rp-04-31.pdf

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Part III

Administrative, Procedural, and Miscellaneous

26 CFR 601.204: Changes in accounting periods and methods of accounting.
(Also Part I, '' 461, 481; 1.461-2.)

Revenue Procedure 2004-31

SECTION 1. PURPOSE

This revenue procedure provides procedures for taxpayers to change their
method of accounting for deducting under § 461(f) of the Internal Revenue Code
amounts transferred to trusts in transactions described in Notice 2003-77, 2003-49
I.R.B. 1182.

SECTION 2. BACKGROUND

.01 On November 19, 2003, the Internal Revenue Service and Treasury
Department filed with the Federal Register proposed and temporary regulations under
§ 461(f). 68 Fed. Reg. 65634, 65645; 2003-49 I.R.B. 1175, 1191. These regulations
clarify that the transfer of a taxpayer’s note or promise to provide property or services in
the future is not a transfer for the satisfaction of a contested liability under § 461(f). The
regulations also provide that a transfer of a taxpayer’s stock or the stock or note of a
related party is not a transfer for the satisfaction of a contested liability under § 461(f).
The regulations further provide that, in general, economic performance does not occur
when a taxpayer transfers money or other property to a trust, escrow account, or court
to provide for the satisfaction of a contested workers compensation, tort, or other
payment liability. Rather, economic performance occurs when payment is made to the
claimant.

.02 Notice 2003-77, 2003-49 I.R.B. 1182, identifies as “listed transactions” for
purposes of § 1.6011-4(b)(2) of the Income Tax Regulations and §§ 301.6111-2(b)(2)
and 301.6112-1(b)(2) of the Procedure and Administration Regulations, transactions in
which taxpayers established trusts purported to qualify under § 461(f) that are the same
as or substantially similar to the following transactions:

(1) Transactions in which a taxpayer transfers money or other property in
taxable years beginning after December 31, 1953, and ending after August 16, 1954,
and retains certain powers over the money or other property transferred;

(2) Transactions in which a taxpayer transfers any indebtedness of the
taxpayer or any promise by the taxpayer to provide services or property in the future in

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taxable years beginning after December 31, 1953, and ending after August 16, 1954;

(3) Transactions in which a taxpayer using an accrual method of accounting
transfers money or other property after July 18, 1984, to provide for the satisfaction of a
workers compensation or tort liability (unless the trust is the person to which the liability
is owed, or payment to the trust discharges the taxpayer’s liability to the claimant);

(4) Transactions in which a taxpayer using an accrual method of accounting
transfers money or other property in taxable years beginning after December 31, 1991,
to provide for the satisfaction of a liability for which payment is economic performance
under ' 1.461-4(g) (unless the trust is the person to which the liability is owed, or
payment to the trust discharges the taxpayer’s liability to the claimant), other than a
liability for workers compensation or tort; and

(5) Transactions in which a taxpayer transfers stock issued by the taxpayer,
or indebtedness or stock issued by a party related to the taxpayer (as defined in '
267(b)), on or after November 19, 2003.

.03 Section 1.6011-4(a) provides that every taxpayer that has participated (as
described in § 1.6011-4(c)(3)) in a reportable transaction and that is required to file a tax
return must attach a disclosure statement to its return. A reportable transaction
includes any transaction that is the same as or substantially similar to one of the types
of transactions that the IRS has determined to be a tax avoidance transaction and
identified by published guidance as a listed transaction. Section 1.6011-4(b)(2).
Generally, a listed transaction is not treated as a reportable transaction if the transaction
affected the taxpayer's Federal income tax liability as reported on any tax return filed on
or before February 28, 2000. Section 1.6011-4T(b)(2) as published in T.D. 8877 in 65
Fed. Reg. 11205. See also § 1.6011-4(h).

.04 Sections 446(e) and 1.446-1(e) provide that, except as otherwise provided, a
taxpayer must secure the consent of the Commissioner before changing a method of
accounting for federal income tax purposes. Section 1.446-1(e)(3)(i) provides that, to
obtain the Commissioner's consent to an accounting method change, a taxpayer must
file a Form 3115, Application for Change in Accounting Method, during the taxable year
in which the taxpayer desires to make the proposed change. Section 1.446-1(e)(3)(ii)
authorