(v) Reduced substantially-all percent-
age.
(6) Aggregation of equity investments.
(7) Subsequent purchasers.
(d) Qualified low-income community
investments.
(1) In general.
(i) Investment in a qualified active
low-income community business.
(ii) Purchase of certain loans from
CDEs.
(iii) Financial counseling and other
services.
(iv) Investments in other CDEs.
(2) Payments of, or for, capital, equity
or principal.
(i) In general.
(ii) Subsequent reinvestments.
(iii) Special rule for loans.
(iv) Example.
(3) Special rule for reserves.
(4) Qualified active low-income com-
munity business.
(i) In general.
(A) Gross-income requirement.
(B) Use of tangible property.
(C) Services performed.
(D) Collectibles.
(E) Nonqualified financial property.
(ii) Proprietorships.
(iii) Portions of business.
(5) Qualified business.
(i) In general.
(ii) Rental of real property.
(iii) Exclusions.
(A) Trades or businesses involving
intangibles.
(B) Certain other trades or businesses.
(C) Farming.
(6) Qualifications.
(i) In general.
(ii) Control.
(A) In general.
(B) Definition of control.
(7) Financial counseling and other ser-
vices.
(e) Recapture.
(1) In general.
(2) Recapture event.
(3) Bankruptcy.
(4) Waiver of requirement or extension
of time.
(i) In general.
(ii) Manner for requesting a waiver or
extension.
(iii) Terms and conditions.
(5) Example.
(f) Basis reduction.
(1) In general.
(2) Adjustment in basis of interest in
partnership or S corporation.
(g) Other rules.
January 22, 20023112002–3 I.R.B.

(1) Anti-abuse.
(2) Reporting requirements.
(i) Notification by CDE to taxpayer.
(A) Allowance of new markets tax
credit.
(B) Recapture event.
(ii) CDE reporting requirements to
Secretary.
(iii) Manner of claiming new markets
tax credit.
(iv) Reporting recapture tax.
(h) Effective date.
(b)Allowance of credit—(1)In gen-
eral. For purposes of the general business
credit under section 38, a taxpayer hold-
ing a qualified equity investment on a
credit allowance date which occurs dur-
ing the taxable year may claim the new
markets tax credit determined under sec-
tion 45D and this section for such taxable
year in an amount equal to the applicable
percentage of the amount paid to a quali-
fied community development entity
(CDE) for such investment at its original
issue.Qualified equity investmentis
defined in paragraph (c) of this section.
Credit allowance dateis defined in para-
graph (b)(2) of this section.Applicable
percentageis defined in paragraph (b)(3)
of this section. ACDEis a qualified com-
munity development entity as defined in
section 45D(c). The amount paid at origi-
nal issue is determined under paragraph
(b)(4) of this section.
(2)Credit allowance date. The term
credit allowance datemeans, with respect
to any qualified equity investment—
(i) The date on which the investment is
initially made; and
(ii) Each of the 6 anniversary dates of
such date thereafter.
(3)Applicable percentage. Theappli-
cable percentageis 5 percent for the first
3 credit allowance dates and 6 percent for
the other 4 credit allowance dates.
(4)Amount paid at original issue. The
amount paid to the CDE for a qualified
equity investment at its original issue
consists of all amounts paid by the tax-
payer to, or on behalf of, the CDE
(including any underwriter’s fees) to pur-
chase the investment at its original issue.
(c)Qualified equity investment—(1)In
general. The termqualified equity invest-
mentmeans any equity investment (as
defined in paragraph (c)(2) of this sec-
tion) in a CDE if—
(i) The investment is acquired by the
taxpayer at its original issue (directly or
through an underwriter) solely in
exchange for cash;
(ii) Substantially all (as defined in
paragraph (c)(5) of this section) of such
cash is used by the CDE to make quali-
fied low-income community investments
(as defined in paragraph (d)(1) of this
section); and
(iii) The investment is designated for
purposes of section 45D and this section
by the CDE on its books and records
using any reasonable method.
(2)Equity investment. The termequity
investment meansany stock (other than
nonqualified preferred stock as defined in
section 351(g)(2)) in an entity that is a
corporation for Federal tax purposes and
any capital interest in an entity that is a
partnership for Federal tax purposes. See
§§301.7701–1 through 301.7701–3of
this chapter for rules governing when a
business entity, such as a business trust or
limited liability company, is classified as
a corporation or a partnership for Federal
tax purposes.
(3)Equity investments made prior to
allocation—(i)In general. Except as pro-
vided in paragraph (c)(3)(ii) of this sec-
tion, an equity investment in an entity is
not eligible to be designated as a qualified
equity investment if it is made before the
entity enters into an allocation agreement
with the Secretary. Anallocation agree-
mentis an agreement between the Secre-
tary and a CDE relating to a new markets
tax credit allocation under section
45D(f)(2).
(ii)Exception. Notwithstanding para-
graph (c)(3)(i) of this section, an equity
investment in an entity is eligible to be
designated as a qualified equity invest-
ment under paragraph (c)(1)(iii) of this
section if—
(A) The equity investment is made on
or after April 20, 2001;
(B) The entity in which the equity
investment is made is certified by the
Secretary as a CDE under section 45D(c)
before January 1, 2003;
(C) The entity in which the equity
investment is made receives notification
of the credit allocation (with the actual
receipt of such credit allocation contin-
gent upon subsequently entering into an
allocation agreement) from the Secretary
before January 1, 2003; and
(D) The equity investment otherwise
satisfies the requirements of section 45D
and this section.
(iii)Initial investment date.Ifan
equity investment is designated as a
qualified equity investment in accordance
with paragraph (c)(3)(ii) of this section,
the investment is treated as initially made
on the effective date of the allocation
agreement between the CDE and the Sec-
retary.
(4)Limitations—(i)In general. The
termqualified equity investmentdoes not
include—
(A) Any equity investment issued by a
CDE more than 5 years after the date the
CDE enters into an allocation agreement
(as defined in paragraph (c)(3)(i) of this
section) with the Secretary; and
(B) Any equity investment by a CDE
in another CDE, if the CDE making the
investment has received an allocation
under section 45D(f)(2).
(ii)Allocation limitation. The maxi-
mum amount of equity investments
issued by a CDE that may be designated
under paragraph (c)(1)(iii) of this section
by the CDE may not exceed the portion
of the limitation amount allocated to the
CDE by the Secretary under section
45D(f)(2).
(5)Substantially all—(i)In general.
Except as provided in paragraph (c)(5)(v)
of this section, the termsubstantially all
means at least 85 percent. The
substantially-all requirement must be sat-
isfied for each annual period in the 7-year
credit period using either the direct-
tracing calculation under paragraph
(c)(5)(ii) of this section, or the safe har-
bor calculation under paragraph (c)(5)(iii)
of this section. The substantially-all
requirement is treated as satisfied for an
annual period if either the direct-tracing
calculation under paragraph (c)(5)(ii) of
this section, or the safe harbor calculation
under paragraph (c)(5)(iii) of this section,
is performed every six months and the
average of the two calculations for the
annual period is at least 85 percent. For
purposes of this paragraph (c)(5)(i), the
7-year credit periodmeans the period of
7 years beginning on the date the quali-
fied equity investment is initially made.
See paragraph (c)(6) of this section for
circumstances in which a CDE may treat
more than one equity investment as a
single qualified equity investment.
2002–3 I.R.B.312January 22, 2002

(ii)Direct-tracing calculation. The
substantially-all requirement is satisfied if
at least 85 percent of the taxpayer’s
investment is directly traceable to quali-
fied low-income community investments
as defined in paragraph (d)(1) of this sec-
tion. The direct-tracing calculation is a
fraction the numerator of which is the
CDE’s aggregate cost basis determined
under section 1012 in all of the qualified
low-income community investments that
are directly traceable to the taxpayer’s
cash investment, and the denominator of
which is the amount of the taxpayer’s
cash investment under paragraph (b)(4) of
this section. For purposes of this para-
graph (c)(5)(ii), cost basis includes the
cost basis of any qualified low-income
community investment that becomes
worthless. See paragraph (d)(2) of this
section for the treatment of amounts
received by a CDE in payment of, or for,
capital, equity or principal with respect to
a qualified low-income community
investment.
(iii)Safe harbor calculation. The
substantially-all requirement is satisfied if
at least 85 percent of the aggregate gross
assets of the CDE are invested in quali-
fied low-income community investments
as defined in paragraph (d)(1) of this sec-
tion. The safe harbor calculation is a frac-
tion the numerator of which is the CDE’s
aggregate cost basis determined under
section 1012 in all of its qualified low-
income community investments, and the
denominator of which is the CDE’s
aggregate cost basis determined under
section 1012 in all of its assets. For pur-
poses of this paragraph (c)(5)(iii), cost
basis includes the cost basis of any quali-
fied low-income community investment
that becomes worthless. See paragraph
(d)(2) of this section for the treatment of
amounts received by a CDE in payment
of, or for, capital, equity or principal with
respect to a qualified low-income com-
munity investment.
(iv)Time limit for making investments.
The taxpayer’s cash investment received
by a CDE is treated as invested in a quali-
fied low-income community investment
as defined in paragraph (d)(1) of this sec-
tion only to the extent that the cash is so
invested no later than 12 months after the
date the cash is paid by the taxpayer
(directly or through an underwriter) to the
CDE.
(v)Reduced substantially-all percent-
age.For purposes of the substantially-all
requirement (including the direct-tracing
calculation under paragraph (c)(5)(ii) of
this section and the safe harbor calcula-
tion under paragraph (c)(5)(iii) of this
section), 85 percent is reduced to 75 per-
cent for the seventh year of the 7-year
credit period (as defined in paragraph
(c)(5)(i) of this section).
(6)Aggregation of equity investments.
A CDE may treat any qualified equity
investments issued on the same day as
one qualified equity investment. If a CDE
aggregates equity investments under this
paragraph (c)(6), the rules in this section
shall be construed in a manner consistent
with that treatment.
(7)Subsequent purchasers.A qualified
equity investment includes any equity
investment that would (but for paragraph
(c)(1)(i) of this section) be a qualified
equity investment in the hands of the tax-
payer if the investment was a qualified
equity investment in the hands of a prior
holder.
(d)Qualified low-income community
investments—(1)In general. The term
qualified low-income community invest-
mentmeans any of the following—
(i)Investment in a qualified active
low-income community business. Any
capital or equity investment in, or loan to,
any qualified active low-income commu-
nity business (as defined in paragraph
(d)(4) of this section).
(ii)Purchase of certain loans from
CDEs. The purchase from another CDE
(whether or not that CDE has received an
allocation from the Secretary under sec-
tion 45D(f)(2)) of any loan made by such
entity that is a qualified low-income com-
munity investment. A loan purchased
from another CDE is a qualified low-
income community investment if it quali-
fies as such either—
(A) At the time the selling CDE made
the loan; or
(B) At the time the loan is purchased
from the selling CDE.
(iii)Financial counseling and other
services.Financial counseling and other
services (as defined in paragraph (d)(7) of
this section) provided to any qualified
active low-income community business,
or to any residents of a low-income com-
munity (as defined in section 45D(e)).
(iv)Investments in other CDEs. Any
equity investment in, or loan to, any
CDE, but only to the extent that the CDE
in which the equity investment or loan is
made uses the proceeds of the investment
or loan in a manner—
(A) That is described in paragraphs
(d)(1)(i) or (iii) of this section; and
(B) That would constitute a qualified
low-income community investment if it
were made directly by the CDE making
such equity investment or loan.
(2)Payments of, or for, capital, equity
or principal—(i)In general. Except as
otherwise provided in this paragraph
(d)(2), amounts received by a CDE in
payment of, or for, capital, equity or prin-
cipal with respect to a qualified low-
income community investment must be
reinvested by the CDE in a qualified low-
income community investment no later
than 12 months from the date of receipt to
be treated as continuously invested in a
qualified low-income community invest-
ment. If the amounts received by the
CDE are equal to or greater than the cost
basis of the original qualified low-income
community investment (or applicable por-
tion thereof), and the CDE reinvests, in
accordance with this paragraph (d)(2)(i),
an amount at least equal to such original
cost basis, then an amount equal to such
original cost basis will be treated as con-
tinuously invested in a qualified low-
income community investment. In addi-
tion, if the amounts received by the CDE
are equal to or greater than the cost basis
of the original qualified low-income com-
munity investment (or applicable portion
thereof), and the CDE reinvests, in accor-
dance with this paragraph (d)(2)(i), an
amount less than such original cost basis,
then only the amount so reinvested will
be treated as continuously invested in a
qualified low-income community invest-
ment. If the amounts received by the
CDE are less than the cost basis of the
original qualified low-income community
investment (or applicable portion
thereof), and the CDE reinvests an
amount in accordance with this paragraph
(d)(2)(i), then the amount treated as con-
tinuously invested in a qualified low-
income community investment will equal
the excess (if any) of such original cost
basis over the amounts received by the
CDE that are not so reinvested. Amounts
received by a CDE in payment of, or for,
January 22, 20023132002–3 I.R.B.

capital, equity or principal with respect to
a qualified low-income community
investment during the seventh year of the
7-year credit period (as defined in para-
graph (c)(5)(i) of this section) do not have
to be reinvested by the CDE in a qualified
low-income community investment in
order to be treated as continuously
invested in a qualified low-income com-
munity investment.
(ii)Subsequent reinvestments.In
applying paragraph (d)(2)(i) of this sec-
tion to subsequent reinvestments, the
original cost basis is reduced by the
amount (if any) by which the original cost
basis exceeds the amount determined to
be continuously invested in a qualified
low-income community investment.
(iii)Special rule for loans. Periodic
amounts received during a calendar year
as repayment of principal on a loan that is
a qualified low-income community
investment are treated as continuously
invested in a qualified low-income com-
munity investment if the amounts are
reinvested in another qualified low-
income community investment by the end
of the following calendar year.
(iv)Example. The application of para-
graphs (d)(2)(i) and (ii) of this section is
illustrated by the following example:
Example. On April 1, 2003, A, B, and C each
pay $100,000 to acquire a capital interest in X, a
partnership. X is a CDE that has received a new
markets tax credit allocation from the Secretary. X
treats the 3 partnership interests as one qualified
equity investment under paragraph (c)(6) of this sec-
tion. In August 2003, X uses the $300,000 to make
a qualified low-income community investment
under paragraph (d)(1) of this section. In August
2005, the qualified low-income community invest-
ment is redeemed for $250,000. In February 2006,
X reinvests $230,000 of the $250,000 in a second
qualified low-income community investment and
uses the remaining $20,000 for operating expenses.
Under paragraph (d)(2)(i) of this section, $280,000
of the proceeds of the qualified equity investment is
treated as continuously invested in a qualified low-
income community investment. In December 2008,
X sells the second qualified low-income community
investment and receives $400,000. In March 2009,
X reinvests $320,000 of the $400,000 in a third
qualified low-income community investment. Under
paragraphs (d)(2)(i) and (ii) of this section,
$280,000 of the proceeds of the qualified equity
investment is treated as continuously invested in a
qualified low-income community investment
($40,000 is treated as invested in another qualified
low-income community investment in March 2009).
(3)Special rule for reserves. Reserves
(not in excess of 5 percent of the taxpay-
er’s cash investment under paragraph
(b)(4) of this section) maintained by the
CDE for loan losses or for additional
investments in existing qualified low-
income community investments are
treated as invested in a qualified low-
income community investment under
paragraph (d)(1) of this section.
(4)Qualified active low-income com-
munity business—(i)In general. The term
qualified active low-income community
businessmeans, with respect to any tax-
able year, a corporation (including a non-
profit corporation) or a partnership, if the
requirements in paragraphs (d)(4)(i)(A),
(B), (C), (D), and (E) are met.
(A)Gross-income requirement.At
least 50 percent of the total gross income
of such entity is derived from the active
conduct of a qualified business (as
defined in paragraph (d)(5) of this sec-
tion) within any low-income community
(as defined in section 45D(e)). An entity
is deemed to satisfy this paragraph
(d)(4)(i)(A) if the entity meets the
requirements of either paragraph
(d)(4)(i)(B) or (C) of this section, if“50
percent”is applied instead of40 percent.
In addition, an entity may satisfy this
paragraph (d)(4)(i)(A) based on all the
facts and circumstances.
(B)Use of tangible property. At least
40 percent of the use of the tangible prop-
erty of such entity (whether owned or
leased) is within any low-income commu-
nity. This percentage is determined based
on a fraction the numerator of which is
the average value of the tangible property
owned or leased by the entity and used by
the entity during the taxable year in a
low-income community and the denomi-
nator of which is the average value of the
tangible property owned or leased by the
entity and used by the entity during the
taxable year. Property owned by the
entity is valued at its cost basis as deter-
mined under section 1012. Property
leased by the entity is valued at a reason-
able amount established by the entity.
(C)Services performed. At least 40
percent of the services performed for such
entity by its employees are performed in
a low-income community. This percent-
age is determined based on a fraction the
numerator of which is the total amount
paid by the entity for employee services
performed in a low-income community
during the taxable year and the denomina-
tor of which is the total amount paid by
the entity for employee services during
the taxable year.
(D)Collectibles. Less than 5 percent
of the average of the aggregate unad-
justed bases of the property of such entity
is attributable to collectibles (as defined
in section 408(m)(2)) other than col-
lectibles that are held primarily for sale to
customers in the ordinary course of busi-
ness.
(E)Nonqualified financial property.
Less than 5 percent of the average of the
aggregate unadjusted bases of the prop-
erty of such entity is attributable tonon-
qualified financial property(as defined in
section 1397C(e)). Because the definition
ofnonqualified financial propertyin sec-
tion 1397C(e) includes debt instruments
with a term in excess of 18 months,
banks, credit unions, and other financial
institutions are generally excluded from
the definition of aqualified active low-
income community business.
(ii)Proprietorships. Any business car-
ried on by an individual as a proprietor is
a qualified active low-income community
business if the business would meet the
requirements of paragraph (d)(4)(i) of this
section if the business were incorporated.
(iii)Portions of business. A CDE may
treat any trade or business as a qualified
active low-income community business if
the trade or business would meet the
requirements of paragraph (d)(4)(i) of this
section if the trade or business were sepa-
rately incorporated.
(5)Qualified business—(i)In general.
Except as otherwise provided in this para-
graph (d)(5), the termqualified business
means any trade or business. There is no
requirement that employees of a qualified
business be residents of a low-income
community.
(ii)Rental of real property. The rental
to others of real property located in any
low-income community (as defined in
section 45D(e)) is aqualified businessif
and only if the property is not residential
rental property (as defined in section
168(e)(2)(A)) and there are substantial
improvements located on the real prop-
erty.
(iii)Exclusions—(A)Trades or busi-
nesses involving intangibles. The term
qualified businessdoes not include any
trade or business consisting predomi-
nantly of the development or holding of
intangibles for sale or license.
2002–3 I.R.B.314January 22, 2002

(B)Certain other trades or businesses.
The termqualified businessdoes not
include any trade or business consisting
of the operation of any private or com-
mercial golf course, country club, mas-
sage parlor, hot tub facility, suntan facil-
ity, racetrack or other facility used for
gambling, or any store the principal busi-
ness of which is the sale of alcoholic bev-
erages for consumption off premises.
(C)Farming. The termqualified busi-
nessdoes not include any trade or busi-
ness the principal activity of which is
farming (within the meaning of section
2032A(e)(5)(A) or (B)) if, as of the close
of the taxable year of the taxpayer con-
ducting such trade or business, the sum of
the aggregate unadjusted bases (or, if
greater, the fair market value) of the
assets owned by the taxpayer that are
used in such a trade or business, and the
aggregate value of the assets leased by
the taxpayer that are used in such a trade
or business, exceeds $500,000. For pur-
poses of this paragraph (d)(5)(iii)(C), two
or more trades or businesses will be
treated as a single trade or business under
rules similar to the rules of section 52(a)
and (b).
(6)Qualifications—(i)In general.
Except as provided in paragraph (d)(6)(ii)
of this section, an entity is treated as a
qualified active low-income community
business for the duration of the CDE’s
investment in the entity if the CDE rea-
sonably expects, at the time the CDE
makes the capital or equity investment in,
or loan to, the entity, that the entity will
satisfy the requirements to be a qualified
active low-income community business
under paragraph (d)(4)(i) of this section
throughout the entire period of the invest-
ment or loan.
(ii)Control—(A)In general.IfaCDE
controls or obtains control of an entity at
any time during the 7-year credit period
(as defined in paragraph (c)(5)(i) of this
section), the entity will be treated as a
qualified active low-income community
business only if the entity satisfies the
requirements of paragraph (d)(4)(i) of this
section throughout the entire period the
CDE controls the entity.
(B)Definition of control. Generally,
control means, with respect to an entity,
direct or indirect ownership (based on
value) or control (based on voting or
management rights) of 33 percent or
more of the entity. However, a CDE does
not control an entity if an unrelated per-
son possesses greater control over the
entity than the CDE.
(7)Financial counseling and other
services. The termfinancial counseling
and other servicesmeans advice provided
by the CDE relating to the organization or
operation of a trade or business.
(e)Recapture—(1)In general. If, at
any time during the 7-year period begin-
ning on the date of the original issue of a
qualified equity investment in a CDE,
there is a recapture event under paragraph
(e)(2) of this section with respect to such
investment, then the tax imposed by
Chapter 1 of the Internal Revenue Code
for the taxable year in which the recap-
ture event occurs is increased by the
credit recapture amount under section
45D(g)(2). A recapture event under para-
graph (e)(2) of this section requires recap-
ture of credits allowed to the taxpayer
who purchased the equity investment
from the CDE at its original issue and to
all subsequent holders of that investment.
(2)Recapture event. There is a recap-
ture event with respect to an equity
investment in a CDE if—
(i) The entity ceases to be a CDE;
(ii) The proceeds of the investment
cease to be used in a manner that satisfies
the substantially-all requirement of para-
graph (c)(1)(ii) of this section; or
(iii) The investment is redeemed by
the CDE.
(3)Bankruptcy. Bankruptcy of a CDE
is not a recapture event.
(4)Waiver of requirement or extension
of time—(i)In general. The Commis-
sioner may waive a requirement or extend
a deadline if such waiver or extension
does not materially frustrate the purposes
of section 45D and this section.
(ii)Manner for requesting a waiver or
extension. A CDE that believes it has
good cause for a waiver or an extension
may request relief from the Commis-
sioner in a ruling request. The request
should set forth all the relevant facts and
include a detailed explanation describing
the event or events relating to the request
for a waiver or an extension. For further
information on the application procedure
for a ruling, see Rev. Proc. 2001–1
(2001–1 I.R.B. 1) (see§601.601(d)(2) of
this chapter).
(iii)Terms and conditions. The grant-
ing of a waiver or an extension to a CDE
under this section may require adjust-
ments of the CDE’s requirements under
section 45D and this section as may be
appropriate.
(5)Example. The application of this
paragraph (e) is illustrated by the follow-
ing example:
Example. In 2003, A and B acquire separate
qualified equity investments in X, a partnership. X
is a CDE that has received a new markets tax credit
allocation from the Secretary. X uses the proceeds
of A’s qualified equity investment to make a quali-
fied low-income community investment in Y, and X
uses the proceeds of B’s qualified equity investment
to make a qualified low-income community invest-
ment in Z. Y and Z are not CDEs. X controls both
Y and Z within the meaning of paragraph
(d)(6)(ii)(B) of this section. In 2003, Y and Z are
qualified active low-income community businesses.
In 2007, Y, but not Z, is a qualified active low-
income community business and X does not satisfy
the substantially-all requirement using the safe har-
bor calculation under paragraph (c)(5)(iii) of this
section. A’s equity investment satisfies the
substantially-all requirement of paragraph (c)(1)(ii)
of this section using the direct-tracing calculation of
paragraph (c)(5)(ii) of this section because A’s
equity investment is traceable to Y. However, B’s
equity investment fails the substantially-all require-
ment using the direct-tracing calculation because
B’s equity investment is traceable to Z. Therefore,
under paragraph (e)(2)(ii) of this section, there is a
recapture event for B’s equity investment (but not
A’s equity investment).
(f)Basis reduction—(1)In general.A
taxpayer’s basis in a qualified equity
investment is reduced by the amount of
any new markets tax credit determined
under paragraph (b)(1) of this section
with respect to the investment. A basis
reduction occurs on each credit allowance
date under paragraph (b)(2) of this sec-
tion. This paragraph (f) does not apply for
purposes of sections 1202, 1400B, and
1400F.
(2)Adjustment in basis of interest in
partnership or S corporation. The
adjusted basis of either a partner’s interest
in a partnership, or stock in an S corpora-
tion, must be appropriately adjusted to
take into account adjustments made under
paragraph (f)(1) of this section in the
basis of a qualified equity investment
held by the partnership or S corporation
(as the case may be).
(g)Other rules—(1)Anti-abuse.Ifa
principal purpose of a transaction or a
series of transactions is to achieve a result
that is inconsistent with the purposes of
section 45D and this section, the Com-
missioner may treat the transaction or
January 22, 20023152002–3 I.R.B.

series of transactions as causing a recap-
ture event under paragraph (e)(2) of this
section.
(2)Reporting requirements—(i)Notifi-
cation by CDE to taxpayer—(A)Allow-
ance of new markets tax credit. A CDE
must provide notice to any taxpayer who
acquires a qualified equity investment in
the CDE at its original issue that the
equity investment is a qualified equity
investment entitling the taxpayer to claim
the new markets tax credit. The notice
must be provided by the CDE to the tax-
payer no later than 60 days after the date
the taxpayer makes the investment in the
CDE. The notice must contain the amount
paid to the CDE for the qualified equity
investment at its original issue and the
taxpayer identification number of the
CDE.
(B)Recapture event. If, at any time
during the 7–year period beginning on the
date of the original issue of a qualified
equity investment in a CDE, there is a
recapture event under paragraph (e)(2) of
this section with respect to such invest-
ment, the CDE must provide notice to
each holder, including all prior holders, of
the investment that a recapture event has
occurred. The notice must be provided by
the CDE no later than 60 days after the
date the CDE becomes aware of the
recapture event.
(ii)CDE reporting requirements to
Secretary. Each CDE must comply with
such reporting requirements to the Secre-
tary as the Secretary may prescribe.
(iii)Manner of claiming new markets
tax credit. A taxpayer may claim the new
markets tax credit for each applicable tax-
able year by completing Form 8874,
“New Markets Credit,”and by filing
Form 8874 with the taxpayer’s Federal
income tax return.
(iv)Reporting recapture tax. If there is
a recapture event with respect to a tax-
payer’s equity investment in a CDE, the
taxpayer must include the credit recapture
amount under section 45D(g)(2) on the
line for recapture taxes on the taxpayer’s
Federal income tax return for the taxable
year in which the recapture event under
paragraph (e)(2) of this section occurs (or
on the line for total tax, if there is no such
line for recapture taxes) and writeNMCR
(new markets credit recapture) next to the
entry space.
(h)Effective date. This section applies
on or after December 26, 2001.
PART 602—OMB CONTROL NUM-
BERS UNDER THE PAPERWORK
REDUCTION ACT
Par. 3. The authority citation for part
602 continues to read as follows:
Authority: 26 U.S.C. 7805.
Par.4.In§602.101, paragraph (b) is
amended by adding an entry to the table
in numerical order to read as follows:
§602.101 OMB Control numbers.
*****
(b)***
CFR part or section where
identified and described
Current OMB
control No.
*****
1.45D–1T..................................................................................................................................................................1545–1765
*****
Robert E. Wenzel,
Deputy Commissioner of Internal Revenue.
Approved December 17, 2001.
Mark Weinberger,
Assistant Secretary of the Treasury.
(Filed by the Office of the Federal Register on December 21, 2001, 8:45 a.m., and published in the issue of the Federal Register for December 26, 2001, 66F.R.
66307)
Section 106.—Contributions
by Employer to Accident and
Health Plans
(Also Section 125—Cafeteria Plans and Section
105—Amounts Received Under Accident and
Health Plans).
Application of sections 106(a) and 105(b) to
reimbursements of employees for salary reduction
amounts previously excluded from gross income
under section 106(a).
Rev. Rul. 2002–3
ISSUE
Whether, under the facts described, the
exclusions from gross income under
§§106(a) or 105(b) of the Internal Rev-
enue Code apply to reimbursements by an
employer to employees for salary reduc-
tion amounts used to pay for health insur-
ance premiums.
FACTS
Employer M provides health coverage
for its employees through a group health
insurance policy. The coverage consti-
tutes accident or health coverage for pur-
poses of the exclusion for employer-
provided accident or health coverage
under§106(a).
2002–3 I.R.B.316January 22, 2002

M has a payroll arrangement under
which employees’salaries are reduced,
and M applies the salary reduction
amounts to the payment of the health
insurance premiums for the employees.
Thus, employees receive lower salaries in
exchange for employer-provided health
coverage. In addition, M makes“reim-
bursement”payments to employees with
respect to the health insurance premiums
in amounts that cause employees’after-
tax pay from M to be the same as what it
would have been if there were no salary
reduction and no“reimbursement”pay-
ments. M takes the position that both the
salary reduction and the“reimbursement”
payments are excluded from gross
income of employees and are not subject
to Federal Insurance Contributions Act
(FICA) or Federal Unemployment Tax
Act (FUTA) taxes.
The salary reduction used to pay for
health insurance premiums under M’s
payroll arrangement could be done with
or without employee elections. For
example, M could make a unilateral deci-
sion to reduce employees’salaries and
use those amounts to provide health
insurance to the employees. Alternatively,
M could offer employees the choice
under a§125 cafeteria plan to reduce
their salaries in order to receive
employer-provided health insurance.
LAW AND ANALYSIS
In general,§106(a) provides that gross
income of an employee does not include
employer-provided coverage under an
accident or health plan. Under§106(a), an
employee may exclude premiums for
accident or health insurance coverage that
are paid by an employer. Also, under
§105(b), an employee may exclude
amounts received through employer-
provided accident or health insurance if
those amounts are paid to reimburse
expenses incurred by the employee for
medical care (of the employee, the
employee’s spouse, or the employee’s
dependents) for personal injuries or sick-
ness. To the extent amounts are excluded
from gross income under§105(b) or
106(a), they are also excluded from
income tax withholding under§3401. In
addition, amounts paid to reimburse
expenses incurred by the employee for
medical care (of the employee, the
employee’s spouse, or the employee’s
dependents) for personal injuries or sick-
ness are also excluded from FICA and
FUTA taxes under§§3121(a) and
3306(b).
Under§125, an employer may estab-
lish a cafeteria plan that permits an
employee to choose among two or more
benefits, consisting of cash (generally,
salary) and qualified benefits, including
accident or health coverage. Pursuant to
§125, the amount of an employee’s salary
reduction applied to purchase such cover-
age is not included in gross income, even
though it is available to the employee and
the employee could have chosen to
receive cash instead. If an employee
elects salary reduction pursuant to§125,
the coverage is excludable from gross
income under§106 as employer-provided
accident or health coverage.
Rev. Rul. 61–146 (1961–2 C.B. 25)
provides that the§106 exclusion applies
to an employer’s reimbursement of an
employee for individual accident and
health insurance premiums paid by the
employee to an insurer if (1) the
employer has an accident and health plan
under which it permits such reimburse-
ments and (2) any reimbursement is of
premiums actually paid by the employee.
Under the rationale of Rev. Rul.
61–146,§106 allows an employee to
exclude employer reimbursements for
health insurance premiums, but only if
those premiums are actually paid by the
employee. Under both alternative
arrangements described above, when M
applies the amount of employees’salary
reduction to pay health insurance premi-
ums, the premium payments are paid by
M, not the employees, and are excludable
from the employees’gross income under
§106 because they are paid by M.
Although the§106 exclusion applies to
the health insurance premiums paid by M,
there is no employee-paid premium for M
to“reimburse”, and therefore the reim-
bursement payments that M makes to
employees are not excluded from gross
income under§106. Similarly, the reim-
bursement payments are not excluded
from gross income under§105 because
they do not reimburse employees for
expenses incurred for medical care.
Accordingly, the reimbursement pay-
ments are not excluded from income tax
withholding under§3401. In addition,
because the reimbursement payments are
not reimbursements of expenses incurred
for medical care, they are not excluded
from FICA taxes under§3121(a) or
FUTA taxes under§3306(b).
If the premium payments were instead
actually paid by the employees out of the
employees’salaries, the salary amounts
from which the payments were made
would not be excludable from the
employees’gross income, but any pay-
ments by M to reimburse the employees
for the premium payments would be
excludable under section 106.
HOLDING
The exclusions from gross income
under§§106(a) and 105(b) do not apply
to amounts that an employer pays to
employees to reimburse the employees
for amounts paid by an employer for
health insurance coverage that are
excluded from gross income under
§106(a) (including salary reduction
amounts pursuant to a cafeteria plan
under§125 that are applied to pay for
such coverage). Accordingly, the reim-
bursement amounts that the employer
pays to the employees are included in the
employees’gross income under§61 and
are subject to employment taxes under
§§3401, 3121(a), and 3306(b).
EFFECT ON OTHER REVENUE
RULINGS
Rev. Rul. 61–146 is distinguished.
DRAFTING INFORMATION
The principal author of this Revenue
Ruling is Janet A. Laufer of the Office of
Division Counsel/Associate Chief Coun-
sel (Tax Exempt and Government Enti-
ties). For further information regarding
this Revenue Ruling, contact her at (202)
622–6080 (not a toll-free call).
January 22, 20023172002–3 I.R.B.

Section 6050I.—Returns
Relating to Cash Received in
Trade or Business, etc.
26 CFR 1.6050I–1: Returns relating to cash in
excess of $10,000 received in a trade or business.
T.D. 8974
DEPARTMENT OF THE
TREASURY
Internal Revenue Service
26 CFR Part 1
Amendment to Section 6050I
Cross-Referencing Section
5331 of Title 31 Relating to
Reporting of Certain Currency
Transactions by Nonfinancial
Trades or Businesses Under
the Bank Secrecy Act
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Final regulations.
SUMMARY: This document contains
final amendments to the Income Tax
Regulations under section 6050I of the
Internal Revenue Code which requires
persons to report information about finan-
cial transactions to the IRS, and section
5331 of title 31 which requires persons to
report similar information about certain
transactions to the Financial Crimes
Enforcement Network. These regulations
provide that this information shall be
reported on the same form as prescribed
by the Secretary.
DATES:Effective Date: These regula-
tions are effective December 31, 2001.
FOR FURTHER INFORMATION CON-
TACT: Concerning the regulations, con-
tact Tiffany P. Smith at (202) 622–4910
(not a toll-free number).
SUPPLEMENTARY INFORMATION:
Background and Explanation of
Provisions
This document amends the Income
Tax Regulations (26 CFR part 1) under
section 6050I of the Internal Revenue
Code (Code). These final regulations
address the related reporting requirements
of section 6050I of the Code and section
5331 of title 31.
The Bank Secrecy Act, Titles I and II
of Public Law 91–508 (84 Stat. 1116) as
amended, codified at 12 U.S.C. 1829b, 12
U.S.C. 1951–1959, and 31 U.S.C. 5311,
et seq., authorizes the Secretary of the
Treasury, inter alia, to issue regulations
requiring financial institutions to keep
records and file reports that are deter-
mined to have a high degree of usefulness
in criminal, tax, and regulatory matters,
and to implement counter-money launder-
ing programs and compliance procedures.
Regulations implementing Title II of the
Bank Secrecy Act (codified at 31 U.S.C.
5311, et seq.), appear at 31 CFR Part 103.
Section 365 of the Uniting and
Strengthening America by Providing
Appropriate Tools Required to Intercept
and Obstruct Terrorism Act of 2001 (the
USA Patriot Act), Public Law 107–56
(115 Stat. 272) amended the Bank
Secrecy Act by adding section 5331.
Under 31 U.S.C. 5331, any person who is
engaged in a trade or business and who,
in the course of such trade or business,
receives more than $10,000 in coins or
currency in one transaction (or two or
more related transactions), is required to
file a report with respect to such transac-
tion (or related transactions) with the
Treasury Department. Reporting under
section 5331 does not apply to amounts
received in a transaction reported under
31 U.S.C. 5313 and the accompanying
regulations.
The reporting requirement under sec-
tion 5331 of title 31 is analogous to the
reporting requirement administered by the
IRS, under section 6050I of title 26,
United States Code, and 26 CFR
1.6050I–1. Inasmuch as section 6050I of
title 26 requires persons to report infor-
mation about financial transactions to the
IRS, and section 5331 of title 31 requires
persons to report similar information
about certain transactions to the Financial
Crimes Enforcement Network, these final
regulations provide that this information
shall be reported on the same form as pre-
scribed by the Secretary.
Effective Date of Regulations
These regulations are effective as of
the date of publication in theFederal
Register.
Special Analyses
Because this regulation merely advises
taxpayers that information reported under
section 6050I is, with one exception, also
reported under 31 U.S.C. 5331, and
imposes no requirement on any person,
notice and public procedure are unneces-
sary pursuant to 5 U.S.C. 553(b)(B). For
this reason, a delayed effective date is not
required pursuant to 5 U.S.C. 553(d)(3).
It has been determined that this final
regulation is not a significant regulatory
action as defined in Executive Order
12866. Therefore, a regulatory assess-
ment is not required. Because no notice
of proposed rulemaking is required, the
provisions of the Regulatory Flexibility
Act (5 U.S.C. chapter 6) do not apply.
Pursuant to section 7805(f) of the Code,
this final regulation was submitted to the
Chief Counsel for Advocacy of the Small
Business Administration for comment on
its impact on small business.
Drafting Information
The principal author of these final
regulations is Tiffany P. Smith, Office of
the Associate Chief Counsel (Procedure
and Administration), Administrative Pro-
visions and Judicial Practice Division.
*****
Final Amendments to the Regulations
Accordingly, 26 CFR part 1 is
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 1.6050I–0 is amended
by revising the entry for§1.6050I(a)(1)
and adding entries to the table for
§1.6050I–1(a)(1)(i) and (a)(1)(ii) to read
as follows:
§1.6050I–0 Table of contents.
*****
2002–3 I.R.B.318January 22, 2002

§1.6050I–1 Returns relating to cash
in excess of $10,000 received in a trade
or business.
(a)***
(1) Reportable transaction.
(i) In general.
(ii) Certain financial transactions.
*****
Par. 3. Section 1.6050I–1 is amended
by:
1. Redesignating paragraph (a)(1) as
paragraph (a)(1)(i).
2. Adding a new paragraph heading for
(a)(1).
3. Adding paragraph (a)(1)(ii).
The additions read as follows:
§1.6050I–1 Returns relating to cash in
excess of $10,000 received in a trade or
business.
(a)Reportingrequirement—(1)
Reportable transaction—(i)In general.
***
(ii)Certain financial transactions.
Section 6050I of title 26 requires persons
to report information about financial
transactions to the Internal Revenue Ser-
vice, and section 5331 of title 31 requires
persons to report similar information
about certain transactions to the Financial
Crimes Enforcement Network.
This information shall be reported on
the same form as prescribed by the Secre-
tary.
*****
Robert E. Wenzel,
Deputy Commissioner of
Internal Revenue.
Approved December 20, 2001.
Mark Weinberger,
Assistant Secretary of the Treasury.
(Filed by the Office of the Federal Register on
December 28, 2001, 8:45 a.m., and published in the
issue of the Federal Register for December 31,
2001, 66 F.R. 67687)
January 22, 20023192002–3 I.R.B.

Part III. Administrative, Procedural, and Miscellaneous
Updated Procedures for
Processing Employment Tax
Cases Involving Worker
Classification and Section
530 of the Revenue Act of
1978 Under Section 7436 of
the Internal Revenue Code
Notice 2002–5
PURPOSE
Section 314(f) of the Community
Renewal Tax Relief Act of 2000
(“CRTRA’00”) (H.R. 5662, incorporated
in H.R. 4577, the Consolidated Appro-
priations Act 2001), Pub. L. No. 106–554,
112 Stat. 2763, 2762A–643 (2000),
amended§7436 of the Internal Revenue
Code (Code) to expand, retroactively to
August 5, 1997, the subject matter juris-
diction of the Tax Court in employment
status proceedings. This notice provides
information about when and how the
Internal Revenue Service (Service) will
issue a Notice of Determination of
Worker Classification (Notice of Determi-
nation) and how taxpayers petition for
Tax Court review of the determinations
under Code§7436. This notice modifies
and supercedes Notice 98–43 (1998–2
C.B. 207).
BACKGROUND
The Taxpayer Relief Act of 1997
(“TRA’97”), Pub. L. No. 105–34, 111
Stat. 788, created§7436 of the Code,
which provides Tax Court review rights
concerning certain employment tax deter-
minations. As originally enacted,§7436
authorized the Tax Court only to review
determinations by the Service that a tax-
payer’s workers should be classified as
employees for purposes of subtitle C
(which governs employment taxes) of the
Code, or that the taxpayer for whom the
services were performed is not entitled to
treatment under section 530(a) of the
Revenue Act of 1978 (which relieves a
taxpayer of employment tax liability in
certain circumstances)
1
. Section 7436(a)
requires that the determination(s) involve
an actual controversy and that the deter-
mination(s) be made as part of an exami-
nation.
By§314(f) of CRTRA’00, Code
§7436(a) was amended retroactively to
August 5, 1997. The jurisdiction given to
the Tax Court by the original legislation
was retained, but CRTRA’00 also autho-
rized the Tax Court to determine the
proper amount of employment tax under
the determinations of worker status and
section 530 treatment.
ISSUES TO WHICH§7436 APPLIES
Section 7436(a) provides that for pur-
poses of subtitle C of the Code, the Tax
Court has jurisdiction to:
(1) review the Service’s determination
that one or more individuals performing
services for the taxpayer are employees;
(2) review the Service’s determination
that the taxpayer is not entitled to treat-
ment under§530(a) of the Revenue Act
of 1978 with respect to those individuals;
and
(3) determine the proper amount of
employment tax under the above determi-
nations.
The employment taxes imposed by
subtitle C of the Code are Federal Insur-
ance Contributions Act (FICA) taxes
(under Code§§3101–3128), the Railroad
Retirement Tax Act (RRTA) taxes (under
Code§§3201–3232), the Federal Unem-
ployment Tax Act (FUTA) taxes (under
Code§§3301–3311), the Railroad Unem-
ployment Repayment Tax (RURT) taxes
(under Code§§3321–3322), and the col-
lection of income tax at source on wages
(under Code§§3401–3406).“Employ-
ment tax”under the statutory language
includes the additions to tax, additional
amounts, and penalties provided by chap-
ter 68A of the Code (§§6651–6665).
Thus, the Tax Court has jurisdiction to
determine the proper amount of the addi-
tions to tax, additional amounts, and pen-
alties that relate to the employment tax
imposed by subtitle C with respect to
determinations of worker classification
and§530 treatment.
Section 7436(a) does not provide the
Tax Court with jurisdiction to review any
employment tax determinations other
than the three listed in the statute. The
procedures set forth in§7436 do not
apply to employment status issues not
arising under Subtitle C, such as the clas-
sification of individuals for purposes of
pension plan coverage or the proper treat-
ment of individual income tax deductions.
Nor is Tax Court review available when
there is no controversy with respect to the
classification of workers, such as where
the taxpayer itself treated the workers as
employees by issuing them Forms W–2
(Wage and Tax Statements). Additionally,
since§7436(a) only confers jurisdiction
upon the Tax Court to review determina-
tions that are made by the Service as part
of an examination, other Service determi-
nations of employment status (including
those that are made in the context of pri-
vate letter rulings, technical advice
memoranda or Forms SS–8[Determina-
tion of Employee Work Status for Pur-
poses of Federal Employment Taxes and
Income Tax Withholding]) that are not
made as part of an examination are not
subject to review by the Tax Court under
§7436(a).
The Service will issue a Notice of
Determination only after the Service has
determinedboththat the taxpayer is not
entitled to§530 treatment and that one or
more individuals performing services for
the taxpayer are employees for purposes
of subtitle C. The amount of employment
tax under those determinations will also
be determined and set forth in the Notice
of Determination.
TAXPAYERS ELIGIBLE TO SEEK
TAX COURT REVIEW
Section 7436(b) of the Code provides
that a pleading seeking Tax Court review
of the Service’s determinations may be
filed only by“the person for whom the
services are performed.”Thus, workers
1
That statutory language of section 530 of the Revenue Act of 1978, as amended, although not codified in the Internal Revenue Code of 1986, can usually befound in the publisher’s
notes following Code§3401(a).
2002–3 I.R.B.320January 22, 2002

may not seek review of the Service’s
determinations under§7436. In addition,
because the statute specifies that there be
an actual controversy that the workers
performing services“for such person”are
employees“of such person,”review may
not be sought by a third party that has not
been determined by the Service to be the
employer of the workers.
NOTICE OF DETERMINATION OF
WORKER CLASSIFICATION
The Service will provide taxpayers
with notice of a determination described
in§7436(b) of the Code by sending the
taxpayer, by certified or registered mail, a
“Notice of Determination of Worker Clas-
sification.
2
”A copy of the new Notice of
Determination is attached hereto as
Exhibit 1.
The Notice of Determination advises
taxpayers of the opportunity to seek Tax
Court review and provides information on
how to do so. The Notice of Determina-
tion will include a schedule describing
which workers the Service has deter-
mined should be classified as employees.
The Notice of Determination will also
show each kind of tax with its proposed
employment tax adjustment by taxable
period.
In most cases, a taxpayer who receives
a Notice of Determination will have pre-
viously received a“thirty-day letter,”
which the Service sends to taxpayers in
unagreed examination cases. The thirty-
day letter lists the proposed employment
tax adjustments to be made, and describes
the taxpayer’s right either to agree to the
proposed employment tax adjustments or,
alternatively, to protest the proposed
adjustments to the Appeals function
(“Appeals”) of the Service within thirty
days of the date of the letter. If the tax-
payer does not respond to the thirty-day
letter by agreeing to the proposed adjust-
ments or, alternatively, by filing a protest
to Appeals, the taxpayer will receive, by
certified or registered mail, a Notice of
Determination. Under normal procedures,
if the taxpayer does not respond to the
thirty-day letter, the taxpayer should gen-
erally expect to receive the Notice of
Determination within sixty days after
expiration of the thirty-day period begin-
ning with the date on the thirty-day letter.
If no Notice of Determination is received
during this period, the taxpayer may wish
to contact the Internal Revenue Service
office that issued the thirty-day letter to
check on the status of the case.
If the taxpayer responds to the thirty-
day letter by filing a protest to Appeals
(or if the case proceeds to Appeals by
way of the employment tax early referral
procedures,seeAnnouncement 97–52,
1997–21 I.R.B. 22, Announcement
96–13, 1996–12 I.R.B. 33, Rev. Proc.
96–9, 1996–1 C.B. 575) and the worker
classification and§530 treatment issues
are not settled on an agreed basis in
Appeals, the taxpayer will thereafter
receive a Notice of Determination. Tax-
payers are encouraged to resolve cases in
nondocketed status by requesting use of
the early referral procedures in appropri-
ate cases.
PREREQUISITE FOR SEEKING TAX
COURT REVIEW
Because the Notice of Determination
constitutes the Service’s determination
described in§7436(a), the Notice of
Determination is a jurisdictional prerequi-
site for seeking Tax Court review of the
Service’s determinations regarding
worker classification,§530 treatment,
and the proper amount of employment tax
under those determinations. Tax Court
proceedings seeking review of these
determinations may not be commenced
prior to the time the Service sends the
Notice of Determination by certified or
registered mail.
TIME BY WHICH PETITION MUST
BE FILED
Section 7436(b)(2) provides that a tax-
payer’s petition for review must be filed
with the Tax Court before the 91st day
after the Service mails its Notice of
Determination by certified or registered
mail. On the first page of the Notice of
Determination, the Service will specify
the last date by which the taxpayer may
timely file a petition in the Tax Court. If
the taxpayer discusses the case with the
Service during the period before the 91st
day following the mailing of the Notice
of Determination, the discussion will not
extend the period during which the tax-
payer may timely file a petition with the
Tax Court.
A taxpayer who does not file a Tax
Court petition within the allotted time
retains the right to seek judicial review of
the Service’s determinations by paying
the tax and filing a claim for refund, as
required by§7422 of the Code. If the
claim for refund is denied, or if after six
months the Service has not responded to
the claim for refund, the taxpayer may
file a refund suit in district court or the
Court of Federal Claims.
APPEALS CONSIDERATION
Cases docketed in the United States
Tax Court will be referred by Area Coun-
sel to the Appeals function for consider-
ation of settlement unless the Notice of
Determination was issued by Appeals.
Cases in which Appeals issued such a
Notice of Determination may be referred
to Appeals unless Area Counsel deter-
mines that there is little likelihood that a
settlement of all or a part of the case can
be achieved in a reasonable period of
time.
SMALL TAX CASE PROCEEDINGS
At the option of the taxpayer, and with
the concurrence of the Tax Court,
employment status proceedings under
§7436 may be conducted pursuant to the
Tax Court’s simplified procedures for
small tax cases, if the amount of employ-
ment taxes placed in dispute is $50,000 or
less for each calendar quarter involved.
The simplified procedures for small tax
cases are set forth in§7463 of the Code
and Rule 295 of the Tax Court’s Rules of
Practice and Procedure.
SUSPENSION OF STATUTE OF
LIMITATIONS
Section 7436(d)(1) provides that the
suspension of the limitations period for
assessment in Code§6503(a) applies in
2
The original notice was called“Notice of Determination Concerning Worker Classification Under§7436.”The title has now been simplified to“Notice of Determination of Worker
Classification.”
January 22, 20023212002–3 I.R.B.

the same manner as if a notice of defi-
ciency had been issued. Thus, the mailing
of the Notice of Determination by certi-
fied or registered mail will suspend the
statute of limitations for assessment of
taxes attributable to the worker classifica-
tion and§530 treatment issues. The stat-
ute of limitations for assessment is sus-
pended for the 90-day period during
which the taxpayer can begin a suit in Tax
Court, plus an additional 60 days thereaf-
ter. Moreover, if the taxpayer does file a
timely petition in the Tax Court, the stat-
ute of limitations for assessment will be
suspended until the decision of the Tax
Court becomes final and for 60 days
thereafter.
RESTRICTIONS ON ASSESSMENT
Section 7436(d)(1) provides that vari-
ous restrictions on assessment in Code
§6213 apply in the same manner as if a
notice of deficiency had been issued.
3
Thus, after the Notice of Determination is
mailed, the Service is precluded from
assessing the taxes identified in the
Notice of Determination prior to expira-
tion of the 90-day period during which
the taxpayer may file a timely Tax Court
petition.
4
If the taxpayer does not file a
timely Tax Court petition before the 91st
day after the Notice of Determination was
mailed, the employment taxes identified
in the Notice of Determination shall
thereafter be assessed.
AGREED SETTLEMENTS
If the taxpayer wishes to settle the
worker classification,§530 treatment,
and amount of employment tax issues on
an agreed basis, either before issuance of
the Notice of Determination, or after issu-
ance of the Notice of Determination but
before expiration of the 90–day period for
filing a Tax Court petition, the taxpayer
must formally waive the restrictions on
assessment contained in Code§§7436
(d)(1) and 6213(a). This will generally be
accomplished by execution of an agreed
settlement that contains the following lan-
guage:
I understand that by signing this agree-
ment, I am waiving the restrictions on
assessment provided in section 7436(d)
and 6213(a) of the Internal Revenue Code
of 1986.
The Service will not assess employ-
ment taxes attributable to worker classifi-
cation or§530 treatment issues unless
either the Service has issued a Notice of
Determination to the taxpayer and the
90-day period for filing a Tax Court peti-
tion has expired, or, alternatively, the tax-
payer has waived the restrictions on
assessment. If the Service erroneously
makes an assessment of taxes attributable
to worker classification and§530 issues
without first either issuing a Notice of
Determination or obtaining a waiver of
restrictions on assessment from the tax-
payer, the taxpayer is entitled to an auto-
matic abatement of the assessment. How-
ever, once any such procedural defects
are corrected, the Service may reassess
the employment taxes to the same extent
as if the abated assessment had not
occurred.
EFFECTIVE DATE
Section 1454 of TRA’97 and§314(f)
of CRTRA’00 are effective as of August
5, 1997. Assessments that were made
prior to the August 5, 1997, effective date
are not subject to the procedures dis-
cussed above. All employment tax exami-
nations involving worker classification
and/or§530 treatment issues that were
pending as of August 5, 1997, are subject
to Code§7436, as amended.
COMMENTS
The Service invites comments with
respect to the attached Notice of Determi-
nation, as well as with respect to any pro-
cedural issues contained in this notice.
Written comments should be submitted to
Linda E. Mosakowski
Office of Chief Counsel,
Internal Revenue Service
1111Constitution Avenue, N.W.
(CC:TEGE:EOEG:ET2)
Washington, D.C. 20224.
For further information regarding this
notice contact Linda E. Mosakowski at
(202) 622–6040 (not a toll-free call).
3
Only the prinicples of subsections (a), (b), (c), (d), and (f) of§6213 apply to the employment status proceedings under§7436.
4
The Service may immediately assess proposed employment tax amounts that do not arise as a result of a determination by the Service that an individual isan employee of the taxpayer.
To the extent the employment taxes relate to individuals the taxpayer was already treating as employees, those tax amounts would not be included in theNotice of Determination and thus,
assessment of those taxes would not be restricted by section 6213 (a).
2002–3 I.R.B.322January 22, 2002

EXHIBIT 1
Internal Revenue Service
IRS Contact Person
Name:
Telephone Number:
Identification Number:
Location Symbols:
Last Day to File a Petition With the United States Tax Court:
Taxpayer Identification Number:
NOTICE OF DETERMINATION
OF WORKER CLASSIFICATION
Dear
This letter is your Notice of Determination of Worker Classification (“Notice”), as required by law, to notify
you (before assessment) that we have determined that you owe additional employment tax, additions to tax,
and/or penalties for the tax periods identified below.
We have made three determinations:
•we have determined that for purposes of federal employment taxes,
the individual(s) described or listed in Table 1 below are to be
legally classified as employees for the tax periods indicated;
•we have determined that with respect to such individual(s) you are
not entitled to relief from employment tax under the treatment
described in section 530(a) of the Revenue Act of 1978; and
•we have determined that for the tax periods indicated, you owe
additional employment tax, additions to tax, and/or penalties in the
amounts set forth in Table 2 following the list of re-classified indi-
viduals. (Please be aware that the figures on Table 2 do not include
the interest that is required by law to be imposed on underpayments
of tax.)
January 22, 20023232002–3 I.R.B.

EXHIBIT 1
For the tax periods indicated, we determined that the following individual(s) are to be legally classified as your employees:
TABLE 1
IndividualsTax Periods
Year
1st
Quarter
2nd
Quarter
3rd
Quarter
4th
Quarter
Calendar
Year
2002–3 I.R.B.324January 22, 2002

EXHIBIT 1
Table 2 indicates the proper amount of employment tax, additions to tax, and/or penalties that arises from the classification of the
above-listed individuals as employees. Please note that these figures do not include the interest that accrues on the underpayment
of tax.
TABLE 2
Tax Period Ending
YearType of TaxMarch 31June 30Sept 30Dec. 31TOTAL
Old Age, Survivor, Disability Insurance$$$$$
Hospital Insurance
Income Tax Withholding
Federal Unemployment Tax Act
Addition to Tax I.R.C.§
Addition to Tax I.R.C.§
Penalty I.R.C.§
TOTAL
Old Age, Survivor, Disability Insurance
Hospital Insurance
Income Tax Withholding
Federal Unemployment Tax Act
Addition to Tax I.R.C.§
Addition to Tax I.R.C.§
Penalty I.R.C.§
TOTAL
Old Age, Survivor, Disability Insurance
Hospital Insurance
Income Tax Withholding
Federal Unemployment Tax Act
Addition to Tax I.R.C.§
Addition to Tax I.R.C.§
Penalty I.R.C.§
TOTAL
If you want to contest any or all of our three determinations in the United States Tax Court, you must file a petition with the United
States Tax Court by the date indicated on the first page of this letter as the“Last Day to File a Petition With the United States Tax
Court.”You may mail the petition to the Tax Court (and/or write to the court with questions about the Tax Court proceedings) at
the following address:
United States Tax Court
400 Second Street, N.W.
Washington, DC 20217
January 22, 20023252002–3 I.R.B.

The time you have to file a petition with the Tax Court (that is, before the 91st day after the letter is mailed) is set by law and
cannot be extended or suspended. Therefore, contacting the Internal Revenue Service (IRS) or contacting the Tax Court for more
information, or receiving other correspondence from the IRS, will not change the period for filing a petition with the Tax Court.
We have enclosed several documents with this Notice of Determination of Worker Classification. Forms 4666, 4667, and/or 4668
provide details on how we calculated the amount of your additional employment tax liability. Form 2504–WC is a waiver form that
you may use if you decide not to file a petition in the Tax Court. Sending us a signed Form 2504–WC gives us permission to assess
the proposed amounts quickly and can help limit the accumulation of interest. Publication 3953,“Questions & Answers About Tax
Court Proceedings for Determination of Employment Status Under I.R.C.§7436”provides details about this Notice and the Tax
Court proceedings.
If you have any questions about this letter, you may write to the person whose name and IRS address are shown on the front of
this letter. If you write, please include your telephone number, the best time for us to call you if we need more information, and a
copy of this letter to help us identify your account. Keep the original letter for your records.
If you prefer, you may call the IRS contact person at the telephone number on the front page of this letter. If this number is outside
your local calling area, there will be a long distance charge to you. You may call the IRS telephone number listed in your local
directory. An IRS employee there may be able to help you, but the contact person at our address shown on this letter is most famil-
iar with your case.
You also have the right to contact a Taxpayer Advocate. If you believe that your tax matter is not being resolved through estab-
lished IRS procedures or you are suffering or about to suffer a significant hardship, a Taxpayer Advocate may assist you in getting
your tax matter addressed in a prompt and proper manner. A Taxpayer Advocate, however, does not have the ability to reverse
legally correct tax determinations, extend the time fixed by law for filing a petition in the United States Tax Court, or act as a sub-
stitute for established IRS procedures, such as the formal appeals process. If you would like to contact a Taxpayer Advocate for
assistance, please refer to section 12 of the enclosed Publication 3953 for the address and telephone number of your local Taxpayer
Advocate.
Thank you for your cooperation.
Sincerely,
Commissioner
By
Restrictions on Disclosure and
Use of Tax Return Information
by Tax Return Preparers
Notice 2002–6
The Internal Revenue Service (IRS)
has received inquiries from practitioners
and tax return preparers regarding the
effect of the Gramm-Leach-Bliley Act on
Section 7216 of the Internal Revenue
Code. The Gramm-Leach-Bliley Act,
Pub. L. No. 106–102, 113 Stat. 1338,
imposed new requirements on financial
institutions to protect the privacy of non-
publicpersonalinformation.I.R.C.
§7216 prohibits the unauthorized use or
disclosure of tax return information by
tax return preparers.
Tax return preparers, as defined in
Treas. Reg.§301.7216–1(b)(2), are
advised that, although tax return preparers
may be subject to the privacy provisions
of the Gramm-Leach-Bliley Act, those
provisions do not supersede, alter, or
affect the preexisting requirements of
I.R.C.§7216 restricting the disclosure or
use of tax return information by a tax
return preparer. Specifically, the Gramm-
Leach-Bliley Act does not permit use or
disclosure of tax return information pro-
hibited by I.R.C.§7216 and regulations
promulgated thereunder.
For guidance on the use or disclosure
of tax return information, tax return pre-
parersmayrefertoTreas.Reg.
§301.7216 and Notice 2000–64
(2000–51 I.R.B. 589).
The principal author of this notice is
Brinton T. Warren of the Office of Asso-
ciate Chief Counsel (Procedure and
Administration), Administrative Provi-
sions and Judicial Practice Division. For
further information regarding this
announcement, contact Brinton Warren at
(202) 622–4940 (not a toll-free call).
2002–3 I.R.B.326January 22, 2002

26 CFR 601.204: Changes in accounting periods and in methods of accounting.
(Also Part I,§§56, 61, 77, 111, 162, 165, 166, 167, 168, 171, 174, 197, 263, 263A, 267, 404, 446, 448, 451, 454, 455, 460, 461, 471, 472, 475, 481, 585, 985,
1272, 1273, 1278, 1281, 1363; 1.61–8, 1.77–1, 1.77–2, 1.162–1, 1.162–3, 1.162–4, 1.162–11, 1.165–2, 1.165–3, 1.167(a)–2, 1.167(a)–14, 1.167(a)–8, 1.167(a)–11,
1.167(e)–1, 1.171–4, 1.174–1, 1.174–3, 1.174–4, 1.197–1T, 1.197–2, 1.263(a)–1, 1.263(a)–2, 1.263A–1, 1.263A–2, 1.263A–3, 1.263A–4, 1.446–1, 1.446–2, 1.448–
2T, 1.451–1, 1.454–1, 1.455–6, 1.460–1. 1.460–4, 1.461–4, 1.461–5, 1.471–1, 1.471–2, 1.471–3, 1.472–1, 1.472–2, 1.472–6, 1.472–8, 1.481–1, 1.481–4, 1.861–18,
1.985–5, 1.985–8, 1.1272–1, 1.1273–1, 1.1273–2.)
Rev. Proc. 2002–9
SECTION 1. PURPOSE ..................................................................................................................................................................... 334
SECTION 2. BACKGROUND AND CHANGES............................................................................................................................. 335
.01 Change in method of accounting defined ............................................................................................................................... 335
.02 Securing permission to make a method change...................................................................................................................... 335
.03 Terms and conditions of a method change.............................................................................................................................. 335
.04 No retroactive method change ................................................................................................................................................. 335
.05 Method change with a§481(a) adjustment............................................................................................................................ 335
(1) Need for adjustment........................................................................................................................................................... 335
(2) Adjustment period............................................................................................................................................................... 335
.06 Method change using a cut-off method................................................................................................................................... 335
.07 Consistency and clear reflection of income ............................................................................................................................ 336
.08 Separate trades or businesses................................................................................................................................................... 336
.09 Penalties.................................................................................................................................................................................... 336
.10 Change made as part of an examination ................................................................................................................................. 336
.11 Significant changes................................................................................................................................................................... 336
SECTION 3. DEFINITIONS .............................................................................................................................................................. 337
.01 Application................................................................................................................................................................................ 337
.02 Applicable provisions ............................................................................................................................................................... 337
.03 Taxpayer ................................................................................................................................................................................... 337
(1) In general............................................................................................................................................................................ 337
(2) Consolidated group............................................................................................................................................................. 337
.04 Timely mailing as timely filing ............................................................................................................................................... 337
.05 Timely performance of acts ..................................................................................................................................................... 338
.06 Year of change.......................................................................................................................................................................... 338
.07 Section 481(a) adjustment period ............................................................................................................................................ 338
.08 Under examination ................................................................................................................................................................... 338
(1) In general............................................................................................................................................................................ 338
(2) Partnerships and S corporations subject to TEFRA......................................................................................................... 338
.09 Issue under consideration......................................................................................................................................................... 338
(1) Under examination............................................................................................................................................................. 338
(2) Before an appeals office..................................................................................................................................................... 338
(3) Before a federal court........................................................................................................................................................ 338
.10 Change within the LIFO inventory method ............................................................................................................................ 339
.11 Director ..................................................................................................................................................................................... 339
SECTION 4. SCOPE .......................................................................................................................................................................... 339
.01 Applicability ............................................................................................................................................................................. 339
.02 Inapplicability ........................................................................................................................................................................... 339
(1) Under examination............................................................................................................................................................. 339
(2) Before an appeals office..................................................................................................................................................... 339
(3) Before a federal court........................................................................................................................................................ 339
(4) Consolidated group member.............................................................................................................................................. 339
(5) Partnerships and S corporations....................................................................................................................................... 339
(6) Prior change....................................................................................................................................................................... 339
(7) Section 381(a) transaction................................................................................................................................................. 339
(8) Final year of trade or business......................................................................................................................................... 339
.03 Nonautomatic changes ............................................................................................................................................................. 339
January 22, 20023272002–3 I.R.B.

SECTION 5. TERMS AND CONDITIONS OF CHANGE.............................................................................................................. 340
.01 In general .................................................................................................................................................................................. 340
.02 Year of change.......................................................................................................................................................................... 340
.03 Section 481(a) adjustment........................................................................................................................................................ 340
.04 Section 481(a) adjustment period ........................................................................................................................................... 340
(1) In general............................................................................................................................................................................ 340
(2) Short period as a separate taxable year........................................................................................................................... 340
(3) Shortened or accelerated adjustment periods................................................................................................................... 340
.05 NOL carryback limitation for taxpayer subject to criminal investigation ............................................................................. 341
.06 Change treated as initiated by the taxpayer ............................................................................................................................ 341
SECTION 6. GENERAL APPLICATION PROCEDURES .............................................................................................................. 341
.01 Consent ..................................................................................................................................................................................... 341
.02 Filing requirements .................................................................................................................................................................. 341
(1) Applications........................................................................................................................................................................ 341
(2) Waiver of taxable year filing requirement......................................................................................................................... 341
(3) Timely duplicate filing requirement................................................................................................................................... 341
(4) Label................................................................................................................................................................................... 342
(5) Signature requirements....................................................................................................................................................... 342
(6) Where to file copy............................................................................................................................................................... 342
(7) No user fee.......................................................................................................................................................................... 342
(8) Single application for certain consolidated groups.......................................................................................................... 342
(9) Additional copies required where scope restrictions waived............................................................................................ 342
.03 Taxpayer under examination .................................................................................................................................................... 342
(1) In general............................................................................................................................................................................ 342
(2) 90–day window period....................................................................................................................................................... 343
(3) 120–day window period..................................................................................................................................................... 343
(4) Consent of director............................................................................................................................................................. 343
(5) Changes lacking audit protection...................................................................................................................................... 343
.04 Taxpayer before an appeals office ........................................................................................................................................... 343
.05 Taxpayer before a federal court ............................................................................................................................................... 343
.06 Compliance with provisions .................................................................................................................................................... 344
SECTION 7. AUDIT PROTECTION FOR TAXABLE YEARS PRIOR TO YEAR OF CHANGE ............................................. 344
.01 In general .................................................................................................................................................................................. 344
.02 Exceptions ................................................................................................................................................................................ 344
(1) Change not made or made improperly.............................................................................................................................. 344
(2) Change in sub-method........................................................................................................................................................ 344
(3) Prior year Service-initiated change................................................................................................................................... 344
(4) Criminal investigation........................................................................................................................................................ 344
SECTION 8. EFFECT OF CONSENT .............................................................................................................................................. 344
.01 In general .................................................................................................................................................................................. 344
.02 Retroactive change or modification......................................................................................................................................... 344
SECTION 9. REVIEW BY DIRECTOR ........................................................................................................................................... 344
.01 In general .................................................................................................................................................................................. 344
.02 Changes not made in compliance with all applicable provisions .......................................................................................... 344
.03 National office consideration ................................................................................................................................................... 345
SECTION 10. REVIEW BY NATIONAL OFFICE .......................................................................................................................... 345
.01 In general .................................................................................................................................................................................. 345
.02 Incomplete application ............................................................................................................................................................. 345
(1) 30 day rule.......................................................................................................................................................................... 345
(2) Failure to provide additional information......................................................................................................................... 345
.03 Conference in the national office ............................................................................................................................................ 345
.04 National office determination .................................................................................................................................................. 345
(1) Consent not granted........................................................................................................................................................... 345
(2) Application changed........................................................................................................................................................... 345
2002–3 I.R.B.328January 22, 2002

SECTION 11. APPLICABILITY OF REV. PROCS. 2001–1 AND 2001–4 .................................................................................... 345
SECTION 12. INQUIRIES ................................................................................................................................................................. 345
SECTION 13. EFFECTIVE DATE .................................................................................................................................................... 345
.01 In general ................................................................................................................................................................................ 345
.02 Transition rules ......................................................................................................................................................................... 345
.03 Special rules. ............................................................................................................................................................................ 346
SECTION 14. EFFECT ON OTHER DOCUMENTS ...................................................................................................................... 346
SECTION 15. PAPERWORK REDUCTION ACT ........................................................................................................................... 346
DRAFTING INFORMATION ............................................................................................................................................................ 346
APPENDIX.......................................................................................................................................................................................... 347
SECTION 1. COMMODITY CREDIT LOANS (§77) .................................................................................................................... 347
.01 Treating amounts received as loans......................................................................................................................................... 347
(1) Description of change and scope....................................................................................................................................... 347
(2) Scope limitations inapplicable........................................................................................................................................... 347
(3) Manner of making change................................................................................................................................................. 347
.02 Reserved ................................................................................................................................................................................... 347
SECTION 1A. TRADE OR BUSINESS EXPENSES (§162) ......................................................................................................... 347
.01 Advances made by a lawyer on behalf of clients—Description of change and scope....................................................... 347
.02 Year 2000 costs—Description of change and scope ............................................................................................................ 347
.03 Aircraft maintenance costs ....................................................................................................................................................... 347
(1) Description of change........................................................................................................................................................ 347
(2) Year of change.................................................................................................................................................................... 347
(3) Scope limitations inapplicable........................................................................................................................................... 347
(4) Transition rule.................................................................................................................................................................... 347
.04 ISO 9000 costs ......................................................................................................................................................................... 347
(1) Description of change........................................................................................................................................................ 347
(2) Scope limitations inapplicable........................................................................................................................................... 347
.05 Track structure expenditures .................................................................................................................................................... 347
(1) Description of change and scope....................................................................................................................................... 347
(2) Year of change.................................................................................................................................................................... 348
(3) Scope limitations inapplicable........................................................................................................................................... 348
(4) Special filing requirements for certain taxpayers............................................................................................................. 348
(5) Manner of making change................................................................................................................................................. 348
(6) Audit protection.................................................................................................................................................................. 348
(7) Effect of consent................................................................................................................................................................. 348
.06 Restaurant smallwares packages .............................................................................................................................................. 348
(1) Description of change........................................................................................................................................................ 348
(2) Scope limitations inapplicable........................................................................................................................................... 348
(3) Section 481(a) adjustment.................................................................................................................................................. 348
SECTION 1B. BAD DEBTS (§166) ................................................................................................................................................ 348
.01 Change from reserve method to specific charge-off method—description of change and scope ..................................... 348
.02 Reserved .................................................................................................................................................................................. 348
SECTION 1C. AMORTIZABLE BOND PREMIUM (§171) .......................................................................................................... 348
.01 Revocation of§171(c) election .............................................................................................................................................. 348
(1) Description of change and scope....................................................................................................................................... 348
(2) Revocation of election........................................................................................................................................................ 348
January 22, 20023292002–3 I.R.B.

(3) Manner of making the change........................................................................................................................................... 348
(4) Additional requirements...................................................................................................................................................... 348
(5) Audit protection.................................................................................................................................................................. 348
.02 Reserved ................................................................................................................................................................................... 349
SECTION 2. DEPRECIATION OR AMORTIZATION (§56(a)(1), 56(g)(4)(A), 167, 168, OR 197, OR
FORMER§168) ................................................................................................................................................................................. 349
.01 Impermissible to permissible method of accounting for depreciation or amortization ......................................................... 349
(1) Description of change........................................................................................................................................................ 349
(2) Scope................................................................................................................................................................................... 349
(3) Additional requirements...................................................................................................................................................... 350
(4) Section 481(a) adjustment.................................................................................................................................................. 350
(5) Basis adjustment................................................................................................................................................................. 351
(6) Meaning of depreciation allowable................................................................................................................................... 351
.02 Permissible to permissible method of accounting for depreciation ....................................................................................... 351
(1) Description of change........................................................................................................................................................ 351
(2) Scope................................................................................................................................................................................... 351
(3) Changes covered................................................................................................................................................................. 352
(4) Additional requirements...................................................................................................................................................... 352
(5) Section 481(a) adjustment.................................................................................................................................................. 353
.03 Sale or lease transactions ........................................................................................................................................................ 353
(1) Description of change and scope....................................................................................................................................... 353
(2) Manner of making the change........................................................................................................................................... 353
(3) No audit protection............................................................................................................................................................. 353
.04 Modern golf course greens ..................................................................................................................................................... 353
(1) Description of change and scope....................................................................................................................................... 353
(2) Additional requirements...................................................................................................................................................... 353
SECTION 2A. RESEARCH AND EXPERIMENTAL EXPENDITURES (§174) ......................................................................... 353
.01 Changes to a different method or different amortization period............................................................................................ 353
(1) Description of change........................................................................................................................................................ 353
(2) Scope................................................................................................................................................................................... 354
(3) Manner of making the change........................................................................................................................................... 354
(4) Additional requirement....................................................................................................................................................... 354
(5) No audit protection............................................................................................................................................................. 354
.02 Reserved ................................................................................................................................................................................... 354
SECTION 2B. COMPUTER SOFTWARE EXPENDITURES (§§162, 167, AND 197) ............................................................... 354
.01 Description of change .............................................................................................................................................................. 354
.02 Scope ........................................................................................................................................................................................ 354
.03 Inapplicability ........................................................................................................................................................................... 354
.04 Statement required.................................................................................................................................................................... 354
SECTION 3. CAPITAL EXPENDITURES (§263) .......................................................................................................................... 354
.01 Package design costs ................................................................................................................................................................ 354
(1) Description of change and scope....................................................................................................................................... 354
(2) Additional requirements...................................................................................................................................................... 355
.02 Line pack gas; cushion gas. ..................................................................................................................................................... 355
(1) Description of change and scope....................................................................................................................................... 355
(2) Additional requirements...................................................................................................................................................... 355
.03 Removal costs .......................................................................................................................................................................... 355
(1) Description of change........................................................................................................................................................ 355
(2) Additional requirements...................................................................................................................................................... 355
(3) Scope limitations inapplicable........................................................................................................................................... 355
SECTION 4. UNIFORM CAPITALIZATION (§263A) .................................................................................................................. 355
.01 Certain uniform capitalization (UNICAP) methods used by resellers and reseller-producers.............................................. 355
(1) Description of change and scope....................................................................................................................................... 355
2002–3 I.R.B.330January 22, 2002

(2) Definitions........................................................................................................................................................................... 355
(3) Section 481(a) adjustment.................................................................................................................................................. 356
(4) Multiple changes................................................................................................................................................................. 356
(5) Example............................................................................................................................................................................... 356
.02 Certain uniform capitalization (UNICAP) methods used by producers................................................................................. 359
(1) Applicability........................................................................................................................................................................ 359
(2) Inapplicability..................................................................................................................................................................... 359
(3) Definition............................................................................................................................................................................ 359
(4) Multiple changes................................................................................................................................................................. 359
.03 Certain uniform capitalization (UNICAP) methods used by taxpayers
in a farming business. ............................................................................................................................................................. 359
(1) Description of change and scope....................................................................................................................................... 359
(2) Year of change.................................................................................................................................................................... 359
(3) Scope limitations inapplicable........................................................................................................................................... 359
(4) Manner of making change; audit protection..................................................................................................................... 359
(5) Multiple changes................................................................................................................................................................. 360
.04 Change to no longer capitalize research and experimental expenditures
under uniform capitalization (UNICAP) ................................................................................................................................ 360
(1) Description of change and scope....................................................................................................................................... 360
(2) Manner of making the change........................................................................................................................................... 360
(3) No audit protection............................................................................................................................................................. 360
SECTION 4A. LOSSES, EXPENSES AND INTEREST WITH RESPECT TO TRANSACTIONS BETWEEN
RELATED TAXPAYERS (§267)....................................................................................................................................................... 360
.01 Change to comply with§267 ................................................................................................................................................. 360
.02 Reserved ................................................................................................................................................................................... 360
SECTION 4B. DEFERRED COMPENSATION (§404) .................................................................................................................. 360
.01 Change to comply with§404(a)(11) ...................................................................................................................................... 360
(1) Description of change and scope....................................................................................................................................... 360
(2) Section 481(a) adjustment period...................................................................................................................................... 360
(3) No audit protection............................................................................................................................................................. 360
.02 Deferred compensation ........................................................................................................................................................... 360
(1) Applicability........................................................................................................................................................................ 360
(2) Inapplicability..................................................................................................................................................................... 361
SECTION 5. METHODS OF ACCOUNTING (§446) .................................................................................................................... 361
.01 Cash or hybrid method to accrual method .............................................................................................................................. 361
(1) Description of change and scope....................................................................................................................................... 361
(2) Section 481(a) adjustment.................................................................................................................................................. 361
(3) Change to a special method of accounting....................................................................................................................... 362
(4) Coordination with section 13.01 of the APPENDIX for short-term obligations............................................................. 362
.02 Multi-year service warranty contracts ..................................................................................................................................... 362
(1) Description of change and scope....................................................................................................................................... 362
(2) Manner of making the change........................................................................................................................................... 362
.03 Multi-year insurance policies for multi-year service warranty contracts—Description of change and scope ................. 362
(1) Applicability........................................................................................................................................................................ 362
(2) Inapplicability..................................................................................................................................................................... 362
(3) Description of method....................................................................................................................................................... 362
.04 Interest accruals on short-term consumer loans—Rule of 78s method ............................................................................. 362
(1) Description of change and scope....................................................................................................................................... 362
(2) Background......................................................................................................................................................................... 362
(3) Manner of making the change........................................................................................................................................... 363
.05 Small taxpayers changing to overall cash method ..................................................................................................................363
(1) Description of change........................................................................................................................................................ 363
(2) Scope limitations inapplicable........................................................................................................................................... 363
(3) Manner of making the change........................................................................................................................................... 363
January 22, 20023312002–3 I.R.B.

(4) Automatic changes to treating inventoriable items as nonincidental materials and supplies under
Rev. Proc. 2001–10............................................................................................................................................................. 363
.06 Nonaccrual-experience method ................................................................................................................................................ 363
(1) Applicability........................................................................................................................................................................ 363
(2) Inapplicability..................................................................................................................................................................... 363
(3) Scope limitations inapplicable........................................................................................................................................... 363
SECTION 5A. TAXABLE YEAR OF INCLUSION (§451) ........................................................................................................... 363
.01 Accrual of interest on nonperforming loans............................................................................................................................ 363
(1) Description of change and scope....................................................................................................................................... 363
(2) Section 481(a) adjustment.................................................................................................................................................. 363
.02 Cash advances on insurance commissions .............................................................................................................................. 363
(1) Description of change........................................................................................................................................................ 363
(2) Year of change.................................................................................................................................................................... 363
(3) Scope limitations inapplicable........................................................................................................................................... 363
(4) Manner of making the change........................................................................................................................................... 363
.03 Advance rentals—description of change and scope ............................................................................................................. 364
SECTION 6. OBLIGATIONS ISSUED AT DISCOUNT (§454) .................................................................................................... 364
.01 Series E, EE or I U.S. savings bonds ..................................................................................................................................... 364
(1) Description of change and scope....................................................................................................................................... 364
(2) Manner of making the change........................................................................................................................................... 364
.02 Reserved ................................................................................................................................................................................... 364
SECTION 7. PREPAID SUBSCRIPTION INCOME (§455) .......................................................................................................... 364
.01 Prepaid subscription income .................................................................................................................................................... 364
(1) Description of change and scope....................................................................................................................................... 364
(2) Manner of making the change........................................................................................................................................... 364
.02 Reserved ................................................................................................................................................................................... 364
SECTION 7A. SPECIAL RULES FOR LONG-TERM CONTRACTS (§460) ............................................................................. 364
.01 Change to comply with final regulations under§460 ........................................................................................................... 364
(1) Description of change and scope....................................................................................................................................... 364
(2) Year of change.................................................................................................................................................................... 364
(3) Manner of making change................................................................................................................................................. 364
(4) Scope limitations inapplicable........................................................................................................................................... 364
(5) No audit protection............................................................................................................................................................. 364
.02 Change from exempt-contract method to percentage-of-completion method ....................................................................... 364
(1) Description of change and scope....................................................................................................................................... 364
(2) Manner of making change................................................................................................................................................. 365
(3) No audit protection............................................................................................................................................................. 365
SECTION 8. TAXABLE YEAR OF DEDUCTION (§461) ............................................................................................................ 365
.01 Timing of incurring liabilities for employee compensation .................................................................................................. 365
(1) Self-insured employee medical benefits............................................................................................................................. 365
(2) Amounts taken into account............................................................................................................................................... 365
.02 Timing of incurring liabilities for real property taxes, personal property taxes and state income taxes ............................. 365
(1) Description of change........................................................................................................................................................ 365
(2) Scope................................................................................................................................................................................... 365
(3) Amounts taken into account............................................................................................................................................... 365
.03 Timing of incurring liabilities under a workers’compensation act, tort, breach of contract, or violation of law .............. 365
(1) Description of change and scope....................................................................................................................................... 365
(2) Amounts taken into account............................................................................................................................................... 365
.04 Timing of incurring liabilities for payroll taxes...................................................................................................................... 365
(1) Applicability........................................................................................................................................................................ 366
(2) Inapplicability..................................................................................................................................................................... 366
(3) Recurring item exception................................................................................................................................................... 366
(4) Amounts taken into account............................................................................................................................................... 366
2002–3 I.R.B.332January 22, 2002

.05 Cooperative advertising............................................................................................................................................................ 366
(1) Description of change and scope....................................................................................................................................... 366
(2) Scope limitations inapplicable........................................................................................................................................... 366
.06 Distributor commissions .......................................................................................................................................................... 366
(1) Changes made under Rev. Proc. 2000–38......................................................................................................................... 366
(2) Changes not made under Rev. Proc. 2000–38.................................................................................................................. 367
SECTION 9. INVENTORIES (§471) ............................................................................................................................................... 367
.01 Cash discounts.......................................................................................................................................................................... 367
(1) Description of change and scope....................................................................................................................................... 367
(2) Computation of§481 adjustment for changes to net invoice method............................................................................. 367
(3) Computation of§481 adjustment for changes to gross invoice method......................................................................... 367
.02 Estimating inventory ................................................................................................................................................................ 367
(1) Description of change and scope....................................................................................................................................... 367
(2) Scope limitations inapplicable........................................................................................................................................... 368
(3) Additional requirements...................................................................................................................................................... 368
(4) Audit protection.................................................................................................................................................................. 368
(5) Future change..................................................................................................................................................................... 368
.03 Small taxpayer exception from requirement to account for inventories under§471........................................................... 368
(1) Description of change........................................................................................................................................................ 368
(2) Scope limitations inapplicable........................................................................................................................................... 368
(3) Manner of making the change........................................................................................................................................... 368
(4) Automatic changes to the cash method under Rev. Proc. 2001–10................................................................................. 368
.04“Floor stocks”payments made or received ............................................................................................................................ 368
(1) Description of change and scope....................................................................................................................................... 368
(2) Requirements....................................................................................................................................................................... 368
(3) Scope limitations inapplicable........................................................................................................................................... 368
(4) Manner of making the change........................................................................................................................................... 368
.05 Qualifying volume-related trade discounts.............................................................................................................................. 368
(1) Description of change and scope....................................................................................................................................... 368
(2) Section 481 adjustment....................................................................................................................................................... 368
.06 Impermissible methods of valuation........................................................................................................................................ 368
SECTION 10. LAST-IN, FIRST-OUT (LIFO) INVENTORIES (§472) ......................................................................................... 368
.01 Change from the LIFO inventory method .............................................................................................................................. 368
(1) Description of change and scope....................................................................................................................................... 368
(2) Limitation on LIFO election.............................................................................................................................................. 369
(3) Effect of subchapter S election by corporation................................................................................................................. 369
(4) Additional requirements...................................................................................................................................................... 369
.02 Determining current-year cost under the LIFO inventory method......................................................................................... 369
(1) Description of change and scope....................................................................................................................................... 369
(2) Manner of making the change........................................................................................................................................... 370
.03 Alternative LIFO inventory method for retail automobile dealers......................................................................................... 370
(1) Description of change and scope....................................................................................................................................... 370
(2) Manner of making the change........................................................................................................................................... 370
.04 Used vehicle alternative LIFO method ................................................................................................................................... 370
(1) Description of change and scope....................................................................................................................................... 370
(2) Additional requirements...................................................................................................................................................... 370
(3) Scope limitations inapplicable........................................................................................................................................... 370
(4) Manner of making change................................................................................................................................................. 370
(5) Concurrent change available for certain IPIC taxpayers................................................................................................. 370
.05 Determining the cost of used vehicles purchased or taken as a trade-in............................................................................... 370
(1) Description of change and scope....................................................................................................................................... 370
(2) Manner of making the change........................................................................................................................................... 371
.06 Change to inventory price index computation (IPIC) method ............................................................................................... 371
(1) Description of change and scope....................................................................................................................................... 371
(2) Manner of making the change........................................................................................................................................... 371
(3) Bargain purchase................................................................................................................................................................ 371
January 22, 20023332002–3 I.R.B.

.07 Changes within inventory price index computation (IPIC) method ...................................................................................... 371
(1) Description of change and scope....................................................................................................................................... 371
(2) Manner of making the change........................................................................................................................................... 371
SECTION 10A. MARK-TO-MARKET ACCOUNTING METHOD FOR DEALERS IN SECURITIES (§475) ........................ 371
.01 Reserved ................................................................................................................................................................................... 371
.02 Commodities dealers, securities traders, and commodities traders electing to use the mark-to-market
method of accounting under§475(e) or (f). ......................................................................................................................... 371
(1) Description of change........................................................................................................................................................ 371
(2) Scope................................................................................................................................................................................... 372
SECTION 11. BANK RESERVES FOR BAD DEBTS (§585) ...................................................................................................... 372
.01 Changing from the§585 reserve method to the§166 specific charge-off method ............................................................ 372
(1) Description of change and scope....................................................................................................................................... 372
(2) Section 481(a) adjustment.................................................................................................................................................. 372
(3) Change from§585 required when electing S corporation status.................................................................................... 372
.02 Reserved ................................................................................................................................................................................... 372
SECTION 11A. INCOME FROM SOURCES WITHIN THE UNITED STATES (§861)............................................................. 372
.01 Transactions involving computer programs ............................................................................................................................ 372
.02 Reserved ................................................................................................................................................................................... 372
SECTION 11B. FUNCTIONAL CURRENCY (§985)..................................................................................................................... 372
.01 Change in functional currency................................................................................................................................................. 372
(1) Description of change and scope....................................................................................................................................... 372
(2) Manner of making change................................................................................................................................................. 372
.02 Reserved ................................................................................................................................................................................... 372
SECTION 12. ORIGINAL ISSUE DISCOUNT (§§1272, 1273) .................................................................................................... 372
.01De minimisoriginal issue discount (OID) .............................................................................................................................. 372
(1) Description of change and scope....................................................................................................................................... 372
(2) Manner of making the change........................................................................................................................................... 372
(3) Additional requirements...................................................................................................................................................... 373
(4) No audit protection............................................................................................................................................................. 373
.02 Reserved ................................................................................................................................................................................... 373
SECTION 12A. MARKET DISCOUNT BONDS (§1278) ............................................................................................................. 373
.01 Revocation of§1278(b) election ............................................................................................................................................ 373
(1) Description of change and scope....................................................................................................................................... 373
(2) Revocation of election........................................................................................................................................................ 373
(3) Manner of making the change........................................................................................................................................... 373
(4) Additional requirements...................................................................................................................................................... 373
(5) Audit protection.................................................................................................................................................................. 373
.02 Reserved ................................................................................................................................................................................... 373
SECTION 13. SHORT-TERM OBLIGATIONS (§1281)................................................................................................................. 373
.01 Interest income on short-term obligations............................................................................................................................... 373
(1) Description of change and scope....................................................................................................................................... 373
(2) Section 481(a) adjustment period...................................................................................................................................... 373
.02 Stated interest on short-term loans of cash method banks ..................................................................................................... 373
(1) Description of change and scope....................................................................................................................................... 373
(2) Change for prior taxable years......................................................................................................................................... 374
(3) Section 481(a) adjustment period...................................................................................................................................... 374
SECTION 1. PURPOSE
This revenue procedure provides the
procedures by which a taxpayer may
obtain automatic consent to change the
methods of accounting described in the
APPENDIX of this revenue procedure.
This revenue procedure clarifies, modi-
fies, amplifies, and supersedes Rev. Proc.
99–49 (1999–2 C.B. 725). It also consoli-
dates automatic consent procedures for
changes in several methods of accounting
that were published subsequent to the
2002–3 I.R.B.334January 22, 2002

publication of Rev. Proc. 99–49, and pro-
vides new automatic consent procedures
for changes in several other methods of
accounting. A taxpayer complying with
all the applicable provisions of this rev-
enue procedure has obtained the consent
of the Commissioner of Internal Revenue
to change its method of accounting under
§446(e) of the Internal Revenue Code
and the Income Tax Regulations thereun-
der.
SECTION 2. BACKGROUND AND
CHANGES
.01Change in method of accounting
defined.
(1) Section 1.446–1(e)(2)(ii)(a)ofthe
Income Tax Regulations provides that a
change in method of accounting includes
a change in the overall plan of accounting
for gross income or deductions, 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 taking of the
item as a deduction. In determining
whether a taxpayer’s accounting practice
for an item involves timing, generally the
relevant question is whether the practice
permanently changes the amount of the
taxpayer’s lifetime income. If the practice
does not permanently affect the taxpay-
er’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, it is not necessary for the
taxpayer to treat the item consistently in
two or more consecutive tax returns to
have adopted a method of accounting. If
a taxpayer has adopted a method of
accounting under these rules, the taxpayer
may not change the method by amending
its prior income tax return(s).SeeRev.
Rul. 90–38 (1990–1 C.B. 57).
(3) A change in the characterization of
an item may also constitute a change in
method of accounting if the change has
the effect of shifting income from one
period to another. For example, a change
from treating an item as income to treat-
ing the item as a deposit is a change in
method of accounting.SeeRev. Proc.
91–31.
(4) A change in method of accounting
does not include correction of mathemati-
cal or posting errors, or errors in the com-
putation of tax liability (such as errors in
computation of the foreign tax credit, net
operating loss, percentage depletion, or
investment credit).See§1.446–
1(e)(2)(ii)(b).
.02Securing permission to make a
method change. Sections 446(e) and
1.446–1(e) state that, except as otherwise
provided, a taxpayer must secure the con-
sent of the Commissioner before chang-
ing a method of accounting for federal
income tax purposes. Section 1.446–
1(e)(3)(i) requires that, in order to obtain
the Commissioner’s consent to a method
change, a taxpayer must file a Form 3115,
Application for Change in Accounting
Method, during the taxable year in which
the taxpayer wants to make the proposed
change.
.03Terms and conditions of a method
change. Section 1.446–1(e)(3)(ii) autho-
rizes the Commissioner to prescribe
administrative procedures setting forth
the limitations, terms, and conditions
deemed necessary to permit a taxpayer to
obtain consent to change a method of
accounting in accordance with§446(e).
The terms and conditions the Commis-
sioner may prescribe include the year of
change, whether the change is to be made
with a§481(a) adjustment or on a cut-off
basis, and the§481(a) adjustment period.
.04No retroactive method change.
Unless specifically authorized by the
Commissioner, a taxpayer may not
request, or otherwise make, a retroactive
change in method of accounting, regard-
less of whether the change is from a per-
missible or an impermissible method.See
generallyRev. Rul. 90–38.
.05Method change with§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
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 employed, and income
for the year of change and the following
taxable years must be determined under
the new method of accounting as if the
new method had always been used.
Example. A taxpayer that is not required to use
inventories uses the overall cash receipts and dis-
bursements method and changes to an overall
accrual method. The taxpayer has $120,000 of
income earned but not yet received (accounts
receivable) and $100,000 of expenses incurred but
not yet paid (accounts payable) as of the end of the
taxable year preceding the year of change. A posi-
tive§481(a) adjustment of $20,000 ($120,000
accounts receivable less $100,000 accounts payable)
is required as a result of the change.
(2)Adjustment period. Section 481(c)
and§§1.446–1(e)(3)(ii) and 1.481–4 pro-
vide that the adjustment required by
§481(a) may be taken into account in
determining taxable income in the man-
ner and subject to the conditions agreed
to by the Commissioner and the taxpayer.
Generally, in the absence of such an
agreement, the§481(a) adjustment is
taken into account completely in the year
of change, subject to§481(b) which lim-
its the amount of tax where the§481(a)
adjustment is substantial. However, under
the Commissioner’s authority in§1.446–
1(e)(3)(ii) to prescribe terms and condi-
tions for changes in methods of account-
ing, this revenue procedure provides
specific adjustment periods that are
intended to achieve an appropriate bal-
ance between the goals of mitigating dis-
tortions of income that result from
accounting method changes and provid-
ing appropriate incentives for voluntary
compliance.
.06Method change using a cut-off
method. The Commissioner may deter-
mine that certain changes in methods of
accounting will be made without a
§481(a) adjustment, using a“cut-off
method.”Under a cut-off method, only
the items arising on or after the beginning
of the year of change (or other operative
date) are accounted for under the new
January 22, 20023352002–3 I.R.B.

method of accounting. Any items arising
before the year of change (or other opera-
tive date) continue to be accounted for
under the taxpayer’s former method of
accounting. See, for example, sections
1.01 and 7A.01 of the APPENDIX of this
revenue procedure. Because no items are
duplicated or omitted from income when
a cut-off method is used to effect a
change in accounting method, no§481(a)
adjustment is necessary.
.07Consistency and clear reflection of
income. Methods of accounting should
clearly reflect income on a continuing
basis, and the Internal Revenue Service
exercises its discretion under§§446(e)
and 481(c) in a manner that generally
minimizes distortions of income across
taxable years and on an annual basis.
.08Separate trades or businesses.
(1) Sections 1.446–1(d)(1) and (2) pro-
vide that when a taxpayer has two or
more separate and distinct trades or busi-
nesses, a different method of accounting
may be used for each trade or business
provided the method of accounting used
for each trade or business clearly reflects
the overall income of the taxpayer as well
as that of each particular trade or busi-
ness. No trade or business is separate and
distinct unless a complete and separable
set of books and records is kept for that
trade or business.
(2) Section 1.446–1(d)(3) provides that
if, by reason of maintaining different
methods of accounting, there is a creation
or shifting of profits or losses between the
trades or businesses of the taxpayer (for
example, through inventory adjustments,
sales, purchases, or expenses) so that
income of the taxpayer is not clearly
reflected, the trades or businesses of the
taxpayer are not separate and distinct.
.09Penalties. Any otherwise appli-
cable penalty, addition to the tax, or addi-
tional amount 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 taxpayer
does not timely file a request to change a
method of accounting.See§446(f). Addi-
tionally, the taxpayer’s return preparer
may also be subject to the preparer pen-
alty under§6694. However, penalties,
additions to the tax, or additional amounts
will not be imposed when a taxpayer
changes from an impermissible method of
accounting to a permissible one by com-
plying with all applicable provisions of
this revenue procedure.
.10Change made as part of an exami-
nation. Sections 446(b) and 1.446–1(b)(1)
provide that if a taxpayer does not regu-
larly employ a method of accounting that
clearly reflects its income, the computa-
tion of taxable income must be made in a
manner that, in the opinion of the Com-
missioner, does clearly reflect income. If
a taxpayer under examination is not eli-
gible to change a method of accounting
under this revenue procedure, the change
may be made by the director. A change
resulting in a positive§481(a) adjustment
will ordinarily be made in the earliest tax-
able year under examination with a one-
year§481(a) adjustment period.
.11Significant changes. Significant
changes to Rev. Proc. 99–49 include:
(1) The term“applicable provisions”is
now defined in new section 3.02.
(2) The term“director”as defined in
section 3.11 of this revenue procedure
replaces the term“district director”as
defined in section 3.11 of Rev. Proc.
99–49.
(3) The scope exclusion in section
4.02(7), relating to a taxpayer engaging in
transactions to which§381(a) applies,
has been narrowed to exclude certain
transactions under§381(a).
(4) The consent provisions of section
6.01 have been clarified.
(5) A new section 6.02(1), clarifying
the form and content of applications, has
been added.
(6) The instructions in section
6.02(6)(c) for hand delivery of applica-
tions to the national office have been
modified.
(7) A new section 6.02(9) has been
added, which provides that where a par-
ticular change waives the scope limita-
tions of section 4.02 of this revenue pro-
cedure, a taxpayer making such a change
that is under examination, before an
appeals office, or before a federal court is
required to provide a copy of its applica-
tion to the examining agent(s), appeals
officer(s), or counsel(s) for the govern-
ment, as appropriate. This requirement
was repeated throughout the APPENDIX
of Rev. Proc. 99–49 in each of the various
changes that waived the scope limitations
of section 4.02. The addition of new sec-
tion 6.02(9) consolidates these various
requirements into a single uniform provi-
sion, and allows the requirements to be
removed throughout the APPENDIX.
(8) A new section 6.03(5) has been
added, permitting a taxpayer under
examination to change its method of
accounting under this revenue procedure
if the APPENDIX of this revenue proce-
dure provides that the audit protection
provisions of section 7 of this revenue
procedure do not apply to the change
made by the taxpayer.
(9) A new section 9.02, relating to tax-
payers that have made a change in
method of accounting without complying
with all the applicable provisions of this
revenue procedure, has been added.
(10) Section 10.02(2) has been
expanded to clarify the procedures appli-
cable to a taxpayer that does not qualify
for automatic consent procedures of this
revenue procedure because the taxpayer
has failed to provide on a timely basis the
additional information requested by the
national office.
(11) Section 10.04(1) has been
expanded to clarify that in no event will
an application under this revenue proce-
dure be treated as an application under
Rev. Proc. 97–27 (or any successor).
(12) The first sentence of section
13.02, relating to the transition rules, has
been rephrased to express more clearly
the intended scope of the rule.
(13) Section 4.01 of the APPENDIX is
modified to include certain additional
uniform capitalization (UNICAP)
changes by resellers.
(14) Section 5.01 of the APPENDIX is
modified to allow certain taxpayers pro-
ducing real or tangible personal property
to change from the cash receipts and dis-
bursements method or a hybrid method to
an overall accrual method (or to the over-
all accrual method in conjunction with the
recurringitemexceptionunder
§461(h)(3)).
(15) Section 8.01 is modified by the
removal of provisions relating to bonuses,
which are transferred to section 4B.02 of
the APPENDIX.
(16) Section 8.02 of the APPENDIX is
modified to include personal property
taxes and state income taxes.
(17) Section 13.02 of the APPENDIX
is modified to be applicable to all cash
method banks.
2002–3 I.R.B.336January 22, 2002

(18) The following changes in method
of accounting have been added to the
APPENDIX of this revenue procedure:
(a) Section 1 of the APPENDIX,
relating to Commodity Credit Corpora-
tion loans.
(b) Section 1A.03 of the APPEN-
DIX, relating to aircraft maintenance
costs.
(c) Section 1A.04 of the APPEN-
DIX, relating to ISO 9000 costs.
(d) Section 1A.05 of the APPEN-
DIX, relating to railroad track structure
expenditures.
(e) Section 1A.06 of the APPEN-
DIX, relating to restaurant smallwares.
(f) Section 1B.01 of the APPEN-
DIX, relating to bad debts.
(g) Section 2.04 of the APPENDIX,
relating to golf course greens.
(h) Section 2B of the APPENDIX,
relating to computer software expendi-
tures.
(i) Section 3.03 of the APPENDIX,
relating to costs of retiring or removing
depreciable assets.
(j) Section 4.02 of the APPENDIX,
relating to uniform capitalization (UNI-
CAP) changes by producers of real or
tangible personal property.
(k) Section 4.03 of the APPENDIX,
relating to uniform capitalization (UNI-
CAP) changes by taxpayers engaged in a
farming business.
(l) Section 4.04 of the APPENDIX,
relating to capitalization of research and
experimental expenditures into inventory
under uniform capitalization (UNICAP).
(m) Section 4A.01 of the APPEN-
DIX, relating to the disallowance or
deferral under§267 of certain deductions
attributable to transactions between
related taxpayers.
(n) Section 4B.02 of the APPEN-
DIX, relating to bonuses and vacation
pay.
(o) Section 5.05 of the APPENDIX,
relating to the use of the cash and dis-
bursements method of accounting by cer-
tain small taxpayers.
(p) Section 5.06 of the APPENDIX,
relating to the nonaccrual experience
method.
(q) Section 5A.02 of the APPEN-
DIX, relating to cash advances of insur-
ance commissions.
(r) Section 5A.03 of the APPEN-
DIX, relating to advance rentals.
(s) Sections 7A.01 and 7A.02 of the
APPENDIX, relating to long-term con-
tracts.
(t) Section 8.06 of the APPENDIX,
relating to distribution fees of open-end
regulated investment companies.
(u) Section 9.03 of the APPENDIX,
relating to an exemption for certain small
taxpayers from the requirement to main-
tain inventories.
(v) Section 9.04 of the APPENDIX,
relating to payments made or received on
“floor stocks.”
(w) Section 9.05 of the APPEN-
DIX, relating to volume related trade dis-
counts.
(x) Section 9.06 of the APPENDIX,
relating to certain impermissible methods
of inventory valuation.
(y) Section 10.04 of the APPEN-
DIX, relating to the used vehicle alterna-
tive LIFO method.
(z) Section 10.06 of the APPEN-
DIX, relating to changes to the inventory
price index computation (IPIC) method.
(aa) Section 10.07 of the APPEN-
DIX, relating to changes within the
inventory price index computation (IPIC)
method.
(bb) Section 11A.01 of the APPEN-
DIX, relating to transactions involving
computer programs.
(cc) Section 11B.01 of the APPEN-
DIX, relating to functional currency
changes.
(19) The following changes in method
of accounting have been removed from
the APPENDIX of this revenue proce-
dure:
(a) Section 8A of the APPENDIX
of Rev. Proc. 99–49, relating to rental
agreements.
(b) Section 10A.01 of the APPEN-
DIX of Rev. Proc. 99–49, relating to
mark-to-market accounting for nonfinan-
cial customer paper.
(c) Section 12A.02 of the APPEN-
DIX of Rev. Proc. 99–49, relating to
pools of debt instruments.
SECTION 3. DEFINITIONS
.01Application. The term“applica-
tion”includes a Form 3115, or any state-
ment that is authorized under the APPEN-
DIX of this revenue procedure to be filed
in lieu of a Form 3115, and any attach-
ments.
.02Applicable provisions. The term
“applicable provisions”means all provi-
sions of this revenue procedure pertinent
to the taxpayer or its requested change,
including but not limited to:
(1) the scope requirements and limi-
tations of section 4 of this revenue proce-
dure;
(2) the terms and conditions of
change in section 5 of this revenue proce-
dure;
(3) the requirements regarding the
form and content of an application in sec-
tion 6 of this revenue procedure;
(4) the filing requirements of section
6 of this revenue procedure; and
(5) the APPENDIX of this revenue
procedure, including
(a) the available changes in method
of accounting;
(b) any restrictions on the availabil-
ity of a requested change to the taxpayer
(including provisions that render the
change inapplicable to the taxpayer); and
(c) any special terms and conditions
applicable to a change, such as the use of
a cut-off method or a§481(a) adjust-
ment, the spread period for any§481(a)
adjustment, and the year of change.
.03Taxpayer.
(1)In general. The term“taxpayer”
has the same meaning as the term“per-
son”defined in§7701(a)(1) (rather than
the meaning of the term“taxpayer”
defined in§7701(a)(14)).
(2)Consolidated group. For purposes
of (a) sections 3.08(1), 3.09(1), and
4.02(1) of this revenue procedure (tax-
payer under examination), (b) sections
3.09(2) and 4.02(2) of this revenue proce-
dure (taxpayer before an appeals office),
or (c) sections 3.09(3) and 4.02(3) of this
revenue procedure (taxpayer before a fed-
eral court), the term“taxpayer”includes a
consolidated group.
.04Timely mailing as timely filing.
Under the provisions of section 7502, any
form (including an application), state-
ment, or other document required to be
filed under this revenue procedure is con-
sidered timely filed if it is timely post-
marked and mailed, postage prepaid, to
the proper address (or an address similar
enough to complete delivery). If these
requirements are met, the date of filing is
the date of the U.S. postmark or the appli-
cable date recorded or marked by a desig-
nated private delivery service.SeeNotice
January 22, 20023372002–3 I.R.B.

2001–62 (2001–40, I.R.B. 307). If the
requirements of section 7502 are not met,
the form, statement, or other document is
considered filed on the date it is delivered
to the Service.
.05Timely performance of acts. The
rules of§7503 apply when the last day
for the taxpayer’s timely performance of
any act (for example, filing an application
or submitting additional information) falls
on a Saturday, Sunday, or legal holiday.
The performance of any act is timely if
the act is performed on the next succeed-
ing day that is not a Saturday, Sunday, or
legal holiday.
.06Year of change. The year of change
is the taxable year for which a change in
method of accounting is effective, that is,
the first taxable year the new method is to
be used, even if no affected items are
taken into account for that year.
.07Section 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. The applicable adjust-
ment periods are set forth in section 5.04
of this revenue procedure.
.08Under examination.
(1)In general.
(a) Except as provided in section
3.08(2) of this revenue procedure, an
examination of a taxpayer with respect to
a federal income tax return begins on the
date the taxpayer is contacted in any man-
ner by a representative of the Service for
the purpose of scheduling any type of
examination of the return. An examina-
tion ends:
(i) in a case in which the Service
accepts the return as filed, on the date of
the“no change”letter sent to the tax-
payer;
(ii) in a fully agreed case, on the
earliest of the date the taxpayer executes
a waiver of restrictions on assessment or
acceptance of overassessment (for
example, Form 870, 4549, or 4605), the
date the taxpayer makes a payment of tax
that equals or exceeds the proposed defi-
ciency, or the date of the“closing”letter
(for example, Letter 891(IN) or 987(DO))
sent to the taxpayer; or
(iii) in an unagreed or a partially
agreed case, on the earliest of the date the
taxpayer (or its representative) is notified
by Appeals that the case has been referred
by the examining agent(s) to Appeals, the
date the taxpayer files a petition in the
Tax Court, the date on which the period
for filing a petition with the Tax Court
expires, or the date of the notice of claim
disallowance.
(b) An examination does not end as a
result of the early referral of an issue to
Appeals under the provisions of Rev.
Proc. 99–28 (1999–2 C.B. 109).
(c) An examination resumes on the
date the taxpayer (or its representative) is
notified by Appeals (or otherwise) that
the case has been referred to the examin-
ing agent(s) for reconsideration.
(2)Partnerships and S corporations
subject to TEFRA. For an entity (includ-
ing a limited liability company), treated
as a partnership or an S corporation for
federal income tax purposes, that is sub-
ject to the TEFRA unified audit and liti-
gation provisions for partnerships and S
corporations, an examination begins on
the date of the notice of the beginning of
an administrative proceeding sent to the
Tax Matters Partner/Tax Matters Person
(TMP). An examination ends:
(a) in a case in which the Service
accepts the partnership or S corporation
return as filed, on the date of the“no
adjustments”letter or the“no change”
notice of final administrative adjustment
sent to the TMP;
(b) in a fully agreed case, when all
the partners, members, or shareholders
execute a Form 870–P, 870–L, or 870–S;
or
(c) in an unagreed or a partially
agreed case, on the earliest of the date the
TMP (or its representative) is notified by
Appeals that the case has been referred by
the examining agent(s) to Appeals, the
date the TMP (or a partner, member, or
shareholder) requests judicial review, or
the date on which the period for request-
ing judicial review expires. But see sec-
tion 4.02(5) of this revenue procedure for
certain rules that preclude an entity from
requesting a change in accounting
method. Also note that S corporations are
not subject to the TEFRA unified audit
and litigation provisions for taxable years
beginning after December 31, 1996.See
Small Business Job Protection Act of
1996, Pub. L. No. 104–188,§1317(a),
110 Stat. 1755, 1787 (1996).
.09Issue under consideration.
(1)Under examination. A taxpayer’s
method of accounting for an item is an
issue under consideration for the taxable
years under examination if the taxpayer
receives written notification (for example,
by examination plan, information docu-
ment request (IDR), or notification of
proposed adjustments or income tax
examination changes) from the examining
agent(s) specifically citing the treatment
of the item as an issue under consider-
ation. For example, a taxpayer’s method
of pooling under the dollar-value, last-in,
first-out (LIFO) inventory method is an
issue under consideration as a result of an
examination plan that identifies LIFO
pooling as a matter to be examined, but it
is not an issue under consideration as a
result of an examination plan that merely
identifies LIFO inventories as a matter to
be examined. Similarly, a taxpayer’s
method of determining inventoriable
costs under§263A is an issue under con-
sideration as a result of an IDR that
requests documentation supporting the
costs included in inventoriable costs, but
it is not an issue under consideration as a
result of an IDR that requests documenta-
tion supporting the amount of cost of
goods sold reported on the return. The
question of whether a method of account-
ing is an issue under consideration may
be referred to the national office as a
request for technical advice under the
provisions of Rev. Proc. 2001–2 (2001–1
I.R.B. 79) (or any successor).
(2)Before an appeals office. A taxpay-
er’s method of accounting for an item is
an issue under consideration for the tax-
able years before an appeals office if the
treatment of the item is included as an
item of adjustment in the examination
report referred to Appeals or is specifi-
cally identified in writing to the taxpayer
by Appeals.
(3)Before a federal court. A taxpay-
er’s method of accounting for an item is
an issue under consideration for the tax-
able years before a federal court if the
treatment of the item is included in the
statutory notice of deficiency, the notice
of claim disallowance, the notice of final
administrative adjustment, the pleadings
2002–3 I.R.B.338January 22, 2002

(for example, the petition, complaint, or
answer) or amendments thereto, or is spe-
cifically identified in writing to the tax-
payer by the counsel for the government.
.10Change within the LIFO inventory
method. A change within the LIFO inven-
tory method is a change from one LIFO
inventory method or sub-method to
another LIFO inventory method or sub-
method. A change within the LIFO inven-
tory method does not include a change in
method of accounting that could be made
by a taxpayer that does not use the LIFO
inventory method (for example, a method
governed by§471 or 263A).
.11Director. The term“director”has
the same meaning as this term has in Rev.
Proc. 2001–1 (2001–1 I.R.B. 1) (or any
successor).
SECTION 4. SCOPE
.01Applicability. This revenue proce-
dure applies to a taxpayer requesting the
Commissioner’s consent to change to a
method of accounting described in the
APPENDIX of this revenue procedure.
This revenue procedure is the exclusive
procedure for a taxpayer within its scope
to obtain the Commissioner’s consent.
.02Inapplicability. Except as other-
wise provided in the APPENDIX of this
revenue procedure (see, for example, sec-
tion 1.01 of the APPENDIX of this rev-
enue procedure), this revenue procedure
does not apply in the following situations:
(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 pro-
vided in section 3.08 of this revenue pro-
cedure), except as provided in sections
6.03(2) (90–day window), 6.03(3) (120-
day window), 6.03(4) (director consent)
and 6.03(5) (changes lacking audit pro-
tection) of this revenue procedure;
(2)Before an appeals office. If, on the
date the taxpayer would otherwise file a
copy of the application with the national
office, the taxpayer is before an appeals
office with respect to any income tax
issue and the method of accounting to be
changed is an issue under consideration
by the appeals office (as provided in sec-
tion 3.09(2) of this revenue procedure);
(3)Before a federal court. If, on the
date the taxpayer would otherwise file a
copy of the application with the national
office, the taxpayer is before a federal
court with respect to any income tax issue
and the method of accounting to be
changed is an issue under consideration
by the federal court (as provided in sec-
tion 3.09(3) of this revenue procedure);
(4)Consolidated group member.A
corporation that is (or was formerly) a
member of a consolidated group is under
examination, before an appeals office, or
before a federal court (for purposes of
sections 4.02(1), (2), and (3) of this rev-
enue procedure) if the consolidated group
is under examination, before an appeals
office, or before a federal court for a tax-
able year(s) that the corporation was a
member of the group;
(5)Partnerships and S corporations.
For an entity (including a limited liability
company) treated as a partnership or an S
corporation for federal income tax pur-
poses, if, on the date the entity would oth-
erwise file a copy of the application with
the national office, the entity’s accounting
method to be changed is an issue under
consideration in an examination of a part-
ner, member, or shareholder’s federal
income tax return or an issue under con-
sideration by an appeals office or by a
federal court with respect to a partner,
member, or shareholder’s federal income
tax return;
(6)Prior change. If the taxpayer,
within the last five taxable years (includ-
ing the year of change), (a) has made a
change in the same method of accounting
(with or without obtaining the Commis-
sioner’s consent), or (b) has applied to
change the same method of accounting
without effecting the change (whether, for
example, the application to change was
withdrawn, not perfected, not granted, or
denied). For purposes of this paragraph
4.02(6), a change in method of account-
ing does not include the adoption of a
method of accounting in the initial tax
return of a taxpayer or in the first taxable
year in which the taxpayer has the item to
which the method of accounting relates;
(7)Section 381(a) transaction. Except
as otherwise provided in this section
4.02(7), if the taxpayer engages in a
transaction to which§381(a) applies
within the proposed taxable year of
change (determined without regard to any
potential closing of the year under
§381(b)(1)).
(a)No differences in methods.An
acquiring corporation may change its
method of accounting pursuant to this
revenue procedure if the acquiring corpo-
ration would be permitted to continue to
use its prior method of accounting under
the rules of§§1.381(c)(4)–1(b)(1) and
(3)(i) (taking into account the third sen-
tence of§1.381(c)(4)–1(b)(4) relating to
no prior method established by a party to
the transaction) or§§1.381(c)(5)–1(b)(1)
and (3)(i) (taking into account the second
sentence of§1.381(c)(5)–1(b)(4)(i) relat-
ing to no prior inventory method estab-
lished by a party to the transaction)
because all of the parties to the transac-
tion used the same method of accounting
on the date of distribution or transfer. The
change pursuant to this revenue proce-
dure is ignored for purposes of determin-
ing whether on the date of distribution or
transfer the parties to the transaction used
the same methods of accounting under
1.381(c)(4)–1(b) or§1.381(c)(5)–1(b),
and thus§§1.381(c)(4)–1(b)(3)(ii) and
(c) and§§1.381(c)(5)–1(b)(3)(ii) and (c)
will not apply.
(b)Separate trades or businesses.An
acquiring corporation may change pursu-
ant to this revenue procedure a method of
accounting used by a trade or business
operated by such corporation if the trade
or business would be permitted to con-
tinue to use its prior method of account-
ing under the rules of§§1.381(c)(4)–
1(b)(2) or§§1.381(c)(5)–1(b)(2). The
change pursuant to this revenue proce-
dure is ignored for purposes of determin-
ing whether on the date of distribution or
transfer the parties to the transaction used
the same methods of accounting under
§1.381(c)(4)–1(b) or§1.381(c)(5)–1(b),
and thus§§1.381(c)(4)–1(b)(3) and (c)
and§§1.381(c)(5)–1(b)(3) and (c) will
not apply.
(8)Final year of trade or business.If
the taxpayer would be required by section
5.04(3)(c) of this revenue procedure to
take the entire amount of the§481(a)
adjustment into account in computing
taxable income for the year of change.
.03Nonautomatic changes. If a tax-
payer is precluded by other than sections
4.02(1) through 4.02(5) of this revenue
procedure from using this revenue proce-
dure to make a change in method of
accounting, the taxpayer requesting such
a change must file a Form 3115 with the
Commissioner in accordance with the
requirements of§1.446–1(e)(3)(i) and
January 22, 20023392002–3 I.R.B.

Rev. Proc. 97–27 (1997–1 C.B. 680) (or
any other applicable Code, regulation, or
administrative provision).
SECTION 5. TERMS AND
CONDITIONS OF CHANGE
.01In general. An accounting method
change filed under this revenue procedure
must be made pursuant to the terms and
conditions provided in this revenue pro-
cedure.
.02Year of change. The year of change
is the taxable year designated on the
application and for which the application
is timely filed under section 6.02(3).
.03Section 481(a) adjustment. Unless
otherwise provided in this revenue proce-
dure, a taxpayer making a change in
method of accounting under this revenue
procedure must take into account a
§481(a) adjustment in the manner pro-
vided in section 5.04 of this revenue pro-
cedure.
.04Section 481(a) adjustment period.
(1)In general. Except as otherwise
provided in section 5.04(3) or the
APPENDIX of this revenue procedure,
the§481(a) adjustment period for posi-
tive and negative§481(a) adjustments is
four taxable years.
(2)Short period as a separate taxable
year. If the year of change, or any taxable
year during the§481(a) adjustment
period, is a short taxable year, the
§481(a) adjustment must be included in
income as if that short taxable year were
a full 12–month taxable year.SeeRev.
Rul. 78–165 (1978–1 C.B. 276).
Example 1. A calendar year taxpayer received
permission to change an accounting method begin-
ning with the 2001 calendar year. The§481(a)
adjustment is $30,000 and the adjustment period is
four taxable years. The taxpayer subsequently
receives permission to change its annual accounting
period to September 30, effective for the taxable
year ending September 30, 2002. The taxpayer must
include $7,500 of the§481(a) adjustment in gross
income for the short period from January 1, 2002,
through September 30, 2002.
Example 2. Corporation X, a calendar year tax-
payer, received permission to change an accounting
method beginning with the 2001 calendar year. The
§481(a) adjustment is $30,000 and the adjustment
period is four taxable years. On July 1, 2003, Cor-
porationZacquires CorporationXin a transaction to
which§381(a) applies. CorporationZis a calendar
year taxpayer that uses the same method of account-
ing to which CorporationXchanged in 2001. Cor-
porationXmustinclude$7,500ofthe
§481(a) adjustment in gross income for its short
period income tax return for January 1, 2003,
through June 30, 2003. In addition, CorporationZ
must include $7,500 of the§481(a) adjustment in
gross income in its income tax return for calendar
year 2003.
(3)Shortened or accelerated adjust-
ment periods. The§481(a) adjustment
period provided in section 5.04(1) or the
APPENDIX of this revenue procedure
will be shortened or accelerated in the
following situations.
(a)De minimis rule. A taxpayer
may elect to use a one-year adjustment
period in lieu of the§481(a) adjustment
period otherwise provided by this revenue
procedure if the entire§481(a) adjust-
ment is less than $25,000 (either positive
or negative). A taxpayer makes an elec-
tion under thisde minimisrule by so indi-
cating on the application. For example,
for a taxpayer filing a Form 3115, the tax-
payer must complete the appropriate line
on the Form 3115 to elect thisde minimis
rule.
(b)Cooperatives. A cooperative
within the meaning of§1381(a) generally
must take the entire amount of a§481(a)
adjustment into account in computing
taxable income for the year of change.
SeeRev. Rul. 79–45 (1979–1 C.B. 284).
(c)Ceasing to engage in the trade
or business or terminating existence.
(i)In general. A taxpayer that
ceases to engage in a trade or business or
terminates its existence must take the
remaining balance of any§481(a) adjust-
ment relating to the trade or business into
account in computing taxable income in
the taxable year of the cessation or termi-
nation. Except as provided in sections
5.04(3)(c)(iv) and (v) of this revenue pro-
cedure, a taxpayer is treated as ceasing to
engage in a trade or business if the opera-
tions of the trade or business cease or
substantially all the assets of the trade or
business are transferred to another tax-
payer. For this purpose,“substantially all”
has the same meaning as in section 3.01
of Rev. Proc. 77–37 (1977–2 C.B. 568).
(ii)Examples of transactions that
are treated as the cessation of a trade or
business. The following is a nonexclusive
list of transactions that are treated as the
cessation of a trade or business for pur-
poses of accelerating the§481(a) adjust-
ment under section 5.04(3)(c) of this rev-
enue procedure:
(A) the trade or business to
which the§481(a) adjustment relates is
incorporated;
(B) the trade or business to
which the§481(a) adjustment relates is
purchased by another taxpayer in a trans-
action to which§1060 applies;
(C) the trade or business to
which the§481(a) adjustment relates is
terminated or transferred pursuant to a
taxable liquidation;
(D) a division of a corporation
ceases to operate the trade or business to
which the§481(a) adjustment relates; or
(E) the assets of a trade or busi-
ness to which the§481(a) adjustment
relates are contributed to a partnership.
(iii)Conversion to or from S corpo-
ration status. Except as provided in sec-
tion 10.01 of the APPENDIX of this rev-
enue procedure, no acceleration of a
§481(a) adjustment is required under sec-
tion 5.04(3)(c) of this revenue procedure
when a C corporation elects to be treated
as an S corporation or an S corporation
terminates its S election and is then
treated as a C corporation.
(iv)Certain transfers to which
§381(a) applies. No acceleration of the
§481(a) adjustment is required under sec-
tion 5.04(3)(c) of this revenue procedure
when a taxpayer transfers substantially all
the assets of the trade or business that
gave rise to the§481(a) adjustment to
another taxpayer in a transfer to which
§381(a) applies and the accounting
method (the change to which gave rise to
the§481(a) adjustment) is a tax attribute
that is carried over and used by the
acquiring corporation immediately after
the transfer pursuant to§381(c). The
acquiring corporation is subject to any
terms and conditions imposed on the
transferor (or any predecessor of the
transferor) as a result of its change in
method of accounting.
(v)Certain transfers pursuant to
§351 within a consolidated group.
(A)In general. No acceleration of
the§481(a) adjustment is required under
section 5.04(3)(c) of this revenue proce-
dure when one member of an affiliated
group filing a consolidated return trans-
fers substantially all the assets of the
trade or business that gave rise to the
§481(a) adjustment to another member of
the same consolidated group in an
exchange qualifying under§351 and the
transferee member adopts and uses the
same method of accounting (the change
2002–3 I.R.B.340January 22, 2002

to which gave rise to the§481(a) adjust-
ment) used by the transferor member. The
transferor member must continue to take
the§481(a) adjustment into account pur-
suant to the terms and conditions set forth
in this revenue procedure. The transferor
member must take into account activities
of the transferee member (or any succes-
sor) in determining whether acceleration
of the§481(a) adjustment is required.
For example, except as provided in the
following sentence, the transferor mem-
ber must take any remaining§481(a)
adjustment into account in computing
taxable income in the taxable year in
which the transferee member ceases to
engage in the trade or business to which
the§481(a) adjustment relates. The
§481(a) adjustment is not accelerated
when the transferee member engages in a
transaction described in section
5.04(3)(c)(iv) or 5.04(3)(c)(v)(A) of this
revenue procedure.
(B)Exception. The provisions of
section 5.04(3)(c)(v)(A) of this revenue
procedure cease to apply and the transf-
eror member must take any remaining
balance of the§481(a) adjustment into
account in the taxable year immediately
preceding any of the following: (1) the
taxable year the transferor member ceases
to be a member of the group; (2) the tax-
able year any transferee member owning
substantially all the assets of the trade or
business which gave rise to the§481(a)
adjustment ceases to be a member of the
group; or (3) a separate return year of the
common parent of the group. In applying
the preceding sentence, the rules of para-
graphs(j)(2),(j)(5),and(j)(6)of
§1.1502–13 apply, but only if the method
of accounting to which the transferor
member changed and to which the
§481(a) adjustment relates is adopted,
carried over, or used by any transferee
member acquiring the assets of the trade
or business that gave rise to the§481(a)
adjustment immediately after acquisition
of such assets. For example, the transferor
member is not required to accelerate the
§481(a) adjustment if a transferee mem-
ber ceases to be a member of a consoli-
dated group by reason of an acquisition to
which§381(a) applies and the acquiring
corporation (1) is a member of the same
group as the transferor member, and (2)
continues, under§381(c)(4) and the
regulations thereunder, to use the same
method of accounting as that used by the
transferor member with respect to the
assets of the trade or business to which
the§481(a) adjustment relates.
.05NOL carryback limitation for tax-
payer subject to criminal investigation.
Generally, no portion of any net operating
loss that is attributable to a negative
§481(a) adjustment may be carried back
to a taxable year prior to the year of
change that is the subject of any pending
or future criminal investigation or pro-
ceeding concerning (1) directly or indi-
rectly, any issue relating to the taxpayer’s
federal tax liability, or (2) the possibility
of false or fraudulent statements made by
the taxpayer with respect to any issue
relating to its federal tax liability.
.06Change treated as initiated by the
taxpayer. For purposes of§481, a change
in method of accounting made under this
revenue procedure is a change in method
of accounting initiated by the taxpayer.
SECTION 6. GENERAL
APPLICATION PROCEDURES
.01Consent. Pursuant to§1.446–
1(e)(2)(i), the consent of the Commis-
sioner is hereby granted to any taxpayer
within the scope of this revenue proce-
dure to change its method(s) of account-
ing as described in the APPENDIX to this
revenue procedure. Such consent is
granted only for the change(s) of account-
ing method and the affected item(s) that
are clearly and expressly identified in the
taxpayer’s application. Such consent is
granted only to the extent that the tax-
payer complies with all the applicable
provisions of this revenue procedure and
implements the change in method of
accounting for the requested year of
change.
.02Filing requirements.
(1)Applications.
(a)Form. Ordinarily, a taxpayer
applies for consent to change a method of
accounting pursuant to this revenue pro-
cedure by completing a Form 3115. In
some cases, however, the provisions of
this revenue procedure applicable to a
particular change may require or allow a
taxpayer to file a statement in lieu of a
Form 3115 as an application for consent
to make such change. See, for example,
§5.02 of the APPENDIX of this revenue
procedure.
(b)Separate applications. Ordinarily,
a taxpayer must submit a separate appli-
cation for each change in method of
accounting. In some cases, however, the
provisions of this revenue procedure
applicable to particular changes may
require or allow a taxpayer to file a single
application with respect to two or more
changes. See, for example,§5.05 of the
APPENDIX of this revenue procedure.
(c)Contents. The taxpayer must sub-
mit a complete and accurate application.
The application must clearly and
expressly identify the method(s) of
accounting to be changed and the item(s)
to which the change(s) applies.
(2)Waiver of taxable year filing
requirement.Therequirementunder
§1.446–1(e)(3)(i) to file a Form 3115
within the taxable year for which the
change is requested is waived for any
application for a change in method of
accounting filed pursuant to this revenue
procedure.See§1.446–1(e)(3)(ii).
(3)Timely duplicate filing require-
ment.
(a)In general. A taxpayer changing a
method of accounting pursuant to this
revenue procedure must complete and file
an application in duplicate. The original
must be attached to the taxpayer’s timely
filed (including extensions) original fed-
eral income tax return for the year of
change, and a copy (with signature) of the
application must be filed with the national
office (see section 6.02(6) of this revenue
procedure for the address) no earlier than
the first day of the year of change and no
later than when the original is filed with
the federal income tax return for the year
of change.
(b)Limited relief for late application.
(i)Automatic extension. An auto-
matic extension of 6 months from the due
date of the return for the year of change
(excluding extensions) is granted to file
an application, provided the taxpayer (A)
timely filed (including extensions) its fed-
eral income tax return for the year of
change, (B) files an amended return
within the 6–month extension period in a
manner that is consistent with the new
method of accounting, (C) attaches the
original application to the amended
return, (D) files a copy of the application
with the national office no later than
when the original is filed with the
amended return, and (E) writes at the top
January 22, 20023412002–3 I.R.B.

of the application“FILED PURSUANT
TO§301.9100–2.”
(ii)Other extensions. A taxpayer
that fails to file the application for the
year of change as provided in section
6.02(3)(a) or 6.02(3)(b)(i) of this revenue
procedure will not be granted an exten-
sion of time to file under§301.9100 of
the Procedure and Administration Regula-
tions, except in unusual and compelling
circumstances.See§301.9100–3(c)(2).
(4)Label.
(a) In order to assist in processing an
application under this revenue procedure,
the section of the APPENDIX of this rev-
enue procedure describing the specific
change in method of accounting should
be included in the application. For
example, a phrase such as“Section 1.01
of the APPENDIX of Rev. Proc. 2002–9”
should be included on the appropriate line
on the Form 3115.
(b) If a taxpayer is authorized under
the APPENDIX of this revenue procedure
to file a statement in lieu of a Form 3115,
the taxpayer must include the taxpayer’s
name and employer identification number
(or social security number in the case of
an individual) at the top of the first page
of the statement underneath any other
required label.
(5)Signature requirements. The copy
of the application must be signed by, or
on behalf of, the taxpayer requesting the
change by an individual with authority to
bind the taxpayer in such matters. For
example, an officer must sign on behalf
of a corporation, a general partner on
behalf of a state law partnership, a
member-manager on behalf of a limited
liability company, a trustee on behalf of a
trust, or an individual taxpayer on behalf
of a sole proprietorship. If the taxpayer is
a member of a consolidated group, an
application submitted on behalf of the
taxpayer must be signed by a duly autho-
rized officer of the common parent. See
the signature requirements set forth in the
General Instructions attached to a current
Form 3115 regarding those who are to
sign. If an agent is authorized to represent
the taxpayer before the Service, receive
the original or a copy of the correspon-
dence concerning the application, or per-
form any other act(s) regarding the appli-
cation filed on behalf of the taxpayer, a
power of attorney reflecting such authori-
zation(s) must be attached to the copy of
the application. In addition, the taxpayer
must attach to the application either a
power of attorney reflecting such authori-
zation(s) or a statement thoroughly
describing such authorizations(s). A tax-
payer’s representative without a power of
attorney to represent the taxpayer as indi-
cated in this section will not be given any
information regarding the application.
(6)Where to file copy.
(a) For a taxpayer other than an
exempt organization, the copy of the
application must be addressed to the
Commissioner of Internal Revenue,
Attention: CC:IT&A (Automatic Rulings
Branch), P.O. Box 7604, Benjamin Fran-
klin Station, Washington, D.C. 20044 (or,
in the case of a designated private deliv-
ery service: Commissioner of Internal
Revenue, Attention: CC:IT&A (Auto-
matic Rulings Branch),1111Constitution
Avenue, NW, Washington, D.C. 20224).
(b) For an exempt organization, the
copy of the application must be addressed
to the Commissioner, Tax Exempt and
Government Entities, Attention:
TEGE:EO, P.O. Box 27720, McPherson
Station, Washington, D.C. 20038 (or, in
the case of a designated private delivery
service: Commissioner, Tax Exempt and
Government Entities, Attention:
TEGE:EO,1111Constitution Avenue,
NW, Washington, D.C. 20224).
(c) The copy of the application may
also be hand delivered between the hours
of 7:00 a.m. and 4:00 p.m., to the couri-
er’s desk at the 12th Street entrance of
1111Constitution Avenue, NW, Washing-
ton, D.C. A receipt will be given at the
courier’s desk. For a taxpayer other than
an exempt organization, the copy of the
application must be addressed to the
Commissioner of Internal Revenue,
Attention: CC:IT&A (Automatic Rulings
Branch),1111Constitution Avenue, NW,
Washington, D.C. 20224. For an exempt
organization, the copy of the application
must be addressed to the Commissioner,
Tax Exempt and Government Entities,
Attention: TEGE:EO,1111Constitution
Avenue, NW, Washington, D.C. 20224
(7)No user fee. A user fee is not
required for an application filed under
this revenue procedure, and, except as
provided in section 6.02(6)(c) of this rev-
enue procedure, the receipt of an applica-
tion filed under this revenue procedure
will not be acknowledged.
(8)Single application for certain con-
solidated groups. A parent corporation
may file a single application to change an
identical method of accounting on behalf
of more than one member of a consoli-
dated group. To qualify, the taxpayers in
the consolidated group must be members
of the same affiliated group under
§1504(a) that join in the filing of a con-
solidated tax return, and they must be
changing from the identical present
method of accounting to the identical pro-
posed method of accounting. All aspects
of the change in method of accounting,
including the present and proposed meth-
ods, the underlying facts, and the author-
ity for the change, must be identical,
except for the§481(a) adjustment.See
section 15.07(3) of Rev. Proc. 2001–1
(2001–1 I.R.B. at 53) (or any successor)
for the information required to be submit-
ted with the application.
(9)Additional copies required where
scope restrictions waived. If (a) one or
more of the scope limitation provisions of
section 4.02 this revenue procedure
would otherwise preclude a taxpayer
from making a change under this revenue
procedure, but (b) the scope limitation
provisions of section 4.02 of this revenue
procedure do not apply to the change
sought by the taxpayer (see, for example
section 1.01 of the APPENDIX of this
revenue procedure), and (c) the taxpayer
is under examination (as provided in sec-
tion 3.08 of this revenue procedure),
before an appeals office, or before a fed-
eral court on the date it files the copy of
its application with the national office,
then the taxpayer must provide a copy of
the application to the examining agent(s),
appeals officer(s), or counsel(s) for the
government, as appropriate, at the same
time that it files a copy of the application
with the national office. The application
must contain the name(s) and telephone
number(s) of the examining agent(s),
appeals officer(s) or counsel(s) for the
government, as appropriate.
.03Taxpayer under examination.
(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
2002–3 I.R.B.342January 22, 2002

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), or 6.03(5) (changes lacking audit
protection) of this revenue procedure. A
taxpayer that files an application beyond
the time periods provided in the 90-day
and 120-day windows is not eligible for
the automatic extension of time and will
not be granted an extension of time to file
under§301.9100, except in unusual and
compelling circumstances.
(2)90-day window period.
(a) A taxpayer may file a copy of
the application with the national office to
change a method of accounting under this
revenue procedure during the first
90-days of any taxable year (the“90-day
window”) if the taxpayer has been under
examination for at least 12 consecutive
months as of the first day of the taxable
year. This 90-day window is not available
if the method of accounting the taxpayer
is changing is an issue under consider-
ation at the time the copy of the applica-
tion is filed or an issue the examining
agent(s) has placed in suspense at the
time the copy of the application is filed.
(b) A taxpayer changing a method
of accounting under this 90-day window
must provide a copy of the application to
the examining agent(s) at the same time it
files the copy of the application with the
national office. The application must con-
tain the name(s) and telephone number(s)
of the examining agent(s). The taxpayer
must attach to the application a separate
statement certifying that, to the best of
the taxpayer’s knowledge, the same
method of accounting is not an issue
under consideration or an issue placed in
suspense by the examining agent(s).
(3)120–day window period.
(a) A taxpayer may file a copy of
the application with the national office to
change a method of accounting under this
revenue procedure during the 120-day
period following the date an examination
ends (the“120-day window”), regardless
of whether a subsequent examination has
commenced. This 120-day window is not
available if the method of accounting the
taxpayer is changing is an issue under
consideration at the time a copy of the
application is filed or an issue the exam-
ining agent(s) has placed in suspense at
the time the copy of the application is
filed.
(b) A taxpayer changing a method
of accounting under this 120-day window
must provide a copy of the application to
the examining agent(s) for any examina-
tion that is in process at the same time it
files the copy of the application with the
national office. The application must con-
tain the name(s) and telephone number(s)
of the examining agent(s). The taxpayer
must attach to the application a separate
statement certifying that, to the best of
the taxpayer’s knowledge, the same
method of accounting is not an issue
under consideration or an issue placed in
suspense by the examining agent(s).
(4)Consent of director.
(a) A taxpayer under examination
may change its method of accounting
under this revenue procedure if the direc-
tor consents to the filing of the applica-
tion. The director will consent to the fil-
ing of the application unless, in the
opinion of the director, the method of
accounting to be changed would ordi-
narily be included as an item of adjust-
ment in the year(s) for which the taxpayer
is under examination. For example, the
director will consent to the filing of an
application to change from a clearly per-
missible method of accounting, or from
an impermissible method of accounting
where the impermissible method was
adopted subsequent to the years under
examination. The question of whether the
method of accounting from which the tax-
payer is changing is permissible or was
adopted subsequent to the years under
examination may be referred to the
national office as a request for technical
advice under the provisions of Rev. Proc.
2001–2 (or any successor).
(b) A taxpayer changing a method
of accounting under this revenue proce-
dure with the consent of the director must
attach to the copy of the application a
statement from the director consenting to
the filing of the application. In addition,
the taxpayer must attach to its application
a statement certifying that it has obtained
the written consent of the director to the
filing of the application and that the tax-
payer will maintain a copy of such con-
sent available for inspection. The tax-
payer must provide a copy of the
application to the director at the same
time it files a copy of the application with
the national office. The application must
contain the name(s) and telephone num-
ber(s) of the examining agent(s).
(5)Changes lacking audit protection.
(a) A taxpayer under examination
may change its method of accounting
under this revenue procedure if the
description of the change in the APPEN-
DIX of this revenue procedure provides
that the change is not subject to the audit
protection provisions of section 7 of this
revenue procedure.
(b) A taxpayer changing a method
of accounting under this section 6.03(5)
must provide a copy of the application to
the examining agent(s) for any examina-
tion that is in process at the same time it
files the copy of the application with the
national office. The application must con-
tain the name(s) and telephone number(s)
of the examining agent(s).
.04Taxpayer before an appeals office.
Except as otherwise provided in the
APPENDIX of this revenue procedure
(see, for example, section 1.01 of the
APPENDIX of this revenue procedure), a
taxpayer that is before an appeals office
must attach to the application a separate
statement certifying that, to the best of
the taxpayer’s knowledge, the same
method of accounting is not an issue
under consideration by the appeals office.
The taxpayer must provide a copy of the
application to the appeals officer at the
same time it files a copy of the applica-
tion with the national office. The applica-
tion must contain the name and telephone
number of the appeals officer.
.05Taxpayer before a federal court.
Except as otherwise provided in the
APPENDIX of this revenue procedure
(see, for example, section 1.01 of the
APPENDIX of this revenue procedure), a
taxpayer that is before a federal court
must attach to the application a separate
statement certifying that, to the best of
the taxpayer’s knowledge, the same
method of accounting is not an issue
under consideration by the federal court.
The taxpayer must provide a copy of the
application to the counsel for the govern-
ment at the same time it files a copy of
the application with the national office.
The application must contain the name
January 22, 20023432002–3 I.R.B.

and telephone number of the counsel for
the government.
.06Compliance with provisions.Ifa
taxpayer to which this revenue procedure
applies changes to a method of account-
ing without complying with all the appli-
cable provisions of this revenue proce-
dure (for example, the taxpayer changes
to a method of accounting that varies
from the applicable accounting method
described in this revenue procedure or the
taxpayer is outside the scope of this rev-
enue procedure), the taxpayer has initi-
ated a change in method of accounting
without obtaining the consent of the
Commissioner as required by§446(e).
Seesections 9.02 and 10.04 of this rev-
enue procedure.
SECTION 7. AUDIT PROTECTION
FOR TAXABLE YEARS PRIOR TO
YEAR OF CHANGE
.01In general. Except as provided in
sections 6.03(5) or 7.02 or in the APPEN-
DIX of this revenue procedure, when a
taxpayer timely files a copy of the appli-
cation with the national office in compli-
ance with all the applicable provisions of
this revenue procedure, the Service will
not require the taxpayer to change its
method of accounting for the same item
for a taxable year prior to the year of
change.
.02Exceptions.
(1)Change not made or made
improperly. The Service may change a
taxpayer’s method of accounting for prior
taxable years if (a) the taxpayer fails to
implement the change, (b) the taxpayer
implements the change but does not com-
ply with all the applicable provisions of
this revenue procedure, or (c) the method
of accounting is changed or modified
because there has been a misstatement or
omission of material facts (seesection
8.02(2) of this revenue procedure).
(2)Change in sub-method. The Ser-
vice may change a taxpayer’s method of
accounting for prior taxable years if the
taxpayer is changing a sub-method of
accounting within the method. For
example, an examining agent may pro-
pose to terminate the taxpayer’s use of
the LIFO inventory method during a prior
taxable year even though the taxpayer
changes its method of valuing increments
in the current year.
(3)PrioryearService-initiated
change. The Service may make adjust-
ments to the taxpayer’s returns for the
same item for taxable years prior to the
requested year of change to reflect a prior
year Service-initiated change reported as
an issue pending or in a Revenue Agent’s
Report.
(4)Criminal investigation. The Ser-
vice may change a taxpayer’s method of
accounting for the same item for taxable
years prior to the year of change if there
is any pending or future criminal investi-
gation or proceeding concerning (a)
directly or indirectly, any issue relating to
the taxpayer’s federal tax liability for any
taxable year prior to the year of change,
or (b) the possibility of false or fraudulent
statements made by the taxpayer with
respect to any issue relating to its federal
tax liability for any taxable year prior to
the year of change.
SECTION 8. EFFECT OF CONSENT
.01In general. A taxpayer that changes
to a method of accounting pursuant to this
revenue procedure may be required to
change or modify that method of account-
ing for the following reasons:
(1) the enactment of legislation;
(2) a decision of the United States
Supreme Court;
(3) the issuance of temporary or final
regulations;
(4) the issuance of a revenue ruling,
revenue procedure, notice, or other state-
ment published in the Internal Revenue
Bulletin;
(5) the issuance of written notice to
the taxpayer that the change in method of
accounting is not in accord with the cur-
rent views of the Service; or
(6) a change in the material facts on
which the consent was based.
.02Retroactive change or modifica-
tion. Except in rare or unusual circum-
stances, if a taxpayer that changes its
method of accounting under this revenue
procedure is subsequently required under
section 8.01 of this revenue procedure to
change or modify that method of account-
ing, the required change or modification
will not be applied retroactively, provided
that:
(1) the taxpayer complied with all the
applicable provisions of this revenue pro-
cedure;
(2) there has been no misstatement or
omission of material facts;
(3) there has been no change in the
material facts on which the consent was
based;
(4) there has been no change in the
applicable law; and
(5) the taxpayer to whom consent
was granted acted in good faith in relying
on the consent, and applying the change
or modification retroactively would be to
the taxpayer’s detriment.
SECTION 9. REVIEW BY DIRECTOR
.01In general. The director must
apply a change in method of accounting
made in compliance with all the appli-
cable provisions of this revenue proce-
dure in determining the taxpayer’s liabil-
ity, unless the director recommends that
the change in method of accounting
should be modified or revoked. (See sec-
tion 9.02 of this revenue procedure if a
change in method of accounting is made
without complying with all the applicable
provisions of this revenue procedure.)
The director will ascertain if the change
in method of accounting was made in
compliance with all the applicable provi-
sions of this revenue procedure, including
whether:
(1) the representations on which the
change was based reflect an accurate
statement of the material facts;
(2) the amount of the§481(a) adjust-
ment was properly determined;
(3) the change in method of account-
ing was implemented in compliance with
all the applicable provisions of this rev-
enue procedure.
The director will also ascertain
whether:
(4) there has been any change in the
material facts on which the change was
based during the period the method of
accounting was used; and
(5) there has been any change in the
applicable law during the period the
method of accounting was used.
.02Changes not made in compliance
with all applicable provisions.Ifthe
director determines that the taxpayer has
2002–3 I.R.B.344January 22, 2002

not complied with all of the other appli-
cable provisions of this revenue proce-
dure, the director may:
(1) deny the change in method of
accounting and require the taxpayer to
continue to use the prior method of
accounting;
(2) deny the change in method of
accounting and place the taxpayer on a
proper method of accounting (see section
2.10 of this revenue procedure); or
(3) make any adjustments (including
the amount of any§481(a) adjustment)
that are necessary to bring the change in
method of accounting into compliance
with all applicable provisions of this rev-
enue procedure.
The director may impose any other-
wise applicable penalty, addition to tax,
or additional amount on the understate-
ment of tax attributable to the change in
method of accounting.
.03National office consideration.If
the director recommends that a change in
method of accounting (other than the
§481(a) adjustment) made in compliance
with all the applicable provisions of this
revenue procedure should be modified or
revoked, the director will forward the
matter to the national office for consider-
ation before any further action is taken.
Such a referral to the national office will
be treated as a request for technical
advice, and the provisions of Rev. Proc.
2001–2 (or any successor) will be fol-
lowed.
SECTION 10. REVIEW BY
NATIONAL OFFICE
.01In general. Any application filed
under this revenue procedure may be
reviewed by the national office. If the
application is reviewed by the national
office, the procedures in sections 10.02
through 10.04 of this revenue procedure
apply.
.02Incomplete application.
(1)30-day rule. If the national office
reviews an application and determines
that the application is not properly com-
pleted in accordance with the instructions
of the Form 3115 or the provisions of this
revenue procedure, or if supplemental
information is needed, the national office
will notify the taxpayer. The notification
will specify the information that needs to
be provided, and the taxpayer will be per-
mitted 30 days from the date of the noti-
fication to furnish the necessary informa-
tion. The national office reserves the right
to impose shorter reply periods if subse-
quent requests for additional information
are made. An extension of the 30-day
period to furnish information, not to
exceed 30 days, may be granted to a tax-
payer. A request for an extension of the
30-day period must be made in writing
and submitted within the initial 30–day
period. If the extension request is denied,
there is no right of appeal.
(2)Failure to provide additional
information. Ordinarily, if the taxpayer
fails to provide the additional information
on a timely basis, the application does not
qualify for the automatic consent proce-
dures of this revenue procedure. If the
national office determines that the appli-
cation does not qualify for the automatic
consent procedures of this revenue proce-
dure because the taxpayer has failed to
provide the additional information on a
timely basis, the national office will
notify the taxpayer that consent to make
the change in method of accounting is not
granted.
.03Conference in the national office.
If the national office tentatively deter-
mines that the taxpayer has changed its
method of accounting without complying
with all the applicable provisions of this
revenue procedure (for example, the tax-
payer changed to a method of accounting
that varies from the applicable accounting
method described in this revenue proce-
dure or the taxpayer is outside the scope
of this revenue procedure), the national
office will notify the taxpayer of its tenta-
tive adverse determination and will offer
the taxpayer a conference of right, if the
taxpayer has requested a conference. For
conference procedures for taxpayers other
than exempt organizations, see section 11
of Rev. Proc. 2001–1 (or any successor).
For conference procedures for exempt
organizations, see section 12 of Rev.
Proc. 2001–4, 2001–1 I.R.B. 121 (or any
successor).
.04National office determination.
(1)Consent not granted. Except as
provided in section 10.04(2) of this rev-
enue procedure, if the national office
determines that a taxpayer has changed its
method of accounting without complying
with all the applicable provisions of this
revenue procedure, the national office
will notify the taxpayer that consent to
make the change in method of accounting
is not granted. In no event will an appli-
cation under this revenue procedure be
treated as an application under Rev. Proc.
97–27 (or any successor).
(2)Application changed.Ifthe
national office determines that a taxpayer
has changed its method of accounting
without complying with all the applicable
provisions of this revenue procedure, the
national office, in its discretion, may
allow the taxpayer (a) to make appropri-
ate adjustments to conform its change in
method of accounting to the applicable
provisions of this revenue procedure, and
(b) to make conforming amendments to
any federal income tax returns filed for
the year of change and subsequent taxable
years. Any application changed under
section 10.04(2) of this revenue proce-
dure is subject to review by the director
as provided in section 9 of this revenue
procedure.
SECTION 11. APPLICABILITY OF
REV. PROCS. 2001–1 AND 2001–4
Rev. Procs. 2001–1 and 2001–4(or
any successors) are applicable to applica-
tions filed under this revenue procedure,
unless specifically excluded or overridden
by other published guidance (including
the special procedures in this document).
SECTION 12. INQUIRIES
Inquiries regarding this revenue proce-
dure may be addressed to the Commis-
sioner of Internal Revenue, Attention:
CC:IT&A, 1111 Constitution Avenue,
NW, Washington, D.C. 20224.
SECTION 13. EFFECTIVE DATE
.01In general. Except as provided in
sections 13.02 and 13.03 of this revenue
procedure, this revenue procedure is
effective for taxable years ending on or
after January 7, 2002. The Service will
return any application that is filed on or
after December 31, 2001, if the applica-
tion is filed with the national office pur-
suant to the Code, regulations, or admin-
istrative guidance other than this revenue
procedure and the change in method of
accounting is within the scope of this rev-
enue procedure.
.02Transition rules. If a taxpayer filed
an application or ruling request with the
January 22, 20023452002–3 I.R.B.

national office to make a change in
method of accounting described in the
APPENDIX of this revenue procedure for
a year of change for which this revenue
procedure is effective (see section 13.01
of this revenue procedure), and the appli-
cation or ruling request is pending with
the national office on January 7, 2002, the
taxpayer may make the change under this
revenue procedure. However, the national
office will process the application or rul-
ing request in accordance with the author-
ity under which it was filed, unless prior
to the later of February 15, 2002, or the
issuance of the letter ruling granting or
denying consent to the change, the tax-
payer notifies the national office that it
wants to make the change under this rev-
enue procedure. If the taxpayer timely
notifies the national office that it wants to
make the method change under this rev-
enue procedure, the national office will
require the taxpayer to make appropriate
modifications to the application or ruling
request to comply with the applicable
provisions of this revenue procedure. In
addition, any user fee that was submitted
with the application or ruling request will
be returned to the taxpayer.
.03Special rules.
(1)Certain uniform capitalization
(UNICAP) methods used by taxpayers in
a farming business. For a change in
method of accounting described in sec-
tion 4.03 of the APPENDIX of this rev-
enue procedure, this revenue procedure is
effective for the taxpayer’s first taxable
year ending after August 21, 2000 (in the
case of property that is not inventory in
the hands of the taxpayer), or the first
taxable year beginning after August 21,
2000 (in the case of property that is
inventory in the hands of the taxpayer),
whichever is applicable.
(2)Stated interest on short-term
loans of cash banks. For a change in
method of accounting described in sec-
tion 13.02(1)(a) of the APPENDIX of this
revenue procedure, this revenue proce-
dure is effective for taxable years ending
on or after December 31, 2001, and for
any taxable year ending before December
31, 2000, for which the requirements of
section 13.02(2) of the APPENDIX of
this revenue procedure are satisfied.
SECTION 14. EFFECT ON OTHER
DOCUMENTS
.01 Rev. Proc. 99–49 is clarified,
modified, amplified, and superseded.
.02Reserved
SECTION 15. PAPERWORK
REDUCTION ACT
The collections of information con-
tained in this revenue procedure have
been reviewed and approved by the
Office of Management and Budget in
accordance with the Paperwork Reduc-
tion Act (44 U.S.C. 3507) under control
number 1545–1551. An agency may not
conduct or sponsor, and a person is not
required to respond to, a collection of
information unless the collection of infor-
mation displays a valid OMB control
number.
The collections of information in this
revenue procedure are in sections 6, 10,
and sections 1C, 2, 2B, 3, 4, 5, 5A, 6, 7,
9, 10, 10A, 12, 12A and 13 of the
APPENDIX. This information is neces-
sary and will be used to determine
whether the taxpayer properly changed to
a permitted method of accounting. The
collections of information are required for
the taxpayer to obtain consent to change
its method of accounting. The likely
respondents are the following: individu-
als, farms, business or other for-profit
institutions, nonprofit institutions, and
small businesses or organizations.
The estimated total annual reporting
and/or recordkeeping burden is 13,804
hours.
The estimated annual burden per
respondent/recordkeeper varies from 1/6
hour to 8 1/2 hours, depending on indi-
vidual circumstances, with an estimated
average of 1 1/2 hours. The estimated
number of respondents is 13,195. The
estimated annual frequency of responses
is on occasion.
Books or records relating to a 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.
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 regarding this revenue proce-
dure, contact Mr. Anderson at (202) 622–
4930 (not a toll-free call). For further
information regarding the APPENDIX of
this revenue procedure, contact the fol-
lowing individuals (calls are not toll-
free): (1) for changes in method of
accounting under sections 1A.03 and 3.03
of the APPENDIX of this revenue proce-
dure, Merrill D. Feldstein of the Office of
Associate Chief Counsel (Income Tax &
Accounting) at (202) 622–4950; (2) for
changes in method of accounting under
section 1A.05 of the APPENDIX of this
revenue procedure, Kimberly L. Koch of
the Office of Associate Chief Counsel
(Income Tax and Accounting) at (202)
622–5020; (3) for changes in method of
accounting under section 1A.06 of the
APPENDIX of this revenue procedure,
Angella L. Warren of the Office of the
Associate Chief Counsel (Income Tax and
Accounting) at (202) 622–4950; (4) for
changes in methods of accounting under
sections 1C.01 and 12A.01 of the
APPENDIX of this revenue procedure,
Christina Morrison of the Office of Asso-
ciate Chief Counsel (Financial Institu-
tions and Products) at (202) 622–3950;
(5) for changes in methods of accounting
under sections 2.01, 2.02, 2.04 and 2B of
the APPENDIX of this revenue proce-
dure, Douglas Kim of the Office of Asso-
ciate Chief Counsel (Passthroughs and
Special Industries) at (202) 622–3110; (6)
for changes in methods of accounting
under section 2A.01 of the APPENDIX of
this revenue procedure, Lisa Shuman of
the Office of Associate Chief Counsel
(Passthroughs and Special Industries) at
(202) 622–3120; (7) for changes in meth-
ods of accounting under section 4B of the
APPENDIX of this revenue procedure,
Norm Paul of the Office of the Division
Counsel/Associate Chief Counsel (Tax
Exempt and Government Entities) at
(202) 622–6060; (8) for changes in meth-
ods of accounting under sections 5.04, 6,
12, and 13 of the APPENDIX of this rev-
enue procedure, William E. Blanchard of
the Office of Associate Chief Counsel
(Financial Institutions and Products) at
(202) 622–3950; (9) for changes in
method of accounting under sections 5.05
and 9.03, Cheryl Lynn Oseekey of the
Office of Associate Chief Counsel
(Income Tax and Accounting) at (202)
622–4960; (10) for changes in methods of
2002–3 I.R.B.346January 22, 2002

accounting under section 5A.01 of the
APPENDIX of this revenue procedure,
Timothy Sebastian of the Office of Asso-
ciate Chief Counsel (Financial Institu-
tions and Products) at (202) 622–3920;
(11) for changes in methods of account-
ing under section 5A.02 of the APPEN-
DIX of this revenue procedure, Leo F.
Nolan II of the Office of Associate Chief
Counsel (Income Tax and Accounting) at
(202) 622–4970; (12) for changes in
methods of accounting under sections
9.04, 10.06, and 10.07 of the APPENDIX
of this revenue procedure, Jeffery G.
Mitchell or Leo F. Nolan II of the Office
of Associate Chief Counsel (Income Tax
and Accounting) at (202) 622–4930; (13)
for changes in methods of accounting
under section 11 of the APPENDIX of
this revenue procedure, Craig R. Wojay
of the Office of Associate Chief Counsel
(Financial Institutions and Products) at
(202) 622–3920 (not a toll-free call); (14)
for changes in method of accounting
under section 11B of the APPENDIX of
this revenue procedure, Milton Cahn of
the Office of the Associate Chief Counsel
(International) at (202) 622–3870; (15)
for changes in methods of accounting
under section 13.02 of the APPENDIX of
this revenue procedure, William E. Blan-
chard or Marsha A. Sabin of the Office of
the Associate Chief Counsel (Financial
Institutions and Products) at (202) 622–
3950; and for all other sections, Mr.
Anderson at (202) 622–4930.
APPENDIX
CHANGES IN METHODS OF
ACCOUNTING TO WHICH
THISREVENUEPROCEDURE
APPLIES
SECTION 1. COMMODITY CREDIT
LOANS (§77)
.01Treating amounts received as
loans.
(1)Description of change and scope.
This change applies to a taxpayer that
wants to change its method of accounting
for loans received from the Commodity
Credit Corporation from including the
loan amount in gross income for the tax-
able year in which the loan is received to
treating the loan amount as a loan.
(2)Scope limitations inapplicable.A
taxpayer that wants to make this change
is not subject to the scope limitations of
section 4.02 of this revenue procedure.
(3)Manner of making change. This
change is made on a cut-off basis.
Accordingly, a§481(a) adjustment is nei-
ther permitted nor required.
.02Reserved
SECTION 1A. TRADE OR BUSINESS
EXPENSES (§162)
.01Advances made by a lawyer on
behalf of clients—Description of change
and scope. This change applies to a law-
yer handling cases on a contingent fee
basis that advances money to pay for
costs of litigation or for other expenses on
behalf of clients and that wants to change
the method of accounting for such
advances from treating them as deduct-
ible business expenses to treating them as
loans.See Boccardo v. United States,12
Cl. Ct. 184 (1987);Canelo v. Commis-
sioner, 53 T.C. 217 (1969),aff’d per
curiam, 447 F.2d 484 (9th Cir. 1971).
.02Year 2000 costs—Description of
change and scope. This change applies to
a taxpayer that wants to change its
method of accounting for Year 2000 costs
(as defined in Rev. Proc. 97–50, 1997–2
C.B. 525) to conform to the method
described in section 3 of Rev. Proc.
97–50. Section 3 of Rev. Proc. 97–50 pro-
vides that Year 2000 costs fall within the
purview of Rev. Proc. 69–21 (1969–2
C.B. 303),superceded byRev. Proc.
2000–50 (2000–52 I.R.B. 601), and that
the Service will not disturb a taxpayer’s
treatment of its Year 2000 costs as
deductible expenses or capital expendi-
tures if the taxpayer treats these costs in
accordance with Rev. Proc. 2000–50.
.03Aircraft maintenance costs.
(1)Description of change. This
change applies to a taxpayer that wants to
change its method of accounting for costs
incurred to perform work on aircraft air-
frames during heavy maintenance visits
to conform with Rev. Rul. 2001–4
(2001–3 I.R.B. 295) and Notice 2001–23
(2001–12 I.R.B. 911).
(2)Year of change. This change
applies only to the taxpayer’s first or sec-
ond taxable year ending after December
21, 2000.
(3)Scope limitations inapplicable.
The scope limitations in section 4.02 of
this revenue procedure are not applicable
to this change unless the taxpayer’s
method of accounting for costs incurred
to perform work on its aircraft airframes
is an issue pending, within the meaning
of section 6.01(6) of Rev. Proc. 2000–38
(2000–40 I.R.B. 310), at the time the
copy of its application is filed with the
national office.
(4)Transition rule. If a taxpayer filed
an application to make this change under
Rev. Proc. 97–27, and the application was
pending with the national office on Feb-
ruary 16, 2001, the taxpayer may change
its method under Rev. Proc. 97–27 or this
revenue procedure. However, the national
office will process the application in
accordance with the procedure under
which it was filed, unless, prior to the
later of April 1, 2001, or the issuance of
the letter ruling granting or denying con-
sent to the change, the taxpayer notifies
the national office that it wants to change
its method of accounting under this rev-
enue procedure. If the taxpayer timely
notifies the national office that it wants to
change its method under this revenue pro-
cedure, the taxpayer must make appropri-
ate modifications to comply with the
applicable provisions of this revenue pro-
cedure. In addition, any application fee
that was submitted with the application
will be returned to the taxpayer.
.04ISO 9000 costs.
(1)Description of change. This
change applies to a taxpayer that wants to
change its method of accounting for costs
incurred to obtain, maintain and renew
ISO 9000 certification to conform with
Rev. Rul. 2000–4 (2000–4 I.R.B. 331).
(2)Scope limitations inapplicable.
The scope limitations in section 4.02 of
this revenue procedure are not applicable
to this change.
.05Track structure expenditures.
(1)Description of change and scope.
This change applies to a taxpayer that
wants to change its method of accounting
for track structure expenditures (as
defined by section 4.02 of Rev. Proc.
2001–46, 2001–37 I.R.B. 263) to the
track maintenance allowance method
described in Rev. Proc. 2001–46.
January 22, 20023472002–3 I.R.B.

(2)Year of change. This change may
be made for the taxpayer’s first or second
taxable year ending on or after December
31, 2000.
(3)Scope limitations inapplicable.
The scope limitations in section 4.02 of
this revenue procedure do not apply to
this change.
(4)Special filing requirements for
certain taxpayers. A taxpayer that wants
to make this change for its first taxable
year ending on or after December 31,
2000, and that files its return for such tax-
able year on or before October 22, 2001,
is not subject to the filing requirements in
section 6.02(2)(a) of this revenue proce-
dure, provided that it complies with the
following filing requirements. The origi-
nal application must be attached to the
taxpayer’s amended federal income tax
return for its first taxable year ending on
or after December 31, 2000. This
amended return must be filed no later
than January 28, 2002. A copy of the
application must be filed with the national
office no later than when the taxpayer’s
amended return is filed.
(5)Manner of making change.
(a)Section 481(a) adjustment.Ifa
taxpayer wants to make this change and
the taxpayer’s treatment of its track struc-
ture expenditures is not an issue under
consideration in examination, before an
area appeals office, or before a federal
court (within the meaning of section 3.08
of Rev. Proc. 97–27, 1997–1 C.B. 680)
on August 21, 2001, the taxpayer must
make the change using an adjustment
under§481(a). If the taxpayer did not file
Form R–1 for one or more of the taxable
years to which the§481(a) adjustment
relates, the taxpayer must compute the
§481(a) adjustment based on information
equivalent to that required by Form R–1.
(b)Cut-off method. If a taxpayer
wants to make this change and the tax-
payer’s treatment of its track structure
expenditures is an issue under consider-
ation in examination, before an area
appeals office, or before a federal court
(within the meaning of section 3.08 of
Rev. Proc. 97–27, 1997–1 C.B. 680) on
August 21, 2001, the taxpayer must make
the change 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 track
maintenance allowance method. 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.
(6)Audit protection. If a taxpayer’s
treatment of its track structure expendi-
tures is an issue under consideration in
examination, before an area appeals
office, or before a federal court (within
the meaning of section 3.08 of Rev. Proc.
97–27, 1997–1 C.B. 680) on August 21,
2001, the taxpayer does not receive audit
protection under the provisions of section
7 of this revenue procedure.
(7)Effect of consent. For purposes
of section 8.01 of this revenue procedure,
a change in the material fact on which the
consent was based includes a material
change in how a taxpayer reports amounts
on the Form R–1 or a change in the tax-
payer’s obligation to file a Form R–1.
.06Restaurant smallwares packages.
(1)Description of change. This
change applies to a taxpayer engaged in
the trade or business of operating a res-
taurant or tavern (within the meaning of
section 4.01 of Rev. Proc. 2002–12,
2002–3 I.R.B. 374) who wants to change
its method of accounting for the cost of
restaurant smallwares to the smallwares
method described in Rev. Proc. 2002–12
(i.e., as materials and supplies that are not
incidental under§1.162–3).
(2)Scope limitations inapplicable.
The scope limitations in section 4.02 of
this revenue procedure are not applicable
to this change.
(3)Section 481(a) adjustment. A tax-
payer changing its method of accounting
for restaurant smallwares under this sec-
tion must take the entire§481(a) adjust-
ment into account in computing taxable
income in the year of change.
SECTION 1B. BAD DEBTS (§166)
.01Change from reserve method to
specific charge-off method—description
of change and scope. This change applies
to a taxpayer (other than a bank as
defined in§585(a)(2)) that wants to
change its method of accounting for bad
debts from a reserve method (or other
improper method) to a specific charge-off
method that complies with§166. For
procedures applicable to banks,see§585
(c) (and the regulations thereunder) and
section 11 of the APPENDIX of this rev-
enue procedure.
.02Reserved.
SECTION 1C. AMORTIZABLE BOND
PREMIUM (§171)
.01Revocation of§171(c) election.
(1)Description of change and scope.
This change applies to a taxpayer that
wants to change its method of accounting
for amortizable bond premium by revok-
ing its§171(c) election. Under§171(c),
a taxpayer that holds certain taxable
bonds may elect to amortize any bond
premium on the bonds in accordance with
regulations prescribed by the Secretary.
Sections 1.171–1 through 1.171–5 pro-
vide rules relating to the amortization of
bond premium by a taxpayer. Section
1.171–4 provides the procedures to make
a§171(c) election to amortize bond pre-
mium.
(2)Revocation of election. The revo-
cation of a§171(c) election applies to all
taxable bonds that are held by the tax-
payer on the first day of the first taxable
year for which the revocation is effective
(year of change), and to all taxable bonds
that are subsequently acquired by the tax-
payer.
(3)Manner of making the change.
This change is made using a cut-off
method and applies only to taxable bonds
held during or after the year of change.
Consequently, for taxable bonds held at
the beginning of the year of change, the
taxpayer may not amortize any remaining
bond premium on the bonds. Because cut-
off treatment is prescribed for this
change, the basis of any bond, adjusted
for amounts previously amortized during
the period of the election, is not affected
by the revocation.
(4)Additional requirements.Ona
statement attached to the application, the
taxpayer must provide:
(a) the reason(s) for revoking the
election; and
(b) a description of the method by
which, and the date on which, the tax-
payer made the§171(c) election that is
proposed to be revoked.
(5)Audit protection. A taxpayer
receives audit protection under section 7
of this revenue procedure in connection
2002–3 I.R.B.348January 22, 2002

with this change. However, the audit pro-
tection applicable to this change does not
preclude the Commissioner from examin-
ing the method used by the taxpayer to
determine the amount of amortizable
bond premium under§171(b) for a tax-
able year prior to the year of change.
.02Reserved.
SECTION 2. DEPRECIATION OR
AMORTIZATION (§56(a)(1),
56(g)(4)(A), 167, 168, OR 197, OR
FORMER§168)
.01Impermissible to permissible
method of accounting for depreciation or
amortization.
(1)Description of change.
(a) This change applies to a tax-
payer that wants to change from an
impermissible method of accounting for
depreciation or amortization (deprecia-
tion) under which the taxpayer did not
claim the depreciation allowable, to a per-
missible method of accounting for depre-
ciation under which the taxpayer will
claim the depreciation allowable.
(b) A change from a taxpayer’s
impermissible method of accounting for
depreciation under which the taxpayer did
not claim the depreciation allowable to a
permissible method of accounting for
depreciation under which the taxpayer
will claim the depreciation allowable is a
change in method of accounting for
which the consent of the Commissioner is
required.Sections1.167(e)–1(a)and
1.446–1(e)(2)(ii)(b). This method change,
however, does not include any correction
of mathematical or posting errors. Section
1.446–1(e)(2)(ii)(b).
(2)Scope.
(a)Applicability. This change
applies to any taxpayer that has used an
impermissible method of accounting for
depreciation in at least the two taxable
years immediately preceding the year of
change, and is changing that accounting
method to a permissible method of
accounting for depreciation, for any item
of property:
(i) for which, under the taxpayer’s
impermissible method of accounting, the
taxpayer has not taken into account any
depreciation allowance or has taken into
account some depreciation but less than
or more than the depreciation allowable
(claimed less than or more than the depre-
ciation allowable);
(ii) for which depreciation is
determined under—56(a)(1), 56(g)(4)(A),
167, 168, 197, or 168 prior to its amend-
ment in 1986 (former§168); and
(iii) that is owned by the taxpayer
at the beginning of the year of change.
(b)Certain scope limitations inap-
plicable. The scope limitations in sections
4.02(7) and 4.02(8) of this revenue proce-
dure are not applicable to this change.
(c)Inapplicability. This change
does not apply to:
(i)anypropertytowhich
§1016(a)(3) (regarding property held by
a tax-exempt organization) applies;
(ii) any taxpayer that is subject to
§263A and that is required to capitalize
the costs with respect to which the tax-
payer wants to change its method of
accounting under section 2.01 of this
APPENDIX, if the taxpayer is not capi-
talizing the costs as required;
(iii) any intangible property sub-
ject to§56(g)(4)(A) or 167, except for
property subject to§167(f) (regarding
certain property excluded from§197);
(iv)anypropertysubjectto
§167(g) (regarding property depreciated
under the income forecast method);
(v) any§1250 property that a tax-
payer is reclassifying to an asset class of
Rev. Proc. 87–56 (1987–2 C.B. 674), or
Rev. Proc. 83–35 (1983–1 C.B. 745), as
appropriate, that does not explicitly
include§1250 property (for example,
asset class 57.0, Distributive Trades and
Services);
(vi) any property for which a tax-
payer is revoking a timely valid election,
or making a late election, under§167,
168, former§168, or§13261(g)(2) or
(3) of the Revenue Reconciliation Act of
1993 (1993 Act), 1993–3 C.B. 1, 128
(relating to amortizable§197 intan-
gibles). A taxpayer may request consent
to revoke or make the election by submit-
ting a request for a letter ruling under
Rev. Proc. 2001–1 (2001–1 I.R.B. 1) (or
any successor);
(vii) any property subject to
§56(g)(4)(A) or 167 (other than§167(f),
regarding certain property excluded from
§197), for which a taxpayer is changing
only the estimated useful life of the prop-
erty. A change in the estimated useful life
of property for which depreciation is
determined under§56(g)(4)(A) or 167
(other than§167(f)) must be made pro-
spectively (see, for example,§1.167(b)–
2(c)). (In contrast, section 2.01 of this
APPENDIX generally applies to a change
in the recovery period of property for
which depreciation is determined under
§56(a)(1), 56(g)(4)(A), 168 or former
§168);
(viii) any depreciable property
that changes use but continues to be
owned by the same taxpayer (see, for
example,§168(i)(5));
(ix) any property for which depre-
ciation is determined in accordance with
§1.167(a)–11 (regarding the Class Life
Asset Depreciation Range System
(ADR));
(x) any change in method of
accounting involving a change from
deducting the cost or other basis of any
property as an expense to capitalizing and
depreciating the cost or other basis;
(xi) any change in method of
accounting involving a change from one
permissible method of accounting for the
property to another permissible method of
accounting for the property. For example:
(A) a change from the straight-line
method of depreciation to the income
forecast method of depreciation for vid-
eocassettes.SeeRev. Rul. 89–62 (1989–1
C.B. 78); or
(B) a change from charging the
depreciation reserve with costs of
removal and crediting the depreciation
reserve with salvage proceeds to deduct-
ing costs of removal as an expense (pro-
vided the costs of removal are not
required to be capitalized under any pro-
vision of the Code, such as,§263(a)) and
including salvage proceeds in taxable
income (see section 2.02 of this APPEN-
DIX for making this change for property
for which depreciation is determined
under§167);
(xii) any change in method of
accounting involving both a change from
treating the cost or other basis of the
property as nondepreciable property to
treating the cost or other basis of the
property as depreciable property and the
adoption of a method of accounting for
depreciation requiring an election under
§167,168,former§168,or
§13261(g)(2) or (3) of the 1993 Act (for
example, a change in the treatment of the
space consumed in landfills placed in ser-
vice in 1990 from nondepreciable to
depreciable property (assuming section
January 22, 20023492002–3 I.R.B.

2.01(2)(c)(xiii) of the APPENDIX does
not apply) and the making of an election
under§168(f)(1) to depreciate this prop-
erty under the unit-of-production method
of depreciation under§167);
(xiii) any change in method of
accounting for an item of income or
deduction other than depreciation, even if
a taxpayer’s present method of account-
ing may have resulted in the taxpayer
claiming less than or more than the depre-
ciation allowable. For example, a change
in method of accounting involving:
(A) a change in inventory costs (for
example, when property is reclassified
from inventory property to depreciable
property, or vice versa) (but see section
3.02 of this APPENDIX for making a
change from inventory property to depre-
ciable property for unrecoverable line
pack gas or unrecoverable cushion gas);
or
(B) a change in the character of a
transaction from sale to lease, or vice
versa (but see section 2.03 of this
APPENDIX for making this change); or
(xiv) a change from determining
depreciation under§168 to determining
depreciation under former§168 for any
property subject to the transition rules in
§203(b) or 204(a) of the Tax Reform Act
of 1986, 1986–3 (Vol. 1) C.B. 1, 60–80.
(3)Additional requirements. A tax-
payer also must comply with the follow-
ing:
(a)Permissible depreciation method.
A taxpayer must change to a permissible
method of accounting for depreciation for
the item of property. This method is the
same method that determines the depre-
ciation allowable for the item of property
(as provided in section 2.01(6) of this
APPENDIX).
(b)Statements required. A taxpayer
must provide the following statements, if
applicable, and attach them to the com-
pleted application:
(i) a detailed description of the
former and new methods of accounting. A
general description of these methods of
accounting is unacceptable (for example,
MACRS to MACRS or erroneous method
to proper method);
(ii) to the extent not provided else-
where on the application, a statement
describing the taxpayer’s business or
income-producing activities. Also, if the
taxpayer has more than one business or
income-producing activity, a statement
describing the taxpayer’s business or
income-producing activity in which the
item of property at issue is primarily used
by the taxpayer;
(iii) to the extent not provided
elsewhere on the application, a statement
of the facts and law supporting the new
method of accounting, new classification
of the item of property, and new asset
class in, as appropriate, Rev. Proc. 87–56
or Rev. Proc. 83–35. If the taxpayer is the
owner and lessor of the item of property
at issue, the statement of the facts and law
supporting the new asset class also must
describe the business or income-
producing activity in which that item of
property is primarily used by the lessee;
(iv) to the extent not provided
elsewhere on the application, a statement
identifying the year in which the item of
property was placed in service;
(v) if the item of property is
depreciated under former§168, a state-
ment identifying the asset class in Rev.
Proc. 83–35 that applies under the tax-
payer’s former and new methods of
accounting (if none, state and explain);
(vi) if any item of property is pub-
lic utility property within the meaning of
§168(i)(10) or former§167(l)(3)(A), as
applicable, a statement providing that the
taxpayer agrees to the following addi-
tional terms and conditions:
(A) a normalization method of
accounting (within the meaning of former
§167(l)(3)(G), former§168(e)(3)(B), or
§168(i)(9), as applicable) will be used
for the public utility property subject to
the application;
(B) as of the beginning of the year
of change, the taxpayer will adjust its
deferred tax reserve account or similar
reserve account in the taxpayer’s regula-
tory books of account by the amount of
the deferral of federal income tax liability
associated with the§481(a) adjustment
applicable to the public utility property
subject to the application; and
(C) within 30 calendar days of fil-
ing the federal income tax return for the
year of change, the taxpayer will provide
a copy of the completed application to
any regulatory body having jurisdiction
over the public utility property subject to
the application;
(vii) if the taxpayer is changing
the classification of an item of§1250
property placed in service after August
19, 1996, to a retail motor fuels outlet
under§168(e)(3)(E)(iii), a statement con-
taining the following representation:“For
purposes of§168(e)(3)(E)(iii) of the
Internal Revenue Code, the taxpayer rep-
resents that (A) 50 percent or more of the
gross revenue generated from the item of
§1250 property is from the sale of petro-
leum products (not including gross rev-
enue from related services, such as the
labor cost of oil changes and gross rev-
enue from the sale of nonpetroleum prod-
ucts such as tires and oil filters), (B) 50
percent or more of the floor space in the
item of property is devoted to the sale of
petroleum products (not including floor
space devoted to related services, such as
oil changes and floor space devoted to
nonpetroleum products such as tires and
oil filters), or (C) the item of§1250
property is 1,400 square feet or less.”;
and
(viii) if the taxpayer is changing
the classification of an item of property
from§1250 property to§1245 property
under§168 or former§168, a statement
of the facts and law supporting the new
§1245 property classification, and a
statement containing the following repre-
sentation:“Each item of property that is
the subject of the application filed under
section 2.01 of the APPENDIX of Rev.
Proc. 2002–9 for the year of change
beginning [Insert the date], and that is
reclassified from [Insert, as appropriate:
nonresidential real property, residential
rental property, 19–year real property,
18–year real property, or 15–year real
property] to an asset class of [Insert, as
appropriate, either: Rev. Proc. 87–56,
1987–2 C.B. 674, or Rev. Proc. 83–35,
1983–1 C.B. 745] that does not explicitly
include§1250 property, is§1245 prop-
erty for depreciation purposes.”
(4)Section 481(a) adjustment.
Because the adjusted basis of the property
is changed as a result of a method change
made under section 2.01 of this APPEN-
DIX (seesection 2.01(5) of this APPEN-
DIX), items are duplicated or omitted.
Accordingly, this change is made with a
§481(a) adjustment. This adjustment may
result in either a negative§481(a) adjust-
ment (a decrease in taxable income) or a
positive§481(a) adjustment (an increase
in taxable income) and may be a different
2002–3 I.R.B.350January 22, 2002

amount for regular tax, alternative mini-
mum tax, and adjusted current earnings
purposes. This§481(a) adjustment equals
the difference between the total amount
of depreciation taken into account in
computing taxable income for the prop-
erty under the taxpayer’s former method
of accounting, and the total amount of
depreciation allowable for the property
under the taxpayer’s new method of
accounting (as determined under section
2.01(6) of this APPENDIX), for open and
closed years prior to the year of change.
However, the amount of the§481(a)
adjustment must be adjusted to account
for the proper amount of the depreciation
allowable that is required to be capital-
ized under any provision of the Code (for
example,§263A) at the beginning of the
year of change.
(5)Basis adjustment.Asofthe
beginning of the year of change, the basis
of depreciable property to which section
2.01 of this APPENDIX applies must
reflectthereductionsrequiredby
§1016(a)(2) for the depreciation allow-
able for the property (as determined under
section 2.01(6) of this APPENDIX).
(6)Meaning of depreciation allow-
able.
(a)In general. Section 2.01(6) of this
APPENDIX provides the amount of the
depreciation allowable, determined under
§56(a)(1), 56(g)(4)(A), 167, 168, 197, or
former§168. This amount, however, may
be limited by other provisions of the
Code (for example,§280F).
(b)Section 56(a)(1) property. The
depreciation allowable for any taxable
year for property for which depreciation
is determined under§56(a)(1) is deter-
mined by using the depreciation method,
recovery period, and convention provided
for under§56(a)(1) that applies for the
property’s placed-in-service date.
(c) Section 56(g)(4)(A) property. The
depreciation allowable for any taxable
year for property for which depreciation
is determined under§56(g)(4)(A) is
determined by using the depreciation
method, recovery period or useful life, as
applicable, and convention provided for
under§56(g)(4)(A) that applies for the
property’s placed-in-service date.
(d)Section 167 property. Generally,
for any taxable year, the depreciation
allowable for property for which depre-
ciation is determined under§167, is
determined either:
(i) under the depreciation method
adopted by a taxpayer for the property; or
(ii) if that depreciation method
does not result in a reasonable allowance
for depreciation or a taxpayer has not
adopted a depreciation method for the
property, under the straight-line deprecia-
tion method.
For determining the estimated useful
life and salvage value of the property, see
§§1.167(a)–1(b) and (c), respectively.
The depreciation allowable for any tax-
able year for property subject to§167(f)
(regarding certain property excluded from
§197) is determined by using the depre-
ciation method and useful life prescribed
in§167(f).
(e)Section 168 property. The depre-
ciation allowable for any taxable year for
property for which depreciation is deter-
mined under§168, is determined by
using either:
(i) the general depreciation system
in§168(a); or
(ii) the alternative depreciation
system in§168(g) if the property is
required to be depreciated under the alter-
native depreciation system pursuant to
§168(g)(1) or other provisions of the
Code (for example, property described in
§263A(e)(2)(A) or 280F(b)(1)). Property
required to be depreciated under the alter-
native depreciation system pursuant to
§168(g)(1) includes property in a class
(as set out in§168(e)) for which the tax-
payer made a timely election under
§168(g)(7).
(f)Section 197 property. The depre-
ciation allowable for any taxable year for
an amortizable§197 intangible (includ-
ing any property for which a timely elec-
tion under§13261(g)(2) of the 1993 Act
was made) is determined in accordance
with§1.197–2(f) of the Income Tax
Regulations.
(g) Former§168 property. The
depreciation allowable for any taxable
year for property subject to former§168
is determined by using either:
(i) the accelerated method of cost
recovery applicable to the property (for
example, for 5–year property, the recov-
ery method under former§168(b)(1)); or
(ii) the straight-line method appli-
cable to the property if the property is
required to be depreciated under the
straight-line method (for example, prop-
erty described in former§168(f)(12) or
former§280F(b)(2)) or if the taxpayer
elected to determine the depreciation
allowance under the optional straight-line
percentage (for example, the straight-line
method in former§168(b)(3)).
.02Permissible to permissible method
of accounting for depreciation.
(1)Description of change. This
change applies to a taxpayer that wants to
change from a permissible method of
accountingfordepreciationunder
§56(g)(4)(A)(iv) or 167 to another per-
missible method of accounting for depre-
ciation under§56(g)(4)(A)(iv) or 167.
Pursuant to§§1.167(a)–7(a) and (c), a
taxpayer may account for depreciable
property either by treating each individual
asset as an account or by combining two
or more assets in a single account and, for
each account, depreciation allowances are
computed separately.
(2)Scope.
(a)Applicability. This change applies
to any taxpayer wanting to make a change
in method of accounting for depreciation
specified in section 2.02(3) of this
APPENDIX for the property in an
account:
(i) for which the present and pro-
posed methods of accounting for depre-
ciation specified in section 2.02(3) of this
APPENDIX are permissible methods for
the property under§56(g)(4)(A)(iv) or
167; and
(ii) that is owned by the taxpayer
at the beginning of the year of change.
(b)Certain scope limitations inappli-
cable. The scope limitations in sections
4.02(7) and 4.02(8) of this revenue proce-
dure are not applicable to this change.
(c)Inapplicability. This change does
not apply to:
(i) any taxpayer that is subject to
§263A and that is required to capitalize
the costs with respect to which the tax-
payer wants to change its method of
accounting under section 2.02 of this
APPENDIX, if the taxpayer is not capi-
talizing the costs as required;
(ii)anypropertytowhich
§1016(a)(3) (regarding property held by
a tax-exempt organization) applies;
(iii) any intangible property,
except distributor commissions (as
defined by section 2 of Rev. Proc. 2000–
38, 2000–40 I.R.B. 310) that are not
January 22, 20023512002–3 I.R.B.

amortizable section 197 intangibles and
for which the taxpayer is making the
change in method of accounting for
depreciation specified in section
2.02(3)(l) or (m) of this APPENDIX;
(iv) any property described in
§167(f) (regarding certain property
excluded from§197);
(v)anypropertysubjectto
§167(g) (regarding property depreciated
under the income forecast method);
(vi) any property for which depre-
ciation is determined under§56(a)(1),
56(g)(4)(A)(i), (ii), (iii), or (v), 168 or
§168 prior to its amendment in 1986
(former§168);
(vii) any property that the tax-
payer elected under§168(f)(1) or former
§168(e)(2) to exclude from the applica-
tion of, respectively,§168 or former
§168;
(viii) any property for which
depreciation is determined in accordance
with§1.167(a)–11 (regarding the Class
Life Asset Depreciation Range System
(ADR));
(ix) any depreciable property for
which the taxpayer is changing the depre-
ciation method pursuant to§1.167(e)–
1(b) (change from declining-balance
methodtostraight-linemethod),
§1.167(e)–1(c) (certain changes for
§1245 property), or§1.167(e)–1(d) (cer-
tain changes for§1250 property). These
changes must be made prospectively and
are not permitted under the cited regula-
tions for property for which the deprecia-
tion is determined under§168 or former
§168; or
(x) any distributor commissions
(as defined by section 2 of Rev. Proc.
2000–38, 2000–40 I.R.B. 310) for which
the taxpayer is changing the useful life
under the distribution fee period method
or the useful life method (both described
in Rev. Proc. 2000–38). A change in this
useful life must be made prospectively
(see,for example,§1.167(b)–2(c)).
(3)Changes covered. Section 2.02 of
this APPENDIX only applies to the fol-
lowing changes in methods of accounting
for depreciation:
(a) a change from the straight-line
method to the sum-of-the-years-digits
method, the sinking fund method, the
unit-of-production method, or the
declining-balance method using any
proper percentage of the straight-line rate;
(b) a change from the declining-
balance method using any percentage of
the straight-line rate to the sum-of-the-
years-digits method, the sinking fund
method, or the declining-balance method
using a different proper percentage of the
straight-line rate;
(c) a change from the sum-of-the-
years-digits method to the sinking fund
method, the declining-balance method
using any proper percentage of the
straight-line rate, or the straight-line
method;
(d) a change from the unit-of-
production method to the straight-line
method;
(e) a change from the sinking fund
method to the straight-line method, the
unit-of-production method, the sum-of-
the-years-digits method, or the declining-
balance method using any proper percent-
age of the straight-line rate;
(f) a change in the interest factor
used in connection with a compound
interest method or sinking fund method;
(g) a change in averaging conven-
tion as set forth in§1.167(a)–10(b).
However, as specifically provided in
§1.167(a)–10(b), in any taxable year in
which an averaging convention substan-
tially distorts the depreciation allowance
for the taxable year, it may not be used
(seeRev. Rul. 73–202, 1973–1 C.B. 81);
(h) a change from charging the
depreciation reserve with costs of
removal and crediting the depreciation
reserve with salvage proceeds to deduct-
ing costs of removal as an expense and
including salvage proceeds in taxable
income as set forth in§1.167(a)–8(e)(2).
SeeRev. Rul. 74–455, 1974–2 C.B. 63.
This change, however, may be made
under this revenue procedure only if:
(i) the change is applied to all
items in the account for which the change
is being made; and
(ii) the removal costs are not
required to be capitalized under any pro-
vision of the Code (for example,§263(a),
263A, or 280B);
(i) a change from crediting the
depreciation reserve with the salvage pro-
ceeds realized on normal retirement sales
to computing and recognizing gains and
losses on such sales (seeRev. Rul.
70–165, 1970–1 C.B. 43);
(j) a change from crediting ordinary
income (including the combination
method of crediting the lesser of esti-
mated salvage value or actual salvage
proceeds to the depreciation reserve, with
any excess of salvage proceeds over esti-
mated salvage value credited to ordinary
income) with the salvage proceeds real-
ized on normal retirement sales, to com-
puting and recognizing gains and losses
on such sales (seeRev. Rul. 70–166,
1970–1 C.B. 45);
(k) a change from item accounting
for specific assets to multiple asset
accounting for the same assets, or vice
versa;
(l) a change from one method
described in Rev. Proc. 2000–38 for
amortizing distributor commissions (as
defined by section 2 of Rev. Proc. 2000–
38, 2000–40 I.R.B. 310) to another
method described in Rev. Proc. 2000–38
for amortizing distributor commissions;
or
(m) a change from pooling to a
single asset, or vice versa, for distributor
commissions (as defined by section 2 of
Rev. Proc. 2000–38, 2000–40 I.R.B. 310)
for which the taxpayer is using the distri-
bution fee period method or the useful
life method (both described in Rev. Proc.
2000–38).
(4)Additional requirements. A tax-
payer also must comply with the follow-
ing:
(a)Basis for depreciation. At the
beginning of the year of change, the basis
for depreciation of property to which this
change applies is the adjusted basis of the
property as provided in§1011 at the end
of the taxable year immediately preceding
the year of change (determined under the
taxpayer’s present method of accounting
for depreciation). If applicable under the
taxpayer’s proposed method of account-
ing for depreciation, this adjusted basis is
reduced by the estimated salvage value of
the property (for example, a change to the
straight-line method).
(b)Rate of depreciation. The rate of
depreciation for property changed to:
(i) the straight-line or sum-of-the-
years-digits method of depreciation must
be based on the remaining useful life of
the property as of the beginning of the
year of change; or
(ii) the declining-balance method
of depreciation must be based on the use-
ful life of the property measured from the
placed-in-servicedate,andnotthe
2002–3 I.R.B.352January 22, 2002

expected remaining life from the date the
change becomes effective.
(c)Regulatory requirements. For
changes in method of depreciation to the
sum-of-the-years-digits or declining-
balance method, the property must meet
the requirements of§1.167(b)–0or
1.167(c)–1, as appropriate.
(d)Public utility property.Ifany
item of property is public utility property
withinthemeaningofformer
§167(l)(3)(A), the taxpayer must attach
to the application a statement providing
that the taxpayer agrees to the following
additional terms and conditions:
(i) a normalization method of
accounting within the meaning of former
§167(l)(3)(G) will be used for the public
utility property subject to the application;
and
(ii) within 30 calendar days of fil-
ing the federal income tax return for the
year of change, the taxpayer will provide
a copy of the completed application to
any regulatory body having jurisdiction
over the public utility property subject to
the application.
(5)Section 481(a) adjustment.
Because the adjusted basis of the property
is not changed as a result of a method
change made under section 2.02 of this
APPENDIX, no items are being dupli-
catedoromitted.Accordingly,the
§481(a) adjustment is zero.
.03Sale or lease transactions.
(1)Description of change and scope.
(a)Applicability. This change
applies to a taxpayer that wants to change
its method of accounting from:
(i) improperly treating property as
sold by the taxpayer to properly treating
property as leased by the taxpayer;
(ii) improperly treating property
as leased by the taxpayer to properly
treating property as sold by the taxpayer;
(iii) improperly treating property
as purchased by the taxpayer to properly
treating property as leased by the tax-
payer; and
(iv) improperly treating property
as leased by the taxpayer to properly
treating property as purchased by the tax-
payer.
(b)Inapplicability. This change does
not apply to:
(i) a rent-to-own dealer that wants
to change its method of accounting for
rent-to-own contracts described in section
3 of Rev. Proc. 95–38 (1995–2 C.B. 397);
or
(ii) a taxpayer that holds assets for
sale or lease, if any asset so held is not
the subject of a sale or lease transaction
as of the beginning of the year of change.
(2)Manner of making the change.
(a) The change in method of
accounting under section 2.03 of this
APPENDIX is made using a cut-off
method and applies to transactions
entered into on or after the beginning of
the year of change.Seesection 2.06 of
this revenue procedure.
(b) If a taxpayer wants to change its
method of accounting for existing sale or
lease transactions, the taxpayer must file
an application with the Commissioner in
accordance with the requirements of
§1.446–1(e)(3)(i) and Rev. Proc. 97–27.
A change involving existing sale or lease
transactions will require a§481(a)
adjustment. Consent to change a method
of accounting for an existing sale or lease
transaction is granted only in unusual and
compelling circumstances.
(3)No audit protection. A taxpayer
does not receive audit protection under
section 7 of this revenue procedure in
connection with this change.
.04Modern golf course greens.
(1)Description of change and scope.
This change applies to a taxpayer wanting
to change the method of accounting for
the cost of modern golf course greens
owned by the taxpayer at the beginning of
the year of change to conform with the
holding in Rev. Rul. 2001–60 (2001–51
I.R.B. 587). Rev. Rul. 2001–60 holds that
the costs of land preparation undertaken
by a taxpayer in the original construction
or reconstruction of modern greens (as
described in Rev. Rul. 2001–60) that is so
closely associated with depreciable assets,
such as a network of underground drain-
age tiles or pipes, that the land prepara-
tion will be retired, abandoned, or
replaced contemporaneously with those
depreciable assets are to be capitalized
and depreciated over the recovery period
of the depreciable assets with which the
land preparation is associated. However,
the general earthmoving, grading, and ini-
tial shaping of the area surrounding and
underneath the modern green that occur
before the construction are inextricably
associated with the land and, therefore,
the costs attributable to this land prepara-
tion are added to the taxpayer’s cost basis
in the land and are not depreciable.
(2)Additional requirements. A tax-
payer that changes its method of account-
ing for the cost of modern golf course
greens under section 2.04 of this APPEN-
DIX must change to a permissible method
of accounting for depreciation of modern
greens. For purposes of§168, the mod-
ern green is includible in asset class 00.3,
Land Improvements, of Rev. Proc. 87–56
(1987–2 C.B. 674).
SECTION 2A. RESEARCH AND
EXPERIMENTAL EXPENDITURES
(§174)
.01Changes to a different method or
different amortization period.
(1)Description of change.
(a) This change applies to a tax-
payer that wants to change the treatment
of expenditures that qualify as research
and experimental expenditures under
§174.
(b) Section 174 and the regulations
thereunder provide the specific rules for
changing a method of accounting under
§174 for research and experimental
expenditures. Under§174, a taxpayer
may treat research and experimental
expenditures that are paid or incurred by
the taxpayer during the taxable year in
connection with the taxpayer’s trade or
business as expenses under§174(a) or as
deferred expenses amortizable ratably
over a period of not less than 60 months
under§174(b). Pursuant to§1.174–1,
research and experimental expenditures
that are not treated as expenses or
deferred expenses under§174 must be
treated as capital expenditures. Further,
§1.174–1 provides that the expenditures
to which§174 applies may relate either
to a general research program or to a par-
ticular project.
(c) If a taxpayer has not treated
research and experimental expenditures
as expenses under§174(a),§§174(a)
(2)(B) and 1.174–3(b)(2) provide that the
taxpayer may, with consent, adopt the
expense method at any time.
January 22, 20023532002–3 I.R.B.

(d) If a taxpayer has treated
research and experimental expenditures
as expenses under§174(a),§§174(a)(3)
and 1.174–3(b)(3) provide that the tax-
payer may, with consent, change to a dif-
ferent method of treating research and
experimental expenditures.
(e) If a taxpayer has treated research
and experimental expenditures as
deferred expenses under§174(b),§§174
(b)(2) and 1.174–4(b)(2) provide that the
taxpayer may, with consent, change to a
different method of treating research or
experimental expenditures or to a differ-
ent period of amortization for deferred
expenses.
(2)Scope.
(a)Applicability. This change
applies to any taxpayer that is changing:
(i) from treating research and
experimental expenditures for a particular
project or projects as expenses under
§174(a) to treating such expenditures as
deferred expenses under§174(b), or vice
versa;
(ii) to a different period of amorti-
zation for research and experimental
expenditures for a particular project or
projects that are being treated as deferred
expenses under§174(b); or
(iii) from treating research and
experimental expenditures for a particular
project or projects as expenses under
§174(a) or deferred expenses under
§174(b) to treating such expenditures as
a capital expenditure under§263(a), or
vice versa.
(b)Scope limitations clarified. The
scope limitation under section 4.02(6) of
this revenue procedure is applied on a
project by project basis.
(c)Inapplicability. This change does
not apply to:
(i) a portion of the research and
experimental expenditures paid or
incurred for a particular project during the
year of change or in subsequent taxable
years (that is, the change must apply to all
of such expenditures;see§§1.174–3(a)
and 1.174–4(a)(5));
(ii) a change in the treatment of
computer software costs under Rev. Proc.
2000–50 (2000–52 I.R.B. 601) (but see
section 2B of this APPENDIX for making
this change); or
(iii) a change in the treatment of
Year 2000 costs under Rev. Proc. 97–50
(1997–2 C.B. 525) (but see section 1A.02
of this APPENDIX for making this
change).
(3)Manner of making the change.
(a) This change is made using a cut-
off method and applies to all research and
experimental expenditures paid or
incurred for a particular project or
projects during the year of change and in
subsequent taxable years.Seesection
2.06 of this revenue procedure and
§§174(b)(2), 1.174–3(a), 1.174–3(b)(2),
and 1.174–4(a)(5).
(b)Therequirementunder
§§1.174–3(b)(2), 1.174–3(b)(3), and
1.174–4(b)(2) to file an application no
later than the end of the first taxable year
in which the different method or different
amortization period is to be used is
waived for this change. However, see sec-
tion 6 of this revenue procedure for filing
requirements applicable under this rev-
enue procedure.
(c) The consent granted under this
revenue procedure satisfies the consent
required under§§174(a)(2)(B),
174(a)(3), 174(b)(2), 1.174–3(b)(2),
1.174–3(b)(3), and 1.174–4(b)(2).
(4)Additional requirement. A tax-
payer must attach to the application a
written statement providing:
(a) the information required in
§1.174–3(b)(2) if the taxpayer is chang-
ing to treating research and experimental
expenditures as expenses under§174(a);
(b) the information required in
§1.174–3(b)(3) if the taxpayer is chang-
ing from treating research and experimen-
talexpendituresasexpensesunder
§174(a); or
(c) the information required in
§1.174–4(b)(2) if the taxpayer is chang-
ing from treating research and experimen-
tal expenditures as deferred expenses
method under§174(b) or is changing to
a different period of amortization for
research and experimental expenditures
being treated as deferred expenses under
§174(b).
(5)No audit protection. A taxpayer
does not receive audit protection under
section 7 of this revenue procedure in
connection with this change.
.02Reserved.
SECTION 2B. COMPUTER
SOFTWARE EXPENDITURES
(§§162, 167, AND 197)
.01Description of change. This
change applies to a taxpayer that wants to
change its method of accounting for the
costs of computer software to a method
described in Rev. Proc. 2000–50
(2000–52 I.R.B. 601). Section 5 of Rev.
Proc. 2000–50 describes the methods
applicable to the costs of developing
computer software. Section 6 of Rev.
Proc. 2000–50 describes the method
applicable to the costs of acquired com-
puter software. Section 7 of Rev. Proc.
2000–50 describes the method applicable
to leased or licensed computer software.
If a taxpayer treats the costs of computer
software in accordance with the appli-
cable method described in Rev. Proc.
2000–50, the Service will not disturb the
taxpayer’s treatment of its costs of com-
puter software.
.02Scope. This change applies to all
costs of computer software as defined in
section 2 of Rev. Proc. 2000–50. How-
ever, this change does not apply to any
computer software that is subject to amor-
tization as an“amortizable section 197
intangible”as defined in§197(c) and the
regulations thereunder, or to costs that a
taxpayer has treated as research and
experimentationexpendituresunder
§174.
.03Inapplicability. This change does
not apply to a change in useful life under
the method described in sections 5.01(2)
or 6.01(2) of Rev. Proc. 2000–50.
.04Statement required. If a taxpayer is
changing to the method described in sec-
tion 5.01(2) of Rev. Proc. 2000–50, the
taxpayer must attach to the application a
statement providing the information
required in section 8.02(2) of Rev. Proc.
2000–50.
SECTION 3. CAPITAL
EXPENDITURES (§263)
.01Package design costs.
(1)Description of change and scope.
(a)Applicability. This change
applies to a taxpayer that wants to change
its method of accounting for package
design costs that are within the scope of
Rev. Proc. 97–35 (1997–2 C.B. 448) to
one of the three alternative methods of
accounting for package design costs
described in section 5 of Rev. Proc.
97–35. The three alternative methods of
accounting for package design costs
described are: (1) the capitalization
2002–3 I.R.B.354January 22, 2002

method, (2) the design-by-design capitali-
zation and 60–month amortization
method, and (3) the pool-of-cost capitali-
zation and 48–month amortization
method.
(b)Inapplicability. This change
does not apply to a taxpayer that wants to
change to the capitalization method for
costs of developing (or modifying) any
package design that has an ascertainable
useful life.
(2)Additional requirements. If a tax-
payer is changing its method of account-
ing for package design costs to the capi-
talization method or the design-by-design
capitalization and 60–month amortization
method, the taxpayer must attach a state-
ment to its timely filed application. The
statement must provide a description of
each package design, the date on which
each was placed in service, and the cost
basis of each (as determined under sec-
tions 5.01(2) or 5.02(2) of Rev. Proc.
97–35).
.02Line pack gas; cushion gas.
(1)Description of change and scope.
This change applies to a taxpayer that
wants to change its method of accounting
for line pack gas or cushion gas to a
method consistent with the holding in
Rev. Rul. 97–54 (1997–2 C.B. 23). Rev.
Rul. 97–54 holds that the cost of line
pack gas or cushion gas is a capital
expenditure under§263, the cost of
recoverable line pack gas or recoverable
cushion gas is not depreciable, and the
cost of unrecoverable line pack gas or
unrecoverable cushion gas is depreciable
under§§167 and 168.
(2)Additional requirements. A tax-
payer that changes its method of account-
ing for unrecoverable line pack gas or
unrecoverable cushion gas under section
3.02 of this APPENDIX must change to a
permissible method of accounting for
depreciation for the cost of that gas.
.03Removal costs.
(1)Description of change. This
change applies to a taxpayer that wants to
change its method of accounting for cer-
tain costs incurred in the retirement and
removal of depreciable assets to conform
with Rev. Rul. 2000–7 (2000–9 I.R.B.
712).
(2)Additional requirements.
(a) Except for assets for which
depreciation is determined in accordance
with§1.167(a)–11 (ADR), the taxpayer’s
new method of treating removal costs for
assets accounted for in a multiple asset
account must be consistent with the tax-
payer’s method of treating salvage pro-
ceeds.SeeRev. Rul. 74–455 (1974–2
C.B. 63). (Seesection 2.02 of the
APPENDIX of this revenue procedure for
changing a taxpayer’s present method of
treating salvage proceeds.)
(b) If this change involves assets
that are public utility property within the
meaning of§168(i)(10) or former
§167(l)(3)(A), the taxpayer must comply
with the terms and conditions in section
2.01(3)(b)(vi) of the APPENDIX of this
revenue procedure.
(3)Scope limitations inapplicable.
The scope limitations in section 4.02 of
this revenue procedure are not applicable
to this change.
SECTION 4. UNIFORM
CAPITALIZATION (§263A)
.01Certain uniform capitalization
(UNICAP) methods used by resellers and
reseller-producers.
(1)Description of change and scope.
(a)Applicability. This change
applies to:
(i) a small reseller of personal
property changing from a permissible
UNICAP method to a permissible non-
UNICAP inventory capitalization method
in any taxable year that it qualifies as a
small reseller;
(ii) a formerly small reseller
changing from a permissible non-
UNICAP inventory capitalization method
to a permissible UNICAP method in the
first taxable year that it does not qualify
as a small reseller;
(iii) a reseller-producer changing
from a permissible UNICAP method for
both its production and resale activities to
a permissible simplified resale method
described in§1.263A–3(d)(3) in any tax-
able year that it qualifies to use a simpli-
fied resale method for both its production
and resale activities under§1.263A–
3(a)(4) (resellers withde minimisproduc-
tion activities);
(iv) a reseller-producer changing
from a permissible simplified resale
method described in§1.263A–3(d)(3) for
both its production and resale activities to
a permissible UNICAP method for both
its production and resale activities in the
first taxable year that it does not qualify
to use a simplified resale method for both
its production and resale activities under
§1.263A–3(a)(4);
(v) a reseller that wants to change
its permissible UNICAP method to
include a special reseller cost allocation
rule; or
(vi) a reseller changing from a
non-UNICAP method to a UNICAP
method specifically described in the regu-
lations in any taxable year, other than the
first taxable year, that it does not qualify
as a small reseller.
(b)Scope limitations inapplicable.A
taxpayer that wants to make a change
described in sections 4.01(1)(a)(i) through
4.01(1)(a)(iv) of this APPENDIX is not
subject to the scope limitations in section
4.02 of this revenue procedure.
(c)Inapplicability. This change does
not apply to a taxpayer making an historic
absorption ratio election under§§1.263
A–2(b)(4) or 1.263A–3(d)(4), or to a tax-
payer that wants to revoke an election to
use the historic absorption ratio with the
simplified resale method (see§1.263A–
3(d)(4)(iii)(B)).
(2)Definitions.
(a)“Reseller”means a taxpayer that
acquires real or personal property
described in§1221(1) for resale.
(b)“Small reseller”means a reseller
whose average annual gross receipts for
the three immediately preceding taxable
years (or fewer, if the taxpayer has not
been in existence during the three preced-
ing taxable years) do not exceed
$10,000,000.See§263A(b)(2)(B).
(c)“Formerly small reseller”means a
reseller that no longer qualifies as a small
reseller.
(d)“Producer”means a taxpayer that
produces real or tangible personal prop-
erty.
(e)“Reseller-producer”means a tax-
payer that is both a producer and a
reseller.
(f)“Permissible UNICAP method”
means a method of capitalizing costs that
is permissible under§263A.
(g)“UNICAP method specifically
described in the regulations”includes the
simplified service cost method using a
labor-based allocation ratio (§1.263A–
1(h)) and the simplified resale method
without an historic absorption ratio elec-
tion (§1.263A–3(d)), but does not
January 22, 20023552002–3 I.R.B.

include any other reasonable allocation
method within the meaning of§1.263A–
1(f)(4).
(h)“Special reseller cost allocation
rule”means the 90–10de minimisrule to
allocate a mixed service department’s
costs to property acquired for resale
(§1.263A–1(g)(4)(ii)), the 1/3 - 2/3 rule
to allocate labor costs of personnel to pur-
chasingactivities(§1.263A–
3(c)(3)(ii)(A)), and the 90–10 de minimis
rule to allocate a dual-function storage
facility’s costs to property acquired for
resale (§1.263A–3(c)(5)(iii)(C)).
(i)“Permissible non-UNICAP inven-
tory capitalization method”means a
method of capitalizing inventory costs
that is permissible under§471.
(3)Section 481(a) adjustment.
Beginning with the year of change, a tax-
payer changing its method of accounting
for costs pursuant to sections
4.01(1)(a)(i), 4.01(1)(a)(iii), or
4.01(1)(a)(iv) of this APPENDIX gener-
ally must take any applicable§481(a)
adjustment into account ratably over the
same number of taxable years, not to
exceed four, that the taxpayer used its
former method of accounting. A taxpayer
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 generally must taken any
applicable§481(a) adjustment into
account ratably over four taxable years.
See section 5.04(3) of this revenue proce-
dure for exceptions to this general rule.
(4)Multiple changes. Taxpayers
making both this change and another
change in method of accounting in the
same year of change must comply with
the ordering rules of§1.263A–7(b)(2).
(5)Example. The following example
illustrates the principles of section 4.01 of
this APPENDIX for small resellers and
formerly small resellers.
Assume X, a corporate reseller of per-
sonal property, incorporated January 2,
1991, adopted a taxable year ending
December 31. X determines that its aver-
age annual gross receipts for the three
taxable years (or fewer, if applicable)
immediately preceding taxable years
1991 through 2000 are as shown in the
table below:
Average Annual Gross
Receipts for the Three Taxable
Years Immediately Preceding the
Current Taxable Year
1991$0
19925,000,000
19936,000,000
19947,000,000
199511,000,000
199611,000,000
19979,000,000
19988,000,000
199911,000,000
200012,000,000
Furthermore, X, which adopted the dollar-value LIFO inventory method, has the following LIFO inventory balances determined
without considering the effects of the UNICAP method:
BeginningEnding
1995$1,000,000$1,100,000
19961,100,0001,200,000
19971,200,0001,300,000
19981,300,0001,400,000
19991,400,0001,500,000
20001,500,0001,600,000
X was required by§263A to change to
the UNICAP method for 1995 because its
average annual gross receipts for the three
taxable years immediately preceding
1995 were $11,000,000, which exceeded
the $10,000,000 ceiling permitted by the
small reseller exception. Assume that X
was required to capitalize $80,000 of
“additional§263A costs”to the cost of
its 1995 beginning inventory because of
this change in inventory method. In addi-
tion, X was required to include one-fourth
of the§481(a) adjustment when comput-
ing taxable income for each of the four
taxable years beginning with 1995. Thus,
X was required to include a $20,000 posi-
tive§481(a) adjustment in its 1995 tax-
able income.
X elected to use the simplified resale
method without an historic absorption
ratio election under§1.263A–3(d)(3) for
2002–3 I.R.B.356January 22, 2002

determining the amount of additional
§263A costs to be capitalized to each
LIFO layer. Assume that X was required
toadd$10,000ofadditional
§263A costs to the cost of its 1995 end-
ing inventory because of the $100,000
increment for 1995.
X’s 1995 Ending Inventory:
Beginning Inventory (Without UNICAP costs)$1,000,000
1995 Increment100,000
Additional§263A Costs in Beginning Inventory80,000
Additional§263A Costs in 1995 Increment10,000
Total 1995 Ending Inventory$1,190,000
X’s Unamortized 1995§481(a) adjustment:
1995§481(a) Adjustment$80,000
Amount Included in 1995 Taxable Income<20,000>
Unamortized 1995§481(a) Adjustment—12/31/95$60,000
Because X failed to satisfy the small reseller exception for 1996, X was required to continue using the UNICAP method for its
inventory costs. Furthermore, X was required to include $20,000 of the unamortized 1995 positive§481(a) adjustment in 1996
taxable income. Assume that X was required to add $10,000 of additional§263A costs to the cost of its 1996 ending inventory
because of the $100,000 increment for 1996.
X’s 1996 Ending Inventory:$1,190,000
Beginning Inventory (With UNICAP costs)100,000
1996 Increment
Additional§263A Costs in 1996 Increment10,000
Total 1996 Ending Inventory$1,300,000
X’s Unamortized 1995§481(a) Adjustment:
Unamortized 1995§481(a) Adjustment—12/31/95$60,000
Amount Included in 1996 Taxable Income<20,000>
Unamortized 1995§481(a) Adjustment—12/31/96$40,000
Because X satisfies the small reseller exception for 1997, X may change voluntarily from the UNICAP method to a permissible
non-UNICAP inventory capitalization 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) adjustment, which is a nega-
tive $100,000 ($1,200,000—$1,300,000). Because X used the UNICAP method for only two years (that is, 1995 and 1996), X
must include one-half of the§481(a) adjustment when computing taxable income for each of the two taxable years beginning with
1997. Thus, X must include a $50,000 negative§481(a) adjustment in 1997 taxable income. In addition, X must include $20,000
of the unamortized 1995§481(a) adjustment in 1997 taxable income.
January 22, 20023572002–3 I.R.B.

X’s 1997 Ending Inventory:
Beginning Inventory (With UNICAP costs)$1,300,000
1997 Increment100,000
1997§481(a) Adjustment <Negative><100,000>
Total 1997 Ending Inventory$1,300,000
X’s Unamortized 1995§481(a) Adjustment:
Unamortized 1995§481(a) Adjustment—12/31/96$40,000
Amount Included in 1997 Taxable Income<20,000>
Unamortized 1995§481(a) Adjustment—12/31/97$20,000
X’s Unamortized 1997§481(a) Adjustment:
1997§481(a) Adjustment <Negative>$ <100,000>
Amount Included in 1997 Taxable Income50,000
Unamortized 1997§481(a) Adjustment—12/31/97$ <50,000>
X also satisfies the small reseller 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 and $50,000 of the unamortized 1997
negative§481(a) adjustment in 1998 taxable income.
X’s 1998 Ending Inventory:
Beginning Inventory (Without UNICAP costs)$1,300,000
1998 Increment100,000
Total 1998 Ending Inventory1,400,000
X’s Unamortized 1995§481(a) Adjustment:
Unamortized 1995§481(a) Adjustment—12/31/97$20,000
Amount Included in 1998 Taxable Income<20,000>
Unamortized 1995§481(a) Adjustment—12/31/98$0
X’s Unamortized 1997§481(a) Adjustment:
Unamortized 1997§481(a) Adjustment—12/31/97<50,000>
Amount Included in 1998 Taxable Income50,000
Unamortized 1997§481(a) Adjustment—12/31/98$0
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. In addition, X must include one-fourth of the§481(a) adjustment when computing
taxable income for each of the four taxable years beginning with 1999. Thus, X must include a $30,000 positive§481(a) adjust-
ment in its 1999 taxable income. Assume that X must add $10,000 of additional§263A costs to the cost of its 1999 ending inven-
tory because of the $100,000 increment for 1999.
2002–3 I.R.B.358January 22, 2002

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$120,000
Amount Included in 1999 Taxable Income<30,000>
Unamortized 1999§481(a) Adjustment—12/31/99$ 90,000
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 $30,000 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$90,000
Amount Included in 2000 Taxable Income<30,000>
Unamortized 1999§481(a) Adjustment—12/31/00$ 60,000
.02Certain uniform capitalization
(UNICAP) methods used by producers.
(1)Applicability. This change applies
to a producer of real or tangible personal
property described in§1.263A–2 that
wants to change to a UNICAP method (or
methods) specifically described in the
regulations.
(2)Inapplicability. This change does
not apply to a producer of real or tangible
personalpropertydescribedin
§1.263A–2 that wants to revoke an elec-
tion to use the historic absorption ratio
with the simplified production method
(see§1.263A–2(b)(4)(iii)(B)).
(3)Definition.A“UNICAP method
specifically described in the regulations”
includes the specific identification
method (§1.263A–1(f)(2)), the burden
rate method (§1.263A–1(f)(3)), the stan-
dard cost method (§1.263A–1(f)(3)), the
direct reallocation method (§1.263A–
1(g)(4)(iii)(A)), the step-allocation
method (§1.263A–1(g)(4)(iii)(B)), the
simplifiedservice-costmethod
(§1.263A–1(h)), and the simplified pro-
duction method without the historic
absorption ratio election (§1.263A–2(b)),
but does not include any other reasonable
allocation method within the meaning of
§1.263A–1(f)(4).
(4)Multiple changes. Taxpayers
making both this change and another
change in method of accounting in the
same year of change must comply with
the ordering rules of§1.263A–7(b)(2).
.03Certain uniform capitalization
(UNICAP) methods used by taxpayers in
a farming business.
(1)Description of change and scope.
This change applies to a taxpayer in a
farming business that wants to change its
method or methods of accounting to com-
ply with§1.263A–4.
(2)Year of change. This change only
applies to the taxpayer’s first taxable year
ending after August 21, 2000 (in the case
of property that is not inventory in the
hands of the taxpayer), or the first taxable
year beginning after August 21, 2000 (in
the case of property that is inventory in
the hands of the taxpayer), whichever is
applicable.
(3)Scope limitations inapplicable.
The scope limitations in section 4.02 of
this revenue procedure do not apply, pro-
vided the taxpayer’s method of account-
ing for property produced in a farming
business is not an issue under consider-
ation within the meaning of section 3.09
of this revenue procedure.
(4)Manner of making change; audit
protection.
(a)Non-inventory property.Inthe
case of property that is not inventory in
the hands of the taxpayer, the change
applies to costs incurred after August 21,
2000, is made on a cut-off basis as
described in section 2.06 of this revenue
procedure, and is not subject to the audit
protection provisions of section 7 of this
revenue procedure. However, a taxpayer
January 22, 20023592002–3 I.R.B.

may receive such audit protection for
non-inventory property by taking into
account any§481(a) adjustment that
results from the change in method of
accounting for non-inventory property to
comply with§1.263A–4. A taxpayer that
opts to determine a§481(a) adjustment
(and, thus, obtain audit protection) for
non-inventory property must take into
account only additional section 263A
costs incurred after December 31, 1986,
in taxable years ending after December
31, 1986.
(b)Inventory property. In the case
of property that is inventory in the hands
of the taxpayer, the change applies to
costs incurred after December 31, 1986,
in taxable years ending after December
31, 1986, and is made by taking into
account an adjustment under§481(a).
Such adjustment must take into account
only additional section 263A costs
incurred after December 31, 1986, in tax-
able years ending after December 31,
1986.
(5)Multiple changes. Taxpayers
making both this change and another
change in method of accounting in the
same year of change must comply with
the ordering rules of§1.263A–7(b)(2).
.04Change to no longer capitalize
research and experimental expenditures
under uniform capitalization (UNICAP)
(1)Description of change and scope.
This change applies to a taxpayer who no
longer wants to capitalize research and
experimental expenditures to inventory
under§263A and the regulations thereun-
der. A taxpayer making this change must
be in compliance with all other aspects of
§263A and the regulations thereunder
and must have an effective election under
either§174(a) or§174(b).
(2)Manner of making the change.A
taxpayer must attach to the application
the following:
(a) a representation that the§174
costs the taxpayer proposes not to capital-
ize to inventory under§263A and the
regulations thereunder are costs that are
subject to the taxpayer’s effective election
under either§174(a) or§174(b) and the
regulations thereunder (Indicate which
section applies to the taxpayer); and
(b) for the§174 costs that it pro-
poses to remove from inventory costs, a
representation that the taxpayer had iden-
tified the§174 costs as§174 costs at the
time that the costs were capitalized to
inventory under§263A and the regula-
tions thereunder.
(3)No audit protection. A taxpayer
does not receive audit protection under
section 7 of this revenue procedure in
connection with this change.
SECTION 4A. LOSSES, EXPENSES
AND INTEREST WITH RESPECT TO
TRANSACTIONS BETWEEN
RELATED TAXPAYERS (§267)
.01Change to comply with§267. This
change applies to a taxpayer that wants to
change its method or methods of account-
ing to comply with the requirements of
§267, which disallows or defers certain
deductions attributable to transactions
between related taxpayers. However, this
change applies to a change for stated
interest only to the extent the stated inter-
est is qualified stated interest (as defined
in§1.1273–1(c)).
.02Reserved.
SECTION 4B. DEFERRED
COMPENSATION (§404)
.01Changetocomplywith
§404(a)(11).
(1)Description of change and scope.
(a)Applicability. This change
applies to a taxpayer required to change
its method of accounting for its first tax-
able year ending after July 22, 1998, to
comply with§404(a)(11). Section
404(a)(11) provides that, for purposes of
determining under§404 whether com-
pensation of an employee is deferred
compensation and when deferred com-
pensation is paid, no amount is treated as
received by the employee, or paid, until it
is actually received by the employee. Sec-
tion 404(a)(11) overturns the decision in
Schmidt Baking Co. v. Commissioner, 107
T.C. 271 (1996), in which the court held
that a§83(a) income inclusion event
upon securitization of vacation and sever-
ance pay benefits with a letter of credit
constitutes receipt of those benefits by
employees for purposes of determining
whether an employer’s deduction for the
benefits is subject to§404.SeeNotice
99–16 (1999–1 C.B. 687) (March 29,
1999).
(b)Scope limitations inapplicable.
A taxpayer changing its method of
accounting to comply with§404(a)(11) is
not subject to the scope limitations in sec-
tion 4.02 of this revenue procedure.
(2)Section 481(a) adjustment period.
A taxpayer must take the§481(a) adjust-
ment into account ratably over three tax-
able years.
(3)No audit protection. A taxpayer
does not receive audit protection under
section 7 of this revenue procedure in
connection with this change.
.02Deferred compensation.
(1)Applicability. This change applies
to an accrual method taxpayer that wants
to change its method of accounting to
treat bonuses or vacation pay as follows
(see§404(a)(5) and§1.404(b)–1T, Q&A
2):
(a)Bonuses.
(i)Bonuses not subject to capitali-
zation under§263A. If by the end of the
taxable year all the events have occurred
that establish the fact of the liability to
pay a bonus and the amount of the liabil-
ity can be determined with reasonable
accuracy (see§1.446–1(c)(1)(ii)), and
the bonus is otherwise deductible, but the
bonus is received by the employee after
the 15th day of the 3rd calendar month
after the end of that taxable year, to treat
the bonus as deductible in the taxable
year of the employer in which or with
which ends the taxable year of the
employee in which the bonus is includible
in the gross income of the employee; or
(ii)Bonuses that are subject to
capitalization under§263A. If by the end
of the taxable year all the events have
occurred that establish the fact of the
liability to pay a bonus and the amount of
the liability can be determined with rea-
sonable accuracy (see§1.446–
1(c)(1)(ii)), and the bonus is otherwise
deductible (without regard to§263A),
but the bonus is received by the employee
after the 15th day of the 3rd calendar
month after the end of that taxable year,
to treat the bonus as capitalizable (within
the meaning of§1.263A–1(c)(3)) in the
taxable year of the employer in which or
with which ends the taxable year of the
employee in which the bonus is includible
in the gross income of the employee; or
(b)Vacation pay.
(i)Vacation pay not subject to
capitalization under§263A. If by the end
of the taxable year all the events have
occurred that establish the fact of the
liability to pay vacation pay and the
2002–3 I.R.B.360January 22, 2002

amount of the liability can be determined
with reasonable accuracy (see§1.446–
1(c)(1)(ii)), and the vacation pay is other-
wise deductible, but the vacation pay is
received by the employee after the 15th
day of the 3rd calendar month after the
end of that taxable year, to treat the vaca-
tion pay as deductible in the taxable year
of the employer in which the vacation pay
is paid to the employee; or
(ii)Vacation pay that is subject to
capitalization under§263A. If by the end
of the taxable year all the events have
occurred that establish the fact of the
liability to pay vacation pay and the
amount of the liability can be determined
with reasonable accuracy (see§1.446–
1(c)(1)(ii)), and the vacation pay is other-
wisedeductible(withoutregardto
§263A), but the vacation pay is received
by the employee after the 15th day of the
3rd calendar month after the end of that
taxable year, to treat the vacation pay as
capitalizable (within the meaning of
§1.263A–1(c)(3)) in the taxable year of
the employer in which the vacation pay is
paid to the employee.
(2)Inapplicability. This change
does not apply to the extent that it is also
described in section 4B.01 of this
APPENDIX. This change also does not
apply to a taxpayer that is subject to
§263A and that is required to capitalize
the costs with respect to which the tax-
payer wants to change its method of
accounting if the taxpayer is not capital-
izing the costs as required.
SECTION 5. METHODS OF
ACCOUNTING (§446)
.01Cash or hybrid method to accrual
method.
(1)Description of change and scope.
(a)Applicability. This change
applies to:
(i) a taxpayer that wants to change
to an overall accrual method, or to an
overall accrual method in conjunction
with the recurring item exception under
§461(h)(3), from the cash receipts and
disbursements method (cash method), or
from a hybrid method (the use of a com-
bination of accounting methods under
which an item or items of income or
expense are reported on the cash method
and another item or other items of income
or expense are reported on an accrual
method); or
(ii) a taxpayer that is required to
change to an overall accrual method
under§448, but is ineligible to make the
change under§1.448–1(h)(2) (relating to
the“first§448 year”).
(b)Inapplicability. This change
does not apply to:
(i) a farmer;
(ii) a cooperative organization
described in§501(c)(12), 521, or 1381;
(iii) an individual taxpayer, except
for activities conducted as a sole propri-
etorship;
(iv) a taxpayer required to use an
inventory method of accounting, unless:
(A) the taxpayer is using or
adopts a proper inventory method under
§471 and the regulations thereunder, the
taxpayer is a small reseller within the
meaning of§1.263A–3(a), and, if the
taxpayer has production activities, the
taxpayer’s production activities qualify
under thede minimispresumption of
§1.263A–3(a)(2)(iii);
(B) the taxpayer is using or
adopts a proper inventory method under
§471 and the regulations thereunder, the
taxpayer is a reseller eligible to use the
simplified resale method under§1.263A–
3(d), and the taxpayer is using or adopts
a proper method under that section for the
year of change;
(C) the taxpayer is a producer of
real or tangible personal property
described in§1.263A–2, and is using
both a proper inventory method under
§471 and the regulations thereunder and
a proper capitalization method under
§263A and the regulations thereunder; or
(D) the taxpayer is a producer of
real or tangible personal property
described in§1.263A–2, is using or
adopts a proper inventory method under
§471 and the regulations thereunder, and
adopts a UNICAP method or methods
specifically described in the regulations.
A“UNICAP method specifically
described in the regulations”includes the
specificidentificationmethod
(§1.263A–1(f)(2)), the burden rate
method (§1.263A–1(f)(2)), the standard
cost method (§1.263A–1(f)(3)), the
direct reallocation method (§1.263A–
1(g)(4)(iii)(A)), the step-allocation
method (§1.263A–1(g)(4)(iii)(B)), the
simplifiedservicecostmethod
(§1.263A–1(h)), or the simplified pro-
duction method without the historic
absorption ratio election (§1.263A–2(b)),
but does not include any other reasonable
allocation method within the meaning of
§1.263A–1(f)(4).
(v) a taxpayer required or wanting
to use a special method of accounting,
unless the taxpayer is permitted to change
automatically to the special method under
this revenue procedure. A special method
of accounting is a method that deviates
from the normal tax accounting rules,
such as the method of accounting for
advance payments pursuant to either Rev.
Proc. 71–21 (1971–2 C.B. 549), or
§1.451–5, the installment method of
accounting under§453, or a long-term
contract method, such as the percentage
of completion method or the completed
contract method;
(vi) a taxpayer required to change
to an overall accrual method under§448
and eligible to make the change under
§1.448–1(h)(2).See§1.448–1(h)(2),
which provides an automatic consent pro-
cedure for a taxpayer changing for the
first taxable year that it is subject to
§448.See also§1.448–1(h)(1), which
provides that§1.448–1(h) does not apply
to a change required under any Code sec-
tion (or regulations thereunder) other than
§448 (for example, a taxpayer with
inventories); or
(vii) a taxpayer engaged in two or
more trades or businesses, unless the tax-
payer uses or adopts the same overall
accrual method for each such trade or
business.
(2)Section§481(a) adjustment.
(a)In general. The§481(a) adjust-
ment takes into account the accounts
receivable, accounts payable, inventory,
and any other item determined to be nec-
essary in order to prevent items from
being duplicated or omitted. The§481(a)
adjustment does not include any item of
income accrued but not received that was
worthless or partially worthless (within
the meaning of§166(a)) on the last day
of the year preceding the year of change.
(b)Recurring item exception.As
part of the change to an overall accrual
method, a taxpayer may adopt the recur-
ring item exception for the year of change
if the taxpayer is eligible and follows the
procedures of§1.461–5(d). If the tax-
payer is eligible and wants to adopt this
method as specified in§461(h)(3), the
amount of the§481(a) adjustment must
January 22, 20023612002–3 I.R.B.

be modified to account for the amount of
any additional deduction.
(3)Change to a special method of
accounting. If a taxpayer that wants to
change to an accrual method in conjunc-
tion with a change to a special method of
accounting is not permitted to make the
change under this revenue procedure, the
taxpayer may request to make both
changes only by filing one application
under the provisions of Rev. Proc. 97–27
(1997–1 C.B. 680). Only one user fee
will be required for these changes.
(4)Coordination with section 13.01
of the APPENDIX for short-term obliga-
tions. If a taxpayer subject to§1281
wants to change its method of accounting
under this section 5.01 of the APPENDIX
and, as part of the change, is changing its
method of accounting for interest income
on short-term obligations, then the change
for interest income on short-term obliga-
tions should be made under section 13.01
of the APPENDIX of this revenue proce-
dure and not under this section 5.01 of the
APPENDIX.
.02Multi-year service warranty con-
tracts.
(1)Description of change and scope.
(a)Applicability. This change
applies to an eligible accrual method
manufacturer, wholesaler, or retailer of
motor vehicles or other durable consumer
goods that wants to change to the service
warranty income method described in
section 5 of Rev. Proc. 97–38 (1997–2
C.B. 479). Under the service warranty
income method, a qualifying taxpayer
may, in certain specified and limited cir-
cumstances, include a portion of an
advance payment related to the sale of a
multi-year service warranty contract in
gross income generally over the life of
the service warranty obligation.
(b)Inapplicability. This change
does not apply to a taxpayer outside the
scope of Rev. Proc. 97–38.
(2)Manner of making the change.
(a) This change is made using a cut-
off method, under which the taxpayer
begins the use of the service warranty
income method for all qualified advance
payment amounts received in the year of
change and thereafter.Seesection 2.06 of
this revenue procedure.
(b) In accordance with§1.446–
1(e)(3)(ii), the requirement of§1.446–
1(e)(3)(i) to file an application on Form
3115 is waived and a statement in lieu of
the Form 3115 is authorized for this
change. The statement must be identified
at the top as follows:“CHANGE TO
THESERVICEWARRANTY
INCOME METHOD UNDER SEC-
TION 5.02 OF THE APPENDIX OF
REV. PROC. 2002–9.”The statement
must set forth the information required
under section 6.03 of Rev. Proc. 97–38,
except that the statement under section
6.03(2) (that the taxpayer agrees to all of
the terms and conditions of the revenue
procedure) also should refer to Rev. Proc.
2002–9.
(c) A taxpayer changing to the ser-
vice warranty income method of account-
ing under section 5.02 of this APPENDIX
must satisfy the annual reporting require-
ment set forth in section 6.04 of Rev.
Proc. 97–38.
.03Multi-year insurance policies for
multi-year service warranty contracts—
Description of change and scope.
(1)Applicability. This change applies
to a manufacturer, wholesaler, or retailer
of motor vehicles or other durable con-
sumer goods that wants to change its
method of accounting for insurance costs
paid or incurred to insure its risks under
multi-year service warranty contracts to
the method described in section 5.03(3)
of this APPENDIX. Multi-year service
warranty contracts to which this change
applies include only those separately
priced contracts sold by a manufacturer,
wholesaler, or retailer also selling the
motor vehicles or other durable consumer
goods (to the ultimate customer or to an
intermediary) underlying the contracts.
The classification of goods as“durable
consumer goods”for purposes of this
change depends on the common usage of
the goods, rather than the purchaser’s
actual intended use of the goods.
(2)Inapplicability. This change does
not apply to a taxpayer that covers its
risks under its multi-year service war-
ranty contracts through arrangements not
constituting insurance.
(3)Description of method. If a tax-
payer purchases a multi-year service war-
ranty insurance policy (in connection
with its sale of multi-year service war-
ranty contracts to customers) by paying a
lump-sum premium in advance, the tax-
payer must capitalize the amount paid or
incurred and may only obtain deductions
for that amount by prorating (or amortiz-
ing) it over the life of the insurance
policy (whether the cash method or an
accrual method of accounting is used to
account for service warranty transac-
tions).
.04Interest accruals on short-term
consumer loans—Rule of 78s method.
(1)Description of change and scope.
This change applies to a taxpayer that
wants to change its method of accounting
from the Rule of 78s method to the con-
stant yield method for stated interest
(including stated interest that is original
issue discount) on short-term consumer
loans described in Rev. Proc. 83–40,
1983–1 C.B. 774, which was obsoleted
by Rev. Proc. 97–37 (1997–2 C.B. 455).
However, this change only applies to
loans issued on or after the first day of
the taxpayer’s first taxable year that
begins on or after January 1, 1999.
(2)Background.
(a) A short-term consumer loan is
described in Rev. Proc. 83–40, provided:
(i) the loan is a self-amortizing
loan that requires level payments, at regu-
lar intervals at least annually, over a
period not in excess of five years (with no
balloon payment at the end of the loan
term); and
(ii) the loan agreement between
the borrower and the lender provides that
interest is earned, or upon the prepayment
of the loan interest is treated as earned, in
accordance with the Rule of 78s method.
(b) In general, the Rule of 78s
method allocates interest over the term of
a loan based, in part, on the sum of the
periods’digits for the term of the loan.
See Rev. Rul. 83–84 (1983–1 C.B. 97) for
a description of the Rule of 78s method.
(c) In general, the constant yield
method allocates interest and original
issue discount over the term of a loan
based on a constant yield. See§1.1272–
1(c) for a description of the constant yield
method. The Rule of 78s method gener-
ally front-loads interest as compared to
the constant yield method.
(d) Rev. Proc. 83–40 was obsoleted
because, under§§1.446–2 and 1.1272–1
(which were effective for debt instru-
ments issued on or after April 4, 1994),
taxpayers generally must account for
stated interest and original issue discount
on a debt instrument (loan) by using a
constant yield method. As a result, the
2002–3 I.R.B.362January 22, 2002

Rule of 78s method is no longer an
acceptable method of accounting for fed-
eral income tax purposes.
(e) Notwithstanding§§1.446–2 and
1.1272–1, as a matter of administrative
convenience, the Service will allow a tax-
payer to use the Rule of 78s method for
stated interest on short-term consumer
loans described in Rev. Proc. 83–40 if the
loans were issued prior to the first day of
the taxpayer’s first taxable year that
begins on or after January 1, 1999.
(3)Manner of making the change.
This change applies to loans issued on or
after the first day of the taxpayer’s first
taxable year that begins on or after Janu-
ary 1, 1999. As a result, any§481 adjust-
ment will be computed only with respect
to those loans.
.05Small taxpayers changing to over-
all cash method.
(1)Description of change.This
change applies to a taxpayer (other than a
taxpayer described in§448(a)(3)) with
“average annual gross receipts”(as
defined in section 5.01 of Rev. Proc.
2001–10, 2001–2 I.R.B. 272) of
$1,000,000 or less that wants to change to
the overall cash method of accounting as
described in Rev. Proc. 2001–10.
(2)Scope limitations inapplicable.
The scope limitations in section 4.02 of
this revenue procedure do not apply to
this change.
(3)Manner of making the change.
Taxpayers making this change are urged
to consult Rev. Proc. 2001–10 for addi-
tional guidance on the computation of the
§481(a) adjustment and the completion
of the application.
(4)Automatic changes to treating
inventoriable items as nonincidental
materials and supplies under Rev. Proc.
2001–10.A taxpayer desiring to make
both this change and the change to treat-
ing inventoriable items as materials and
supplies that are not incidental under
§1.162–3 (see section 9.03 of the
APPENDIX of this revenue procedure)
may file a single application for both
changes.
.06Nonaccrual-experience method.
(1)Applicability.This change applies
to a taxpayer using an overall accrual
method that wants to change, and is eli-
gible to change, to the nonaccrual-
experience method of accounting under
§448(d)(5) and regulations thereunder
for amounts to be received for the perfor-
mance of services by the taxpayer which
(on the basis of experience) will not be
collected.
(2)Inapplicability.This change does
not apply to any amount:
(a) if interest is required to be paid
on such amount; or
(b) if a penalty is imposed for fail-
ure to timely pay such amount.
(3)Scope limitations inapplicable.
The scope limitations in section 4.02 of
this revenue procedure are not applicable
to this change.
SECTION 5A. TAXABLE YEAR OF
INCLUSION (§451)
.01Accrual of interest on nonperform-
ing loans.
(1)Description of change and scope.
(a) This change applies to an
accrual method taxpayer that is a bank as
defined in§581 (or whose primary busi-
ness is making or managing loans) and
wants to change its method of accounting
to comply with§§451 and 1.451–1(a) for
qualified stated interest (as defined in
§1.1273–1(c)) on nonperforming loans.
(b) Section 1.451–1(a) requires
income to be accrued when all the events
have occurred that fix the right to receive
the income and the amount thereof can be
determined with reasonable accuracy. A
taxpayer may not stop accruing qualified
stated interest on a nonperforming loan
for federal income tax purposes merely
because payments on the loan are overdue
by a certain length of time, such as 90
days, even if a federal, state, or other
regulatory authority having jurisdiction
over the taxpayer permits or requires that
the overdue interest not be accrued for
regulatory purposes.
(c) Under§§451 and 1.451–1(a), a
taxpayer must continue accruing qualified
stated interest on any nonperforming loan
until either (i) the loan is worthless under
§166 and charged off as a bad debt, or
(ii) the interest is determined to be uncol-
lectible. In order for interest to be deter-
mined uncollectible, the taxpayer must
substantiate, taking into account all the
facts and circumstances, that it has no
reasonable expectation of payment of the
interest. This substantiation requirement
is applied on a loan by loan basis.
(d) A taxpayer that changes its
method of accounting under section
5A.01 of this APPENDIX must do so for
all of its loans.
(2)Section 481(a) adjustment.In gen-
eral, the§481(a) adjustment for a method
change under section 5A.01 of this
APPENDIX represents the amount of
qualified stated interest, on the taxpayer’s
nonperforming loans outstanding as of
the beginning of the year of change, that
should have been accrued under§§451
and 1.451–1(a) and was not accrued.
Interest for which the taxpayer, as of the
beginning of the year of change, has no
reasonable expectation of payment is not
taken into account in determining the
amount of the§481(a) adjustment.
.02Cash advances on insurance com-
missions.
(1)Description of change.
(a) This change applies to an insur-
ance company that wishes to change its
method of accounting for cash advances
on commissions paid to its agents from
deducting a cash advance in the taxable
year in which the advance is paid to the
agent to deducting a cash advance in the
taxable year in which the advance is
earned by the agent. This change applies
only to cash advances qualifying as loans
under Rev. Proc. 2001–24 (2001–10
I.R.B. 788). An insurance company mak-
ing this change must comply with all
other applicable provisions of Rev. Proc.
2001–24.
(b) An agent of an insurance com-
pany making this change is granted con-
sent to change the agent’s method of
accounting to report cash advances in the
year earned rather than in the year paid,
so long as the agent’s change in method
of accounting is consistent with the insur-
ance company’s reporting. No separate
filing is required by an agent.
(2)Year of change.This change
applies only to the insurance company’s
first or second taxable year beginning
after December 31, 1999.
(3)Scope limitations inapplicable.
The scope limitations in section 4.02 of
this revenue procedure do not apply.
(4)Manner of making the change.
(a) The insurance company must
attach to the application a statement that
complies with section 4.03 of Rev. Proc.
2001–24.
(b) This change is effected on a cut-
off basis.Seesection 2.06 of this revenue
January 22, 20023632002–3 I.R.B.

procedure. If the insurance company pre-
viously changed its method of accounting
for cash advances from“loan”to“earned
cash advances”and that change resulted
in a§481(a) adjustment that has not been
fully included in the insurance company’s
taxable income, the insurance company
must include the remaining§481(a)
adjustment in taxable income in the year
of change. Similarly, if the insurance
company previously changed its method
of accounting for cash advances from
“loans”to“earned cash advances”and
that change resulted in a§481(a) adjust-
ment that has not been fully included in
the agent’s reported income, the insurance
company must include the remaining
§481(a) adjustment on the agent’s appli-
cable Form 1099–MISC,Miscellaneous
Income, or Form W–2,Wage and Tax
Statement, for the year of change.
.03Advance rentals—description of
change and scope. This change applies to
a taxpayer that wishes to change its
method of accounting for advance rentals
(other than advance rentals subject to
§467 and the regulations thereunder) to
include such advance rentals in gross
income in the taxable year received.See
§1.61–8(b).
SECTION 6. OBLIGATIONS ISSUED
AT DISCOUNT (§454)
.01Series E, EE or I U.S. savings
bonds.
(1)Description of change and scope.
This change applies to a cash method tax-
payer that wants to change its method of
accounting for interest income on Series
E, EE, or I U.S. savings bonds. However,
this change only applies to a taxpayer that
has previously made an election under
§454 to report as interest income the
increase in redemption price on a bond
occurring in a taxable year, and that now
wants to report this income in the taxable
year in which the bond is redeemed, dis-
posed of, or finally matures, whichever is
earliest.
(2)Manner of making the change.
(a) This change is made using a cut-
off method and is effective for any
increase in redemption price occurring
after the beginning of the year of change
for all Series E, EE and I U.S. savings
bonds held by the taxpayer on or after the
beginning of the year of change.Seesec-
tion 2.06 of this revenue procedure.
(b) In accordance with§1.446–
1(e)(3)(ii), the requirement of§1.446–
1(e)(3)(i) to file an application on Form
3115 is waived and a statement in lieu of
the Form 3115 is authorized for this
change. The statement must be identified
at the top as follows:“CHANGE IN
METHODOFACCOUNTING
UNDER SECTION 6.01 OF THE
APPENDIX OF REV. PROC. 2002–9.”
The statement must set forth:
(i) the Series E, EE, or I U.S. sav-
ings bonds for which this change in
accounting method is requested;
(ii) an agreement to report all inter-
est on any bonds acquired during or after
the year of change when the interest is
realized upon disposition, redemption, or
final maturity, whichever is earliest; and
(iii) an agreement to report all inter-
est on the bonds acquired before the year
of change when the interest is realized
upon disposition, redemption, or final
maturity, whichever is earliest, with the
exception of any interest income previ-
ously reported in prior taxable years.
.02Reserved.
SECTION 7. PREPAID
SUBSCRIPTION INCOME (§455)
.01Prepaid subscription income.
(1)Description of change and scope.
This change applies to an accrual method
taxpayer that wants to change its method
of accounting for prepaid subscription
income to the method described in§455
and the regulations thereunder, including
an eligible taxpayer that wants to make
the“within 12 months”election under
§1.455–2.
(2)Manner of making the change.
(a) This change is made using a cut-
off method and does not apply to any pre-
paid subscription income received before
the first taxable year to which the change
applies. Any prepaid subscription income
arising prior to the year of change is
accounted for under the taxpayer’s former
method of accounting.Seesection 2.06 of
this revenue procedure.
(b) In accordance with§1.446–
1(e)(3)(ii), the requirement of§1.446–
1(e)(3)(i) to file an application on Form
3115 is waived and a statement in lieu of
the Form 3115 is authorized for this
change. The statement must be identified
at the top as follows:“CHANGE IN
METHOD OF ACCOUNTING FOR
PREPAID SUBSCRIPTION INCOME
UNDER SECTION 7.01 OF THE
APPENDIX OF REV. PROC. 2002–9.”
The statement must set forth the informa-
tion required under§1.455–6(b).
(c) The consent granted under this
revenue procedure satisfies the consent
required under§§455(c)(3) and 1.455–
6(b).
.02Reserved.
SECTION 7A. SPECIAL RULES FOR
LONG-TERM CONTRACTS (§460)
.01Change to comply with final regu-
lations under§460.
(1)Description of change and scope.
(a)Applicability. This change
applies to taxpayers that must change
their methods of accounting to comply
with the provisions of§§1.460–1 through
1.460–5 for long-term contracts entered
into on or after January 11, 2001.See
§1.460–1(c)(2) for a description of when
a contract is viewed as“entered into.”
(b)Inapplicability. This change
does not apply to a taxpayer that wishes
to change its exempt-contract method of
accounting (as defined in§1.460–4(c)).
A taxpayer desiring to change its exempt-
contract method of accounting must
obtain consent for such change by filing
an application under Rev. Proc. 97–27 (or
successor).
(2)Year of change. The year of
change for this change is the taxpayer’s
taxable year that includes January 11,
2001.
(3)Manner of making change. This
change is made on a cut-off basis.
Accordingly, a§481(a) adjustment is nei-
ther permitted nor required.
(4)Scope limitations inapplicable.
The scope limitations in section 4.02 of
this revenue procedure do not apply to
this change.
(5)No audit protection. A taxpayer
does not receive audit protection under
section 7 of this revenue procedure in
connection with this change.
.02Change from exempt-contract
methodtopercentage-of-completion
method.
(1)Description of change and scope.
This change applies to a taxpayer that
(a) is not required by§460 and
regulations thereunder to use the
percentage-of-completion method to
account for its long-term contracts, and
2002–3 I.R.B.364January 22, 2002

(b) wants to change its method of
accounting for long-term contracts from
an exempt-contract method (see§1.460–
4(c)) to the percentage of completion
method (see§1.460–4(b)).
(2)Manner of making change. This
change is made on a cut-off basis.
Accordingly, a§481(a) adjustment is nei-
ther permitted nor required. This change
does not apply to any long-term contract
entered into before the year of change.
See§1.460–1(c)(2) for a description of
when a contract is viewed as“entered
into.”
(3)No audit protection. A taxpayer
does not receive audit protection under
section 7 of this revenue procedure in
connection with this change.
SECTION 8. TAXABLE YEAR OF
DEDUCTION (§461)
.01Timing of incurring liabilities for
employee compensation.
(1)Self-insured employee medical
benefits.
(a)Applicability. This change
applies to an accrual method taxpayer that
wants to change its method of accounting
to treat an obligation to pay an employ-
ee’s medical expenses that is neither
insured nor paid from a welfare benefit
fund within the meaning of§419(e) as a
liability incurred in the taxable year in
which the employee files the claim with
the employer.See United States v. Gen-
eral Dynamics Corp., 481 U.S. 239
(1987) (1987–2 C.B. 134).
(b)Inapplicability. This change
does not apply to a taxpayer that is sub-
ject to§263A and that is required to
capitalize the costs with respect to which
the taxpayer wants to change its method
of accounting under section 8.01 of this
APPENDIX, if the taxpayer is not capi-
talizing the costs as required.
(2)Amounts taken into account.
Applicable provisions of the Code, regu-
lations, and other published guidance pre-
scribe the manner in which a liability that
has been incurred is taken into account.
For example, for a taxpayer with invento-
ries, direct labor costs must be included
in inventory costs and may be recovered
throughcostofgoodssold.See
§1.263A–1(e)(2)(i)(B). A taxpayer may
not rely on the provisions of section 8.01
of this APPENDIX to take a current year
deduction.
.02Timing of incurring liabilities for
real property taxes, personal property
taxes and state income taxes.
(1)Description of change.An
accrual method taxpayer generally incurs
a liability in the taxable year that all the
events have occurred that establish the
fact of the liability, the amount of the
liability can be determined with reason-
able accuracy, and economic performance
has occurred with respect to the liability.
See§1.446–1(c)(1)(ii). Under§1.461–
4(g)(6), if the liability of the taxpayer is
to pay a tax, economic performance
occurs as the tax is paid to the govern-
ment authority that imposed the tax.
(2)Scope.
(a)Applicability. This change
applies to an accrual method taxpayer that
wants to change its method of accounting
to:
(i) treat liabilities (for which the
all events test of§461(h)(4) is otherwise
met) for real property taxes, personal
property taxes, or state income taxes as
incurred in the taxable year in which the
taxes are paid, under§§461 and 1.461–
4(g)(6);
(ii) account for real property
taxes, personal property taxes or state
income taxes under the recurring item
exception to the economic performance
rules under§§461(h)(3) and 1.461–
5(b)(1); or
(iii) revoke an election under
§461(c) (ratable accrual election).
(b)Inapplicability. This change
does not apply to a taxpayer that is sub-
ject to§263A and that is required to
capitalize the costs with respect to which
the taxpayer wants to change its method
of accounting under section 8.02 of this
APPENDIX, if the taxpayer is not capi-
talizing the costs as required.
(3)Amounts taken into account.
Applicable provisions of the Code, regu-
lations, and other published guidance pre-
scribe the manner in which a liability that
has been incurred is taken into account.
For example, for a taxpayer with invento-
ries, certain real property taxes must be
included in inventory costs and may be
recovered through cost of goods sold.See
§1.263A–1(e)(3)(ii)(L). A taxpayer may
not rely on the provisions of section 8.02
of this APPENDIX to take a current year
deduction.
.03Timing of incurring liabilities
under a workers’compensation act, tort,
breach of contract, or violation of law.
(1)Description of change and scope.
(a)Applicability. This change
applies to an accrual method taxpayer that
wants to change its method of accounting
for self-insured liabilities (including any
amounts not covered by insurance, such
as a“deductible”amount under an insur-
ance policy) arising under any workers’
compensation act or out of any tort,
breach of contract, or violation of law, to
treating the liability for the workers’com-
pensation, tort, breach of contract, or vio-
lation of law as being incurred in the tax-
able year in which all the events have
occurred which establish the fact of the
liability, the amount of the liability can be
determined with reasonable accuracy, and
payment is made to the person to which
the liability is owed.See§§461 and
1.461–4(g)(2).
(b)Inapplicability. This change
does not apply:
(i) to a taxpayer that is subject to
§263A and that is required to capitalize
the costs with respect to which the tax-
payer wants to change its method of
accounting under section 8.03 of this
APPENDIX, if the taxpayer is not capi-
talizing the costs as required;
(ii) if payment is made to a third
party rather than to the person to which
the liability is owed.See§1.461–4(g)(1);
or
(iii) if payment is made by a third
party.
(2)Amounts taken into account.
Applicable provisions of the Code, regu-
lations, and other published guidance pre-
scribe the manner in which a liability that
has been incurred is taken into account.
For example, for a taxpayer with invento-
ries, certain employee benefit costs
(including workers’compensation) must
be included in inventory costs and may be
recovered through costs of goods sold.
See§1.263A–1(e)(3)(ii)(D). A taxpayer
may not rely on the provisions of section
8.03 of this APPENDIX to take a current
year deduction.
.04Timing of incurring liabilities for
payroll taxes.
January 22, 20023652002–3 I.R.B.

(1)Applicability. This change applies
to:
(a) an accrual method employer that
wants to change its method of accounting
for
(i) FICA and FUTA taxes to a
method consistent with the holding in
Rev. Rul. 96–51 (1996–2 C.B. 36) (Rev.
Rul. 96–51 holds that, under the all
events test of§461, an accrual method
employer may deduct in Year 1 its other-
wise deductible FICA and FUTA taxes
imposed with respect to year-end wages
properly accrued in Year 1, but paid in
Year 2, if the requirements of the recur-
ring item exception are met); and
(ii) state unemployment taxes and,
in the event the taxpayer is an employer
within the meaning of the Railroad
Retirement Tax Act (see§3231(a)), rail-
road retirement taxes to a method under
which the taxpayer may deduct in Year 1
its otherwise deductible state unemploy-
ment taxes and railroad retirement taxes
(if applicable) imposed with respect to
year-end wages properly accrued in Year
1, but paid in Year 2, if the requirements
of the recurring item exception are met
(including the requirement that, as of the
end of the taxable year, all events have
occurred that establish the fact of the
liability and the amount of the liability
can be determined with reasonable accu-
racy,see§1.461–5(b)); or
(b) an accrual method employer
that utilizes a method of accounting for
FICA and FUTA taxes that is consistent
with the holding in Rev. Rul. 96–51
(1996–2 C.B. 36) and wishes to change
its method of accounting for state unem-
ployment taxes and, in the event the
employer is an employer within the
meaning of the Railroad Retirement Tax
Act (see§3231(a)), railroad retirement
taxes to a method under which the tax-
payer may deduct in Year 1 its otherwise
deductible state unemployment taxes and
railroad retirement taxes (if applicable)
imposed with respect to year-end wages
properly accrued in Year 1, but paid in
Year 2, if the requirements of the recur-
ring item exception are met (including the
requirement that, as of the end of the tax-
able year, all events have occurred that
establish the fact of the liability and the
amount of the liability can be determined
with reasonable accuracy,see§1.461–
5(b)).
(2)Inapplicability. This change does
not apply to a taxpayer that is subject to
§263A and that is required to capitalize
the costs with respect to which the tax-
payer wants to change its method of
accounting under section 8.04 of this
APPENDIX, if the taxpayer is not capi-
talizing the costs as required.
(3)Recurring item exception. A tax-
payer that previously has not changed to
or adopted the recurring item exception
for FICA, FUTA, state unemployment
taxes and railroad retirement taxes (if
applicable) must change to the recurring
item exception method for FICA, FUTA,
state unemployment taxes and railroad
retirement taxes (if applicable) as speci-
fied in§461(h)(3) as part of this change.
(4)Amounts taken into account.
Applicable provisions of the Code, regu-
lations, and other published guidance pre-
scribe the manner in which a liability that
has been incurred is taken into account.
For example, for a taxpayer with invento-
ries, certain taxes must be included in
inventory costs and may be recovered
throughcostofgoodssold.See
§1.263A–1(e)(3)(ii)(L). A taxpayer may
not rely on the provisions of section 8.04
of this APPENDIX to take a current year
deduction.
.05Cooperative advertising.
(1)Description of change and scope.
This change applies to a taxpayer that
wants to change its method of accounting
for cooperative advertising costs to a
method consistent with the holding in
Rev. Rul. 98–39 (1998–2 C.B. 198). Rev.
Rul. 98–39 generally provides that, under
the all events test of§461, an accrual
method manufacturer’s liability to pay a
retailer for cooperative advertising ser-
vices is incurred in the year in which the
services are performed, provided the
manufacturer is able to reasonably esti-
mate this liability, and even though the
retailer does not submit the required
claim form until the following year.
(2)Scope limitations inapplicable.A
taxpayer that wants to make this change
for its first or second taxable year ending
on or after August 17, 1998, is not subject
to the scope limitations in section 4.02 of
this revenue procedure.
.06Distributor commissions.
(1)Changes made under Rev. Proc.
2000–38.
(a)Description of change and
scope. This change applies to taxpayers
that wish to change their method of
accounting for distributor commissions
(as defined by§2 of Rev. Proc. 2000–38,
2000–40 I.R.B. 310) to the distribution
fee period method, the 5–year method, or
the useful life method (all described in
Rev. Proc. 2000–38) for the taxpayer’s
taxable year that includes January 1,
2001.
(b)Inapplicability. This change
does not apply to an amortizable section
197 intangible (including any property for
whichatimelyelectionunder
§13261(g)(2) of the 1993 Act was made).
(c)Scope limitations.
(i) A taxpayer that files a copy of
its application for this change with the
national office on or before April 2, 2001
is not subject to the scope limitations in
section 4.02 of this revenue procedure,
unless the taxpayer’s method of account-
ing for distributor commissions is an
issue under consideration before a federal
court within the meaning of section
3.09(3) of this revenue procedure.
(ii) If the taxpayer’s method of
accounting for distributor commissions is
an issue pending at the time that a Form
3115 is filed with the national office, the
taxpayer also must provide to the examin-
ing agent or appeals officer, as appropri-
ate, an executed closing agreement sub-
stantially in the form set forth in
APPENDIX A of Rev. Proc. 2000–38.
For purposes of this change, the taxpay-
er’s method of accounting for distributor
commissions is an issue pending if the
Service has given the taxpayer written
notification indicating an adjustment is
being made or will be proposed with
respect to the taxpayer’s method of
accounting for distributor commissions.
This will normally occur after the Service
has gathered information sufficient to
determine that a proposed adjustment is
appropriate and justified, although the
exact amount of the adjustment may not
yet be determined.
(d)Manner of making the change.
(i)Cut-off method. The change
must be made using a cut-off method, and
applies only to distributor commissions
paid or incurred on or after January 1,
2001. Because no items are duplicated or
omitted from income when a cut-off
method is used, a§481(a) adjustment
2002–3 I.R.B.366January 22, 2002

described in§5.03 of this revenue proce-
dure is not necessary.Seesection 2.06 of
this revenue procedure.
(ii)Year of change. The year of
change is the taxpayer’s taxable year that
includes January 1, 2001.
(iii)Filing requirements. Notwith-
standing section 6.02(3)(a) of this rev-
enue procedure, a taxpayer making this
change may file the required copy of its
application with the national office before
the first day of the year of change if the
taxpayer otherwise properly files its
application under Rev. Proc. 2000–38.
(e)Audit protection. If a taxpayer
complies with the requirements of Rev.
Proc. 2000–38 and this revenue procedure
for changing its method of accounting for
distributor commissions to any of the
three methods of accounting described in
Rev. Proc. 2000–38, the treatment of dis-
tributor commissions will not be raised as
an issue in any taxable year before the
year of change and, if the treatment of
distributor commissions has already been
raised as an issue in a taxable year before
the year of change, the treatment of dis-
tributor commissions will not be further
pursued.
(2)Changes not made under Rev.
Proc. 2000–38.
(a)Change from deducting to capi-
talizing distributor commissions.
(i)Description of change and
scope. This section 8.06(2)(a) applies to a
taxpayer that wishes to change from cur-
rently deducting distributor commissions
(as defined by section 2 of Rev. Proc.
2000–38, 2000–40 I.R.B. 310) to a
method of capitalizing and amortizing
distributor commissions using the distri-
bution fee period method, the 5–year
method, or the useful life method (all
described in Rev. Proc. 2000–38) for a
taxable year other than the taxpayer’s tax-
able year that includes January 1, 2001).
(ii)Inapplicability. This change
does not apply to an amortizable section
197 intangible (including any property for
which a timely election under§13261
(g)(2) of the 1993 Act was made.
(iii)Mannerofmakingthe
change. The change under this section
8.06(2)(a) must be made using the cut-off
method, and applies only to distributor
commissions paid or incurred on or after
the first day of the year of change.
Because no items are duplicated or omit-
ted from income when a cut-off method is
used, a§481(a) adjustment described in
§5.03 of this revenue procedure is not
necessary.Seesection 2.06 of this rev-
enue procedure.
(b)Other changes.Seesection 2.02
of this APPENDIX for (i) changing from
one method described in Rev. Proc.
2000–38 for amortizing distributor com-
missions (as defined by section 2 of Rev.
Proc. 2000–38, 2000–40 I.R.B.310) to
another method described in Rev. Proc.
2000–38 for amortizing distributor com-
missions, or (ii) changing from pooling to
a single asset, or vice versa, for distribu-
tor commissions for which the taxpayer is
using the distribution fee period method
or the useful life method (both described
in Rev. Proc. 2000–38).
SECTION 9. INVENTORIES (§471)
.01Cash discounts
(1)Description of change and scope.
This change applies to a taxpayer that
wants to change its method of accounting
for cash discounts (discounts granted for
timely payment) when they approximate
a fair interest rate, from a method of con-
sistently including the price of the goods
before discount in the cost of the goods
and including in gross income any dis-
counts taken (the“gross invoice
method”), to a method of reducing the
cost of the goods by the cash discounts
and deducting as an expense any dis-
counts not taken (the“net invoice
method”), or vice versa.SeeRev. Rul.
73–65 (1973–1 C.B. 216).
(2)Computation of§481 adjustment
for changes to net invoice method.Inthe
case of a taxpayer changing from the
gross invoice method to the net invoice
method, a negative adjustment must be
made to prevent duplications arising from
the fact that the gross invoice method
reported income upon timely payment for
some or all of the goods that remain in
inventory, and a positive adjustment must
be made to prevent omissions arising
from the fact that the gross method
included the invoice price, unadjusted for
the cash discounts, of some or all goods
in cost of goods sold and the discount
will be earned by payment in a subse-
quent taxable year. The net§481 adjust-
ment can be computed by deducting the
“Applicable Discount”at the beginning
of the year of change from the“Available
Discount”at the beginning of the year of
change. The Available Discount is equal
to the difference between the accounts
payable balance under the gross invoice
method and the net invoice method. The
Applicable Discount is equal to the differ-
ence between the beginning inventory
value under the gross invoice method and
the net invoice method.
Example. Taxpayer’s accounts payable balance
at the beginning of the year of change was $1,000x
under the gross invoice method and $980x under the
net invoice method. Taxpayer’s inventory value was
$3,000x under the gross invoice method and
$2,955x under the net invoice method. The Avail-
able Discount is $20 ($1,000x—$980x) and the
Applicable Discount is $45 ($3,000x—$2,955x).
Thus, Taxpayer’s net§481(a) adjustment is a nega-
tive $25 ($20—$45).
(3)Computation of§481 adjustment
for changes to gross invoice method.In
the case of a taxpayer changing from the
net invoice method to the gross invoice
method, a positive adjustment must be
made to prevent omissions arising from
the fact that the net invoice method did
not report income upon timely payment
for some or all of the goods that remain
in inventory, and a negative adjustment
must be made to prevent duplications
arising from the fact that the net method
included the invoice price, adjusted for
the cash discounts, of some or all goods
in cost of goods sold and the discount
will be earned by payment in a subse-
quent taxable year. The net§481 adjust-
ment can be computed by deducting the
“Applicable Discount”at the beginning
of the year of change from the“Available
Discount”at the beginning of the year of
change. The Available Discount is equal
to the difference between the accounts
payable balance under the gross invoice
method and the net invoice method. The
Applicable Discount is equal to the differ-
ence between the beginning inventory
value under the gross invoice method and
the net invoice method.
Example. Taxpayer’s accounts payable balance
at the beginning of the year of change was $980x
under the net invoice method and $1,000x under the
gross invoice method. Taxpayer’s inventory value
was $2,955x under the net invoice method $3,000x
under the gross invoice method. The Applicable
Discount is $45 ($3,000x—$2,955x) and the Avail-
able Discount is $20 ($1,000x—$980x). Thus,
Taxpayer’s net§481(a) adjustment is a positive $25
($20—$45).
.02Estimating inventory“shrinkage”.
(1)Description of change and scope.
This change applies to a taxpayer that
January 22, 20023672002–3 I.R.B.

wants to change to a method of account-
ing for estimating inventory shrinkage in
computing ending inventory, using:
(a) the“retail safe harbor method”
described in section 4 of Rev. Proc.
98–29 (1998–1 C.B. 857); or
(b) a method other than the retail
safe harbor method, provided (i) the tax-
payer’s present method of accounting
does not estimate inventory shrinkage,
and (ii) the taxpayer’s new method of
accounting (that estimates inventory
shrinkage) clearly reflects income under
§446(b).
(2)Scope limitations inapplicable.A
taxpayer that wants to make this change
is not subject to the scope limitations in
section 4.02 of this revenue procedure.
(3)Additional requirements.Ifthe
taxpayer wants to change to a method of
accounting for inventory shrinkage other
than the retail safe harbor method, the
taxpayer must attach to the application a
statement setting forth a detailed descrip-
tion of all aspects of the new method of
estimating inventory shrinkage (includ-
ing, for LIFO taxpayers, the method of
determining inventory shrinkage for, or
allocating inventory shrinkage to, each
LIFO pool).
(4)Audit protection. A taxpayer,
whose present method of accounting esti-
mates inventory shrinkage, does not
receive audit protection under section 7 of
this revenue procedure in connection with
a change to the retail safe harbor method
if, on the date the taxpayer files a copy of
the Form 3115 with the national office,
the taxpayer’s present method of estimat-
ing inventory shrinkage is an issue under
consideration within the meaning of sec-
tion 3.09 of this revenue procedure.
(5)Future change. A taxpayer that
changes to the retail safe harbor method
described in Rev. Proc. 98–29 will not be
precluded, solely by reason of such
change, from changing to another safe
harbor method for estimating inventory
shrinkage in computing ending inventory
in the first year that such other safe har-
bor method is available.
.03Small taxpayer exception from
requirement to account for inventories
under§471.
(1)Description of change. This
change applies to a taxpayer (other than a
taxpayer described in§448(a)(3)) with
“average annual gross receipts”(as
defined in section 5.01 of Rev. Proc.
2001–10, 2001–2 I.R.B. 272) of
$1,000,000 or less that wants to change
from a method of accounting for invento-
riable items (including, if applicable,
from the method of capitalizing costs
under§263A) to the method described in
Rev. Proc. 2001–10 for treating inventori-
able items in the same manner as materi-
als and supplies that are not incidental
under§1.162–3.
(2)Scope limitations inapplicable.
The scope limitations in section 4.02 of
this revenue procedure do not apply to
this change.
(3)Manner of making the change.
Taxpayers making this change should
consult Rev. Proc. 2001–10 for additional
guidance on the computation of the
§481(a) adjustment and the completion
of the application.
(4)Automatic changes to the cash
method under Rev. Proc. 2001–10. A tax-
payer desiring to make both this change
and the change to the overall cash method
under Rev. Proc. 2001–10 (see section
5.05 of the APPENDIX of this revenue
procedure) may file a single application
for both changes.
.04“Floor stocks”payments made or
received.
(1)Description of change and scope.
This change applies to a taxpayer that
wants to change its method of accounting
for payments made or received with
respect to“floor stocks”to conform with
the holding of Rev. Rul. 2001–8 (2001–9
I.R.B. 726), or to elect the simplifying
assumption regarding goods on hand set
forth in Rev. Rul. 2001–8.
(2)Requirements. This change may
only be made for the first taxable year in
which payments are made or received
with respect to floor stocks subsequent to
February 26, 2001.
(3)Scope limitations inapplicable.
The scope limitations in section 4.02 of
this revenue procedure do not apply to
this change.
(4)Manner of making the change.
(a) The change is made using a cut-
off method relative to payments made or
received with respect to floor stocks on or
before February 26, 2001.Seesection
2.06 of this revenue procedure.
(b) A taxpayer making this change
should clearly indicate on its application,
or in an attachment thereto, if it is elect-
ing to use the simplifying assumption of
Rev. Rul. 2001–8 to identify the goods
physically held on the floor stocks date
for costing purposes.
.05Qualifying volume-related trade
discounts.
(1)Description of change and scope.
This change applies to a taxpayer that
wants to change its method of accounting
to treat qualifying volume-related trade
discounts as a reduction in the cost of
merchandise purchased at the time the
discount is recognized in accordance with
§1.471–3(b). A“qualifying volume-
related trade discount”means a discount
satisfying the following criteria:
(a) the taxpayer receives or earns
the discount solely as the result of the
purchase of the merchandise to which the
discount relates;
(b) the taxpayer is neither obligated
nor expected to perform or provide any
services in exchange for the discount; and
(c) the discount is not a reimburse-
ment of any expenditure incurred or to be
incurred by the taxpayer.
(2)Section 481 adjustment. The net
§481 adjustment attributable to the
change is computed in a manner similar
to the computation of a net§481 adjust-
ment in the case of a change to the net
invoice method of accounting for cash
discounts. See section 9.01(2) of the
APPENDIX.
.06Impermissible methods of valua-
tion. This change applies to a taxpayer
changing a method of accounting to
restore a writedown or discontinue main-
taining a reserve specifically described
within§1.471–2(f).
SECTION 10. LAST-IN, FIRST-OUT
(LIFO) INVENTORIES (§472)
.01Change from the LIFO inventory
method.
(1)Description of change and scope.
(a)In general. This change applies
to any taxpayer that wants to:
(i) change from the LIFO inven-
tory method for all its LIFO inventory or
for a pool or pools within its LIFO inven-
tory; and
(ii) change to the permitted
method as determined in section
10.01(1)(b) of this APPENDIX.
(b)Method to be used.
2002–3 I.R.B.368January 22, 2002

(i)Determining method to be
used. The inventory method to be used by
a taxpayer is determined as follows:
(A) If the taxpayer has invento-
riable goods not included in its LIFO
inventory computations (non-LIFO inven-
tory) and, for all the taxpayer’s non-LIFO
inventory, the taxpayer uses an inventory
method that is a permitted method, then
the taxpayer must use that same inventory
method for all of its non-LIFO inventory,
including the inventory that is the subject
of this accounting method change.
(B) If the LIFO inventory
method is used by the taxpayer with
respect to all its inventoriable goods, then
the taxpayer must use the same inventory
method it used prior to the adoption of
the LIFO inventory method, if that prior
method is a permitted method.
(C) If the taxpayer has only
LIFO inventory and the method used by
the taxpayer prior to the adoption of the
LIFO inventory method is not a permitted
method, then the taxpayer must use a per-
mitted method.
(D) If the taxpayer did not use
an inventory method prior to the adoption
of the LIFO inventory method and has no
inventoriable goods other than its LIFO
inventory, then the taxpayer must use a
permitted method.
(ii)Permitted method defined. For
purposes of section 10.01 of this APPEN-
DIX, a permitted method is a method
under which:
(A) the identification method is
either the first-in, first-out (FIFO) inven-
tory method or the specific identification
inventory method; and
(B) the valuation method is cost;
cost or market, whichever is lower; mar-
ket (but only if the taxpayer is a dealer in
securities, as defined in§1.471–5); the
“farm price method”or the“unit-
livestock-price method”(but only if the
taxpayer is a farmer permitted to use such
methods); or the retail method, reduced to
either approximate cost or approximate
cost or market, whichever is lower (but
only if the taxpayer is a retail merchant).
(iii)Method not to be used. The
average cost method (sometimes also
referred to as“the rolling average
method”) described in Rev. Rul. 71–234
(1971–1 C.B. 148), is not a permitted
method.
(iv)Determiningpermitted
method. Whether an inventory method is
a permitted method is determined by the
taxpayer’s method of inventory identifi-
cation and valuation, and not by which
types and amounts of costs are capitalized
under the taxpayer’s method of comput-
ing inventory cost.See§263A and the
regulations thereunder, which govern the
types and amounts of costs required to be
included in inventory cost for taxpayers
subject to those provisions.
(2)Limitation on LIFO election. The
taxpayer may not re-elect the LIFO
inventory method for a period of at least
five taxable years beginning with the year
of change unless, based on a showing of
unusual and compelling circumstances,
consent is specifically granted by the
Commissioner to change the method of
accounting at an earlier time. A taxpayer
that wants to re-elect the LIFO inventory
method within a period of five taxable
years (beginning with the year of change)
must file a Form 3115 in accordance with
Rev. Proc. 97–27 (1997–1 C.B. 680). A
taxpayer that wants to re-elect the LIFO
inventory method after a period of five
taxable years (beginning with the year of
change) is not required to file a Form
3115 in accordance with Rev. Proc.
97–27, but must file a Form 970,Appli-
cation to Use LIFO Inventory Method,in
accordance with§1.472–3.
(3)Effect of subchapter S election by
corporation.
(a)S election effective for year of
LIFO discontinuance. If a C corporation
elects to be treated as an S corporation for
the taxable year in which it discontinues
use of the LIFO inventory method,
§1363(d) requires an increase in the tax-
payer’s gross income for the LIFO recap-
ture amount (as defined in§1363(d)(3))
for the taxable year preceding the year of
change (the taxpayer’s last taxable year as
a C corporation), and a corresponding
adjustment to the basis of the taxpayer’s
inventory as of the end of the taxable year
preceding the year of change. Any
increase in income tax as a result of the
inclusion of the LIFO recapture amount is
payable in four equal installments, begin-
ning with the taxpayer’s last taxable year
as a C corporation as provided in
§1363(d)(2). Any corresponding basis
adjustment is taken into account in com-
puting the§481(a) adjustment (if any)
that results upon the discontinuance of the
LIFO method by the corporation.
(b)S election effective for a year
after LIFO discontinuance. If a C corpo-
ration elects to be treated as an S corpo-
ration for a taxable year after the taxable
year in which it discontinued use of the
LIFO inventory method, the remaining
balance of any positive§481(a) adjust-
ment must be included in its gross income
in its last taxable year as a C corporation.
If this inclusion results in an increase in
tax for its last taxable year as a C corpo-
ration, this increase in tax is payable in
four equal installments, beginning with
the taxpayer’s last taxable year as a C
corporation as provided in§1363(d)(2),
unless the taxpayer is required to take the
remaining balance of the§481(a) adjust-
ment into account in the last taxable year
as a C corporation under another accel-
eration provision in section 5.04(3)(c) of
this revenue procedure.
(4)Additional requirements. The tax-
payer must complete the following state-
ments and attach them to the application:
(a)“The new method of identifying
inventory goods is the [insert method;
that is, specific identification; FIFO;
retail; etc.] method.”
(b)“The new method of valuing
inventory goods is [insert method; that is,
cost; cost or market, whichever is lower;
etc.].”
(c)“The new method conforms to
the requirements of section 10.01(1)(b)(i)
[insert either (A), (B), (C), or (D)] of the
APPENDIX of Rev. Proc. 2002–9
because [explain in detail how the new
method conforms to the specific subdivi-
sion].”
.02Determining current-year cost
under the LIFO inventory method.
(1)Description of change and scope.
This change applies to a LIFO taxpayer
that wants to change to a method of deter-
mining current year cost:
(a) by reference to the actual cost of
the goods most recently purchased or pro-
duced;
(b) by reference to the actual cost of
the goods purchased or produced during
the taxable year in the order of acquisi-
tion; or
(c) by application of an average
unit cost equal to the aggregate actual
cost of all the goods purchased or pro-
duced throughout the taxable year divided
by the total number of units so purchased
or produced.See§1.472–8(e)(2)(ii).
January 22, 20023692002–3 I.R.B.

(2)Manner of making the change.
This change is made using a cut-off
method.Seesection 2.06 of this revenue
procedure.
.03Alternative LIFO inventory method
for retail automobile dealers.
(1)Description of change and scope.
(a)Applicability. This change
applies to a taxpayer engaged in the trade
or business of retail sales of new automo-
biles or new light-duty trucks (“automo-
bile dealer”) that wants to change to the
“Alternative LIFO Method”described in
section 4 of Rev. Proc. 97–36 (1997–2
C.B. 450), for its LIFO inventories of
new automobiles and new light-duty
trucks. Light-duty trucks are trucks with a
gross vehicle weight of 14,000 pounds or
less, which also are referred to as class 1,
2, or 3 trucks.
(b)Inapplicability. This change
does not apply to an automobile dealer
that uses the inventory price index com-
putation (IPIC) method for goods other
than new automobiles, new light-duty
trucks, parts and accessories, used auto-
mobiles, and used trucks.
(2)Manner of making the change.
(a)Cut-off method. This change is
made using a cut-off method.Seesection
2.06 of this revenue procedure and sec-
tion 5.03(6) of Rev. Proc. 97–36.
(b)IPIC method changes. An auto-
mobile dealer that uses the IPIC method
also must change from the IPIC method
under section 10.03 of this APPENDIX to
another acceptable method for its goods
other than new automobiles and new
light-duty trucks. For parts and accesso-
ries, the automobile dealer must change
to the dollar-value, index method, with all
parts and accessories within each separate
trade or business in a separate LIFO pool.
For used vehicles, the automobile dealer
must change to the dollar-value, link-
chain method, with all used automobiles
within each separate trade or business in
one LIFO pool and all used trucks within
each separate trade or business in another
separate LIFO pool.
(c)Additional requirements.An
automobile dealer also must comply with
the following:
(i) the conditions in section 5.03
of Rev. Proc. 97–36; and
(ii) for an automobile dealer
changing from the IPIC method, the auto-
mobile dealer also must attach to the
application a schedule setting forth the
classes of goods for which the automobile
dealer has elected to use the LIFO
method and the accounting method
changes being made under section 10.03
of this APPENDIX for each class of
goods.
.04Used vehicle alternative LIFO
method.
(1)Description of change and scope.
(a)Applicability. This change
applies to a taxpayer that sells used auto-
mobiles and used light-duty trucks (“used
vehicle dealers”) that wishes to change to
the“Used Vehicle Alternative LIFO
Method”as described in Rev. Proc.
2001–23 (2001–10 I.R.B. 784).
(b)Inapplicability. This change
does not apply to used vehicle dealers
that use the IPIC method and have in
inventory goods other than new or used
automobiles, new or used light duty
trucks, and parts and accessories.Seesec-
tion 5.03(2) of Rev. Proc. 2001–23.
(2)Additional requirements. A tax-
payer making this change must comply
with the additional conditions set forth in
section 5.04 of Rev. Proc. 2001–23.
(3)Scope limitations inapplicable.
The scope limitations in section 4.02 of
this revenue procedure do not apply to
this change, provided that the change is
made for the first or second taxable year
ending on or after December 31, 2000,
unless the taxpayer’s method of valuing
its LIFO inventories of used automobiles
or used light-duty trucks is an issue pend-
ing within the meaning of section 6.01(6)
of Rev. Proc. 2000–38 (2000–40 I.R.B.
310).
(4)Manner of making change.
(a)Cut-off method. This change
must be effected on a cut-off method,
which requires that the value of the tax-
payer’s used automobile and used light-
duty truck inventory at the beginning of
the year of change must be the same as
the value of that inventory at the end of
the preceding taxable year, plus cost res-
torations, if any, required by section
5.04(5) of Rev. Proc. 2001–23. However,
if the taxpayer has previously improperly
accounted for a bulk bargain purchase,
the taxpayer, as part of a change to the
Used Vehicle Alternative LIFO Method,
must first change its method of account-
ing to comply withHamilton Industries,
Inc. v. Commissioner, 97 T.C. 120 (1991),
and compute a§481(a) adjustment for
that part of the change (see Announce-
ment 91–173, 1991–47 I.R.B. 29).
(b)New base year. In effecting a
change to the Used Vehicle Alternative
LIFO Method under this revenue proce-
dure, any LIFO inventory cost increments
previously determined and the value of
those increments must be retained.
Instead of using the earliest taxable year
for which the taxpayer adopted LIFO as
the base year, the year of change must be
used as the new base year in determining
the value of all existing LIFO cost incre-
ments for the year of change and later
taxable years. (The cumulative index at
the beginning of the year of change will
be 1.00.) The base-year cost of all LIFO
cost increments at the beginning of the
year of change must be restated in terms
of new base-year costs, using the year of
change as the new base year, and the
indexes for previously determined inven-
tory increments must be recomputed
accordingly. The new base-year cost of a
pool is equal to the total current-year cost
of all the vehicles in the pool.
(c) When filing their applications,
taxpayers are reminded to complete all
applicable parts of the Form 3115, includ-
ing Part I of Schedule B.
(5)Concurrent change available for
certain IPIC taxpayers. A used vehicle
dealer using the IPIC method that also
has parts and accessories, new automo-
biles, or new light-duty trucks in inven-
tory may incorporate a change, using a
cut-off method, from IPIC to another
acceptable LIFO method for these other
goods into this change. When changing
from IPIC to a dollar-value LIFO method
for parts and accessories, new automo-
biles, or new light-duty trucks, a separate
inventory pool must be established for
each of these types of inventory.
.05Determining the cost of used
vehicles purchased or taken as a trade-in.
(1)Description of change and scope.
(a)Applicability. This change
applies to a LIFO taxpayer that wants to:
(i) determine the cost of used
vehicles acquired by trade-in using the
average wholesale price listed by an offi-
cial used car guide on the date of the
trade-in.SeeRev. Rul. 67–107 (1967–1
C.B. 115). The official used car guide
selected must be consistently used;
2002–3 I.R.B.370January 22, 2002

(ii) determine the cost of used
vehicles purchased for cash using the
actual purchase price of the vehicle; or
(iii) reconstruct the beginning-of-
the-year cost of used vehicles purchased
for cash using values computed by
national auto auction companies based on
vehicles purchased for cash. The national
auto auction company selected must be
consistently used.
(b)Inapplicability. This change
does not apply to taxpayers that have
adopted or changed to the Used Vehicle
Alternative LIFO Method (seesection
10.06 of the APPENDIX of this revenue
procedure).
(2)Manner of making the change.
This change is made using a cut-off
method and applies to used vehicles
acquired during the year of change and all
subsequent years. See section 2.06 of this
revenue procedure.
.06Change to inventory price index
computation (IPIC) method.
(1)Description of change and scope.
(a) This change applies to a tax-
payer that wants to change from a non-
IPIC LIFO inventory method to the IPIC
method in accordance with all relevant
provisions of§1.472–8(e)(3).
(b) A taxpayer may change its
method of determining current-year cost
as part of a change made under section
10.06 of this APPENDIX by also follow-
ing the provisions of section 10.02 of this
APPENDIX. These changes may be made
using a single application, provided the
application is labeled as being filed under
both sections 10.02 and 10.06 of this
APPENDIX.Seesection 6.02(4) of this
revenue procedure.
(c) A taxpayer may change its
method of pooling to a method permitted
under§1.472–8(b)(4) or§1.472–8(c)(2)
as part of a change made under section
10.06 of this APPENDIX by also follow-
ing the provisions of section 10.07 of this
APPENDIX. These changes may be made
using a single application, provided the
application is labeled as being filed under
both sections 10.06 and 10.07 of this
APPENDIX. See section 6.02(4) of this
revenue procedure.
(2)Manner of making the change.
This change is made using a cut-off
method.Seesection 2.06 of this revenue
procedure.
(3)Bargain purchase. If the taxpayer
has previously improperly accounted for
a bulk bargain purchase, the taxpayer
must, as part of this change, first change
its method of accounting to comply with
Hamilton Industries, Inc. v. Commis-
sioner, 97 T.C. 120 (1991), and compute
a§481(a) adjustment for that part of the
change.SeeAnnouncement 91–173
(1991–47 I.R.B. 29). Upon examination,
if a taxpayer has properly changed under
section 10.04 of this APPENDIX except
for complying with section 10.04(3) of
this APPENDIX, an examining agent may
not deny the taxpayer the change. How-
ever, the taxpayer does not receive audit
protection under section 7 of this revenue
procedure with respect to the improper
method of accounting for the bargain pur-
chase. Accordingly, the examining agent
may make any necessary adjustments in
any open year to effect compliance with
Hamilton Industries, Inc.
.07Changes within inventory price
index computation (IPIC) method.
(1)Description of change and scope.
This change applies to a taxpayer that
wants to make one or more of the follow-
ing changes:
(a) change from the double-
extension IPIC method to the link-chain
IPICmethod,orviceversa.See
§§1.472–8(e)(3)(iii)(E) for principles for
computing the inventory price index
under the double-extension IPIC method
and the link-chain IPIC method;
(b) change to or from the 10 percent
method.See§1.472–8(e)(3)(iii)(C) for
principles for assigning items in a dollar-
value pool to BLS categories;
(c) change to a pooling method
described in§1.472–8(b)(4) or§1.472–
8(c)(2), including a change to begin or
discontinue applying one or both of the 5
percent pooling rules;
(d) combine or separate pools as a
result of the application of a 5 percent
pooling rule described in§1.472–8(b)(4)
or§1.472–8(c)(2);
(e) change its selection of BLS
table from Table 3 (Consumer Price Index
for All Urban Consumers (CPI-U): U.S.
city average, detailed expenditure catego-
ries) of the monthly CPI Detailed Report
to Table 6 (Producer price indexes and
percent changes for commodity groupings
and individual items, not seasonally
adjusted) of the monthly PPI Detailed
Report, or vice versa.See§1.472–
8(e)(3)(iii)(B) for principles for selecting
a BLS table under the IPIC method; or
(f) change the representative month
when necessitated because of a change in
taxable year or a change in method of
determining current-year cost made pur-
suant to section 10.02 of this APPENDIX.
See§1.472–8(e)(3)(iii)(B) for principles
for determining a representative month
under the IPIC method. A change in
method of determining current-year cost
and a change of the representative month
may be made using a single application,
provided the application is labeled as
being filed under both sections 10.02 and
10.07 of this APPENDIX.Seesection
6.02(4) of this revenue procedure.
(2)Manner of making the change.
Changes made pursuant to section 10.07
of this APPENDIX are made using a cut-
off method.Seesection 2.06 of this rev-
enue procedure. A taxpayer that changes
pursuant to sections 10.07(a), (b) and (e)
of this APPENDIX must establish a new
base year in the year of change.
SECTION 10A. MARK-TO-MARKET
ACCOUNTING METHOD FOR
DEALERS IN SECURITIES (§475)
.01Reserved.
.02Commodities dealers, securities
traders, and commodities traders electing
to use the mark-to-market method of
accounting under§475(e) or (f).
(1)Description of change. This
change applies to certain taxpayers that
have elected to use the mark-to-market
method of accounting under§475(e) or
(f). Under§475(e) and (f) and Rev. Proc.
99–17, 1999–1 C.B. 503, if a taxpayer
makes an election under§475(e) or (f),
then beginning with the first taxable year
for which the election is effective (elec-
tion year), mark to market is the only per-
missible method of accounting for securi-
ties or commodities subject to the
election. Thus, if the electing taxpayer’s
method of accounting for its taxable year
immediately preceding the election year
is inconsistent with§475, the taxpayer is
required to change its method of account-
ing to comply with the election. A tax-
payer that makes a§475(e) or (f) election
but fails to change its method of account-
ing to comply with that election is using
an impermissible method.Seesection 4
of Rev. Proc. 99–17.
January 22, 20023712002–3 I.R.B.

(2)Scope
(a)Applicability. This change
applies to a taxpayer if all of the follow-
ing conditions are satisfied:
(i) The taxpayer is a commodities
dealer, securities trader, or commodities
trader that has made a valid election
under§475(e) or (f) (seesection 5.02 or
5.03(1) of Rev. Proc. 99–17) and that is
required to change its method of account-
ing to comply with the election;
(ii) The method of accounting to
which the taxpayer changes is in accor-
dance with its election under§475(e) or
(f); and
(iii) The year of change is the
election year.
(b)Scope limitations inapplicable.
A taxpayer making this change is not sub-
ject to the scope limitations in section
4.02 of this revenue procedure.
SECTION 11. BANK RESERVES FOR
BAD DEBTS (§585)
.01Changing from the§585 reserve
method to the§166 specific charge-off
method.
(1)Description of change and scope.
(a)Applicability. This change
applies to a bank (as defined in§581,
including a bank for which a qualified
subchapter S subsidiary (QSSS) election
is filed) that wants to change its method
of accounting for bad debts from the
§585 reserve method to the§166 spe-
cific charge-off method.
(b)Certain scope limitations inap-
plicable. A bank that changed from the
§593 reserve method under§593(g) to
the§585 reserve method will not be pro-
hibited under section 4.02(6) of this rev-
enue procedure from changing its method
of accounting for bad debts under section
11.01 of this APPENDIX solely because
of the§593(g) change. A bank for which
a QSSS election is filed will not be pro-
hibited under section 4.02(7) of this rev-
enue procedure from changing its method
of accounting for bad debts under section
11.01 of this APPENDIX solely because
of the deemed liquidation of the bank
arising from a QSSS election.
(c)Inapplicability. This change
does not apply to a large bank as defined
in§585(c)(2).
(2)Section 481(a) adjustment. Gen-
erally, the amount of the§481(a) adjust-
ment for a change in method of account-
ing under section 11.01 of this
APPENDIX is the amount of the bank’s
reserve for bad debts as of the close of
the taxable year immediately before the
year of change. However, the amount of
the§481(a) adjustment does not include
the amount of a bank’s pre–1988 reserves
(as described in§593(g)(2)(A)(ii), with-
out taking into account§593(g)(2)(B)) if
the bank changed in a prior year from the
§593 reserve method to the§585 reserve
method and§593(g) applied to that
change. The deemed liquidation of a bank
occurring solely because its parent makes
a QSSS election does not accelerate the
§481(a) adjustment. In accordance with
section 5.04(3)(c) of this revenue proce-
dure, a bank that ceases to be a bank
under§581 must accelerate its§481(a)
adjustment.
(3)Change from§585 required
when electing S corporation status.A
bank electing S corporation status (or a
bank for which a QSSS election is filed)
cannot use the§585 reserve method. The
filing by a bank of a Form 2553 (Election
by a Small Business Corporation)orthe
filing by a bank’s parent of a QSSS elec-
tion with respect to the bank will consti-
tute an agreement by the bank to change
its method of accounting for bad debts
from the§585 reserve method to the
§166 specific charge-off method effec-
tive as of the taxable year for which the S
corporation election or QSSS election is
effective (year of change) in accordance
with all of the applicable provisions of
this revenue procedure (including section
6 of this revenue procedure, which
requires filing a Form 3115 in duplicate).
The§481(a) adjustment is recognized
built-in gain under§1374. See§1.1374–
4(d).
.02Reserved.
SECTION 11A. INCOME FROM
SOURCES WITHIN THE UNITED
STATES (§861)
.01Transactions involving computer
programs. This change applies to a tax-
payer that wishes to change its method of
accounting for transactions involving
computer programs to conform to the pro-
visions of§1.861–18(i)(4). This change
applies only to transactions occurring pur-
suant to contracts entered into on or after
December 31, 1998, or, in the case of a
taxpayermakinganelectionunder
§1.861–18(i)(2)(ii), to transactions
occurring pursuant to contracts entered
into in taxable years ending on or after
October 2, 1998.
.02Reserved.
SECTION 11B. FUNCTIONAL
CURRENCY (§985)
.01Change in functional currency.
(1)Description of change and scope.
This change applies to a taxpayer that
wants to change its functional currency or
the functional currency of a qualified
business unit (QBU) of the taxpayer.
(2)Manner of making change. A tax-
payer making this change must make all
necessary adjustments required by such
change.See§§1.985–5, 1.985–8(c).
.02Reserved.
SECTION 12. ORIGINAL ISSUE
DISCOUNT (§§1272, 1273)
.01De minimis original issue discount
(OID).
(1)Description of change and scope.
(a)Applicability. This change
applies to a taxpayer that wants to change
to the principal-reduction method of
accounting described in section 5 of Rev.
Proc. 97–39 (1997–2 C.B. 485). The
principal-reduction method of accounting
is an aggregate method of accounting for
de minimisOID (discount) on certain
loans originated by the taxpayer.
(b)Scope limitations inapplicable.
A taxpayer that wants to make this
change is not subject to the scope limita-
tions in section 4.02 of this revenue pro-
cedure.
(c)Description. The principal-
reduction method of accounting is a per-
missible method for use by taxpayers to
account for discount on one or more cat-
egories of loans described in section 4.02
or 4.03 of Rev. Proc. 97–39. If the
principal-reduction method is used to
account for any loans in a category of
loans, the method must be used for the
entire category of loans. The principal-
reduction method applies only to loans
described in section 3 of Rev. Proc.
97–39.
(2)Manner of making the change.
(a) This change is made using a cut-
off method and applies only to loans
described in section 3 of Rev. Proc.
97–39 that were acquired on or after the
2002–3 I.R.B.372January 22, 2002

first day of the year of change.Seesec-
tion 2.06 of this revenue procedure.
(b) The taxpayer must maintain
books and records sufficient to satisfy the
director that old and new loans have been
adequately segregated.
(3)Additional requirements.Ona
statement attached to the application, the
taxpayer must:
(a) identify the categories of loans
to which the new method will apply; and
(b) describe any“additional catego-
ries”permitted under section 4.03 of Rev.
Proc. 97–39.
(4)No audit protection. A taxpayer
does not receive audit protection under
section 7 of this revenue procedure in
connection with this change.
.02Reserved.
SECTION 12A. MARKET DISCOUNT
BONDS (§1278)
.01 Revocation of§1278(b) election.
(1)Description of change and scope.
This change applies to a taxpayer that
wants to change its method of accounting
for market discount bonds by revoking its
§1278(b) election. Under§1278(b), a
taxpayer may elect a method of account-
ing under which market discount is cur-
rently included in gross income for the
taxable years to which the discount is
attributable. See Rev. Proc. 92–67
(1992–2 C.B. 429), for the procedures to
make a§1278(b) election (including a
deemed§1278(b) election). The proce-
dures for revoking a§1278(b) election
were formerly provided in section 7 of
Rev. Proc. 92–67.
(2)Revocation of election. The revo-
cation of a§1278(b) election applies to
all market discount bonds that are held by
the taxpayer on the first day of the first
taxable year for which the revocation is
effective (year of change), and to all mar-
ket discount bonds that are subsequently
acquired by the taxpayer. If a§1278(b)
election is revoked, then, for purposes of
§1276(a), accrued market discount with
respect to any bond previously subject to
the election means accrued market dis-
count as defined in§1276(b) less any
market discount included in income while
the bond was subject to the§1278(b)
election.
(3)Manner of making the change.
This change is made using a cut-off
method and applies only to market dis-
count accruing on or after the first day of
the year of change. Market discount
accruing on a bond prior to the year of
change was currently included in income
and market discount accruing on the bond
on and after the first day of the year of
change is included in income generally
upon disposition of the bond. See
§1276(a). Because cut-off treatment is
prescribed for this change, the basis of
any bond, adjusted for amounts previ-
ously included in income during the
period of the election, is not affected by
the revocation.
(4)Additional requirements.Ona
statement attached to the application, the
taxpayer must provide:
(a) the reason(s) for revoking the
§1278(b) election (or deemed§1278(b)
election);
(b) a description of the method by
which, and the date on which, the tax-
payer made the§1278(b) election (or
deemed§1278(b) election) that is being
revoked; and
(c) a statement that, after the revo-
cation, the taxpayer will not make a con-
stant interest rate election for any bond
that has been subject to the§1278(b)
election (or deemed§1278(b) election)
being revoked and for which a constant
interest rate election was not effective in
the year of acquisition.
(5)Audit protection. A taxpayer
receives audit protection under section 7
of this revenue procedure in connection
with this change. However, the audit pro-
tection applicable to this change does not
preclude the Commissioner from examin-
ing the method used by the taxpayer to
determine the amount of accrued market
discount under§1276(b) for a taxable
year prior to the year of change.
.02Reserved.
SECTION 13. SHORT-TERM
OBLIGATIONS (§1281)
.01Interest income on short-term obli-
gations.
(1)Description of change and scope.
(a) This change applies to a tax-
payer that wants to change its method of
accounting to comply with§1281 for
interest income on short-term obligations.
(b) Under§1281, a holder of cer-
tain short-term obligations, including a
bank as defined in§581, must include in
gross income any accrued interest income
on such obligations, regardless of the
holder’s overall method of accounting.
Section 1281 applies to all types of inter-
est income, including acquisition dis-
count, original issue discount (OID), and
stated interest.SeeS. Rep. No. 99–313,
99th Cong., 2d Sess. 903 (1986), 1986–3
(Vol. 3) C.B. 903.
(c) Section 1283(a)(1) generally
defines a short-term obligation as any
bond, debenture, note, certificate, or other
evidence of indebtedness that matures in
one year or less from its issue date.
(d) Under§§1281(a) and 1283(c),
a holder of a short-term obligation subject
to§1281 must include in gross income
an amount equal to the sum of the daily
portions of the acquisition discount or
OID, whichever is applicable, on the obli-
gation for each day during the taxable
year that the obligation is held by the
holder. See§1283(b), as modified by
§1283(c), to determine the daily portions
of acquisition discount or OID. In addi-
tion,§1281(a) requires the holder to
include in gross income any stated inter-
est that is payable on the short-term obli-
gation (other than stated interest taken
into account to determine the amount of
the acquisition discount or OID) as it
accrues.
(2)Section 481(a) adjustment period.
A taxpayer must take the entire§481(a)
adjustment into account in computing
taxable income for the year of change.
.02Stated interest on short-term loans
of cash method banks.
(1)Description of change and scope.
(a)Applicability. This change
applies to a bank that uses the cash
receipts and disbursements method of
accounting as its overall accounting-
method and that wants to change its
method of accounting from accruing
stated interest on short-term loans made
in the ordinary course of business to
using the cash method for that interest.
For example, seeSecurity State Bank v.
Commissioner, 214 F.3d 1254 (10th Cir.
2000),aff’g111 T.C. 210 (1998),acq.,
2001–5 I.R.B., andSecurity Bank Minne-
sota v. Commissioner, 994 F.2d 432 (8th
Cir. 1993),aff’g98 T.C. 33 (1992), in
which the courts held that§1281 does
not apply to short-term loans made by a
cash method bank in the ordinary course
of its business.
January 22, 20023732002–3 I.R.B.

(b)Scope limitations inapplicable.
A taxpayer that wants to make this
change is not subject to the scope limita-
tions in section 4.02 of this revenue pro-
cedure.
(2)Change for prior taxable years.A
taxpayer is permitted to make the change
in accounting method described in section
13.02(1)(a) of this Appendix for any tax-
able year ending before December 31,
2000, provided the year is not barred by
the statute of limitations, there is no
closed taxable year after the year of
change, and the taxpayer complies with
the following requirements:
(a) the taxpayer must attach a com-
pleted Form 3115 to an amended return
for the year of change, and must file, on
or before December 31, 2001, that
amended return and amended returns for
all subsequent affected taxable years, if
any; and
(b) the taxpayer must file a copy of
the Form 3115 with the national office no
later than when the original Form 3115 is
filed with the amended return.
(3)Section 481(a) adjustment period.
A taxpayer making this change must take
the entire§481(a) adjustment into
account in computing taxable income for
the year of change.
26 CFR 601.204: Changes in accounting periods
and methods of accounting.
(Also Part I,§§162, 263(a), 446, 481; 1.162–3,
1.263(a)–1, 1.446–1, 1.481–1.)
Rev. Proc. 2002–12
SECTION 1. PURPOSE
This revenue procedure provides tax-
payers engaged in the trade or business of
operating a restaurant or tavern (as
defined in section 4.01 of this revenue
procedure) with a safe harbor method of
accounting for the cost of“smallwares”
(as defined in section 4.02 of this revenue
procedure) (“smallwares method”). This
revenue procedure also provides a proce-
dure for such taxpayers to obtain auto-
matic consent of the Commissioner to
change to the smallwares method.
SECTION 2. BACKGROUND
.01 The trade or business of operating
a restaurant or tavern requires the use of
many items in the preparation, service,
and storage of food and beverages. Pots
and pans, dishes, and glassware are com-
mon examples of these items, known as
“smallwares”in the restaurant industry.
Generally, an“opening package”of
smallwares is purchased before a restau-
rant or tavern opens its doors to custom-
ers. Although an opening package is
made up of hundreds or thousands of
items, it is typically purchased as one unit
from the same vendor. Replacement items
are thereafter purchased on an ongoing
basis. Industry data shows that the aver-
age cost of an opening package of small-
wares ranges from $10,000 to $50,000,
and that smallwares have an average use-
ful life of slightly over one year.
.02 Section 162(a) of the Internal Rev-
enue Code allows a deduction for ordi-
nary and necessary expenses paid or
incurred during the taxable year in carry-
ing on a trade or business. Under
§1.162–3 of the Income Tax Regulations,
the cost of materials and supplies (other
than incidental materials and supplies)
may be deducted only to the extent that
the materials and supplies are actually
consumed and used in the taxpayer’s
business during the taxable year.
.03 Section 263(a) provides that no
deduction is allowed for the cost of new
buildings or of permanent improvements
or betterments made to increase the value
of any property or estate. Section
1.263(a)–2(a) provides examples of capi-
tal expenditures, such as the cost of
acquisition, construction, or erection of
buildings, machinery and equipment, fur-
niture and fixtures, and similar property
having a useful life substantially beyond
the taxable year.
.04 Except as otherwise provided,
under§§446(e) and 1.446–1(e), a tax-
payer must secure the consent of the
Commissioner before changing a method
of accounting for federal income tax pur-
poses. Section 1.446–1(e)(ii) authorizes
the Commissioner to prescribe adminis-
trative procedures setting forth the limita-
tions, terms, and conditions deemed nec-
essary to permit a taxpayer to obtain
consent to change a method of account-
ing. Section 481(a) generally requires
those adjustments necessary to prevent
amounts from being duplicated or omitted
to be taken into account when a taxpay-
er’s taxable income is computed under a
method of accounting different from the
method used to compute taxable income
for the preceding taxable year.
.05 To resolve disputes concerning
whether the cost of smallwares should be
accounted for as currently deductible
expenses under§162 or capital expendi-
tures within the meaning of§263(a), and
to simplify the record keeping require-
ments with respect to smallwares, the
Internal Revenue Service will permit a
taxpayer engaged in the trade or business
of operating a restaurant or tavern that
complies with the requirements of this
revenue procedure to account for the cost
of smallwares using the smallwares
method provided in section 5 of this rev-
enue procedure.
SECTION 3. SCOPE
This revenue procedure applies to the
cost of smallwares incurred by taxpayers
engaged in the trade or business of oper-
ating a restaurant or tavern. It does not
apply to the cost of smallwares that are
start-up expenditures as defined in§195.
Thus, a taxpayer that is not already
engaged in the trade or business of oper-
ating a restaurant that opens a new restau-
rant may not use the smallwares method
provided in section 5 of this revenue pro-
cedure to account for the cost of small-
wares paid or incurred before the new
restaurant opens.
SECTION 4. DEFINITIONS
.01Trade or Business of Operating a
Restaurant or Tavern. For purposes of
this revenue procedure, a taxpayer is
engaged in the trade or business of oper-
ating a restaurant or tavern if the taxpay-
er’s business consists of preparing food
and beverages to customer order for
immediate on-premises or off-premises
consumption. These businesses include,
for example, full-service restaurants;
limited-service eating places; cafeterias;
special food services, such as food ser-
vice contractors, caterers, and mobile
food services; and, bars, taverns, and
other drinking places. For purposes of
this revenue procedure, the trade or busi-
ness of operating a restaurant or tavern
also may include food or beverage ser-
vices at grocery stores, hotels and motels,
2002–3 I.R.B.374January 22, 2002

amusement parks, theaters, casinos, coun-
try clubs, and similar social or recre-
ational facilities.
.02Smallwares. For purposes of this
revenue procedure, smallwares consist of
the following ten categories of items: (1)
Glassware and paper or plastic cups; (2)
Flatware (silverware) and plastic utensils;
(3) Dinnerware (dishes) and paper or
plastic plates; (4) Pots and Pans; (5) Table
Top Items; (6) Bar Supplies; (7) Food
Preparation Utensils and Tools; (8) Stor-
age Supplies; (9) Service Items; and (10)
Small Appliances that cost $500 or less.
Categories 5 through 10 include, but are
not limited to, the items listed below:
(5)Table Top Itemsinclude items
placed on customer tables, such
as salt and pepper shakers, cheese
shakers, ash trays, teapots, cruets,
sugar caddies, tablecloths, nap-
kins, menu holders, menus, vases,
candles, and candleholders.
(6)Bar Suppliesinclude mixing
glasses, bar strainers, cutting
boards, liquor pourers, jiggers,
corkscrews, bottle openers, stor-
age bottles, wine and champagne
stoppers, bar caddies, wine cool-
ers, decanters, salt and sugar
glass rimmers, slow pourers, and
malt shakers.
(7)Food Preparation Utensils and
Toolsinclude hand utensils
(spoons, spatulas, wisks, peelers,
etc.), pastry and grill brushes,
skimmers, knives, kitchen shears,
cutting boards, strainers, colan-
ders, shakers, dippers, measuring
cups and spoons, thermometers,
gloves, goggles, timers, scales,
shaker baskets, salad spinners,
lettuce crispers, sifters, pastry
bags and tubes, mixing bowls,
pot holders, kitchen towels,
cheesecloths, and kitchen staff
uniforms.
(8)Storage Suppliesinclude food
containers, flatware sorters, dish
containers, and spice racks.
(9)Service Itemsinclude pepper
mills, cheese graters, bread
boards, pitchers, squeeze dispens-
ers, coffee pots, napkin recep-
tacles, flatware, plate, glass, and
mug storage racks, wait staff and
self-serve trays, soup and salad
bar trays and containers, bus tubs,
tray carts, booster seats, and wait
staff uniforms.
(10)Small Appliancesinclude iced
tea dispensers, can openers, con-
diment pumps, individual food
warmers, heat lamps, slicers,
glass washers, electric knife
sharpeners, blenders, juicers,
and nonindustrial mixers. Small
appliances do not include appli-
ances that cost in excess of
$500.
For purposes of this revenue procedure,
smallwares do not include office supplies,
general purpose cleaning supplies, or gen-
eral purpose maintenance tools. In addi-
tion, smallwares do not include extraordi-
nary items, such as collectibles or other
items of significant artistic or intrinsic
value, items that are accounted for sepa-
rately for tax or financial purposes, or
items that generally are listed as sched-
uled property for insurance purposes.
Examples of extraordinary items are flat-
ware or dinnerware made of precious
metals, and antique vases used for center-
piece or display purposes.
SECTION 5. SMALLWARES METHOD
.01 Taxpayers within the scope of this
revenue procedure are permitted to
account for smallwares in the same man-
ner as materials and supplies that are not
incidental under§1.162–3.
.02 Under§1.162–3, the costs of
materials and supplies that are not inci-
dental are deductible in the year in which
the materials and supplies are actually
consumed and used in a taxpayer’s busi-
ness.
.03 For purposes of this revenue proce-
dure, smallwares are consumed and used
in a taxpayer’s business, within the mean-
ing of§1.162–3, in the taxable year in
which they are received at the restaurant
and are available for use. For purposes of
this revenue procedure,“received at the
restaurant and available for use”does not
include smallwares purchased and stored
at a warehouse or facility other than the
restaurant where the smallwares will be
used.
SECTION 6. CHANGE IN METHOD
OF ACCOUNTING
.01Limitations, Terms, and Condi-
tions. A change in a taxpayer’s treatment
of the cost of smallwares to the small-
wares method provided in section 5 of
this revenue procedure is a change in
method of accounting to which§§446
and 481 apply. A taxpayer that wants to
change its method of accounting for the
cost of smallwares to the smallwares
method provided in section 5 of this rev-
enue procedure must follow the automatic
change in method of accounting provi-
sions of Rev. Proc. 2002–9 (2002–3
I.R.B. 327) (or its successor) with the fol-
lowing modification: the scope limita-
tions in section 4.02 of Rev. Proc. 2002–9
do not apply. However, if a taxpayer is
under examination, before an area appeals
office, or before a federal court with
respect to any income tax issue at the
time that a copy of the Form 3115,Appli-
cation for Change in Accounting Method,
is filed with the national office, the tax-
payer must provide a copy of the Form
3115 to the examining agent, appeals
officer, or counsel for the government, as
appropriate, at the same time the copy of
the Form 3115 is filed with the national
office. The Form 3115 must contain the
name(s) and telephone number(s) of the
examining agent, appeals officer, or coun-
sel for the government, as appropriate.
.02Audit Protection. If a taxpayer
complies with the requirements of this
revenue procedure and changes its
method of accounting for the cost of
smallwares to the smallwares method
provided in section 5 of this revenue pro-
cedure, the treatment of those costs will
not be raised as an issue in any taxable
year before the year of change and, if the
treatment of the cost of smallwares has
already been raised as an issue in a tax-
able year before the year of change, that
issue will not be further pursued.
.03Section 481(a) Adjustment. A tax-
payer changing its method of accounting
under this revenue procedure for the cost
of smallwares must take the entire net
amount of any§481(a) adjustment into
account in computing taxable income for
the year of change.
SECTION 7. EFFECTIVE DATE
This revenue procedure is effective for
taxable years ending on or after Decem-
ber 31, 2001.
January 22, 20023752002–3 I.R.B.

DRAFTING INFORMATION
The principal author of this revenue
procedure is Angella L. Warren of the
Office of Associate Chief Counsel
(Income Tax and Accounting). For further
information regarding this revenue proce-
dure, contact Ms. Warren at (202) 622–
4950 (not a toll-free call).
2002–3 I.R.B.376January 22, 2002

Part IV. Items of General Interest
Notice of Proposed
Rulemaking by Cross-
Reference to Temporary
Regulations and Notice of
Public Hearing
New Markets Tax Credit
REG–119436–01
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Notice of proposed rulemaking
by cross-reference to temporary regula-
tions and notice of public hearing.
SUMMARY: In T.D. 8971 on page 308 of
this Bulletin, the IRS is issuing temporary
regulations relating to the new markets
tax credit. The text of those regulations
also serves as the text of these proposed
regulations. This document also provides
notice of a public hearing on these pro-
posed regulations.
DATES: Written and electronic comments
must be received by February 25, 2002.
Outlines of topics to be discussed at the
public hearing scheduled for March 14,
2002, must be received by February 21,
2002.
ADDRESSES: Send submissions to:
CC:ITA:RU (REG–119436–01), 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 5 p.m.
to: CC:ITA:RU (REG–119436–01), Cou-
rier’s Desk, Internal Revenue Service,
1111Constitution Avenue NW, Washing-
ton, DC. Alternatively, taxpayers may
send submissions electronically via the
Internet by selecting the“Tax Regs”
option on the IRS Home Page, or directly
to the IRS Internet site athttp://
www.irs.gov/tax_regslist.html. The public
hearing will be held in the IRS Audito-
rium, Internal Revenue Building,1111
Constitution Avenue, NW, Washington,
DC.
FOR FURTHER INFORMATION CON-
TACT: Concerning the regulations, Paul
Handleman (202) 622–3040; concerning
submissions, the hearing, and/or to be
placed on the building access list to
attend the hearing, Treena Garret (202)
622–7180 (not toll-free numbers).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collection of information con-
tained in this notice of proposed rulemak-
ing has been submitted to the Office of
Management and Budget for review in
accordance with the Paperwork Reduc-
tion Act of 1995 (44 U.S.C. 3507(d)).
Comments on the collection of informa-
tion should be sent to theOffice of Man-
agement and Budget, Attn: Desk Officer
for the Department of the Treasury, Office
of Information and Regulatory Affairs,
Washington, DC 20503, with copies to
theInternal Revenue Service, Attn: IRS
ReportsClearanceOfficer,W:CAR:
MP:FP:S:O, Washington, DC 20224.
Comments on the collection of informa-
tion should be received by February 25,
2002.
Comments are specifically requested
concerning:
Whether the proposed collection of
information is necessary for the proper
performance of the functions of the IRS,
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 costs of operation, maintenance, and
purchase of services to provide informa-
tion.
The requirement for the collection of
information in this notice of proposed
rulemaking is in§1.45D–1(g)(2). The
information is required so that a taxpayer
may claim a new markets tax credit on
each credit allowance date during the
7-year credit period and report compli-
ance with the requirements of section
45D and the regulations thereunder to the
Secretary. The collection of information
is mandatory. The likely respondents are
businesses or other for-profit institutions,
nonprofit institutions, and small busi-
nesses or organizations.
Estimated total annual reporting bur-
den: 378 hours.
The estimated annual burden per
respondent 2.5 hours.
Estimated number of respondents: 151.
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 the collection of information dis-
plays a valid control number assigned by
the Office of Management and Budget.
Books or records relating to a 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 T.D. 8971,
page 308, amend the Income Tax Regula-
tions (26 CFR part 1) relating to section
45D. The temporary regulations provide
guidance for taxpayers claiming the new
markets tax credit under section 45D. The
text of those regulations also serves as the
text of these proposed regulations. The
preamble to the temporary regulations
explains the amendments.
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 the collection of
information in these regulations will not
have a significant economic impact on a
substantial number of small entities. This
certification is based upon the fact that
any burden on taxpayers is minimal.
Accordingly, a Regulatory Flexibility
January 22, 20023772002–3 I.R.B.

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, this notice of proposed
rulemaking will be submitted to the Chief
Counsel for Advocacy of the Small Busi-
ness Administration for comment on its
impact on small business.
Comments and Public Hearing
Before these proposed regulations are
adopted as final regulations, consideration
will be given to any written comments (a
signed original and eight (8) copies) or
electronic comments that are submitted
timely to the IRS. The IRS and Treasury
Department specifically request com-
ments on the clarity of the proposed rule
and how it may be made easier to under-
stand. All comments will be available for
public inspection and copying.
A public hearing has been scheduled
for March 14, 2002, at 10 a.m. in the IRS
Auditorium, Internal Revenue Building,
1111Constitution Avenue, NW, Washing-
ton, DC. Due to building security proce-
dures, visitors must use the main building
entrance on Constitution Avenue, NW. In
addition, all visitors must present photo
identification to enter the building.
Because of access restrictions, visitors
will not be admitted beyond the immedi-
ate entrance area more than 15 minutes
before the hearing starts. For information
about having your name placed on the
building access list to attend the hearing,
see the“FOR FURTHER INFORMA-
TION CONTACT”section of this pre-
amble.
The rules of 26 CFR 601.601(a)(3)
apply to the hearing.
Persons who wish to present oral com-
ments at the hearing must submit an out-
line of the topics to be discussed and the
time to be devoted to each topic (signed
original and eight (8) copies) by February
21, 2002.
A period of 10 minutes will be allotted
to each person for making comments.
An agenda showing the scheduling of
the speakers will be prepared after the
deadline for receiving outlines has
passed. Copies of the agenda will be
available free of charge at the hearing.
Drafting Information
The principal author of these regula-
tions is Paul F. Handleman, Office of the
Associate Chief Counsel (Passthroughs
and Special Industries), IRS. However,
other personnel from the IRS and Trea-
sury Department participated in their
development.
*****
Proposed Amendments to the
Regulations
Accordingly, 26 CFR part 1 is pro-
posed to be amended as follows:
PA RT 1—INCOME TAXES
Paragraph 1. The authority citation for
part 1 is amended by adding an entry in
numerical order to read as follows:
Authority: 26 U.S.C. 7805* * *
Section 1.45D–1 also issued under 26
U.S.C. 45D(i);***
Par. 2. Section 1.45D–1 is added to
read as follows:
§1.45D–1 New markets tax credit.
[The text of proposed§1.45D–1isthe
same as the text of§1.45D–1T published
elsewhere in T.D. 8971].
Robert E. Wenzel,
Deputy Commissioner of
Internal Revenue.
(Filed by the Office of the Federal Register on
December 21, 2001, 8:45 a.m., and published in the
issue of the Federal Register for December 26,
2001, 66 F.R. 66376)
2002–3 I.R.B.378January 22, 2002

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.
January 22, 2002i2002–3 I.R.B.

Numerical Finding List
1
Bulletins 2002–1 and 2
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
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
Proposed Regulations:
REG–105344–01, 2002–2 I.R.B.302
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
Revenue Rulings:
2002–1, 2002–2 I.R.B.268
2002–2, 2002–2 I.R.B.271
Treasury Decisions:
8968, 2002–2 I.R.B.274
8969, 2002–2 I.R.B.276
8970, 2002–2 I.R.B.281
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.
2002–3 I.R.BiiJanuary 22, 2002

Finding List of Current Actions
on Previously Published Items
2
Bulletins 2002–1 and 2
Notices:
2000–11
Obsoleted by
Notice 2002–3, 2002–2 I.R.B.289
Revenue Procedures:
84–37
Modified by
Rev. Proc. 2002–1, 2002–1 I.R.B.1
96–13
Modified by
Rev. Proc. 2002–1, 2002–1 I.R.B.1
2002–6
Modified by
Notice 2002–1, 2002–2 I.R.B.583
2002–8
Modified by
Notice 2002–1, 2002–2 I.R.B.583
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
Revenue Procedures:—Continued
2001–8
Superseded by
Rev. Proc. 2002–8, 2002–1 I.R.B.252
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.
January 22, 2002iii2002–3 I.R.B.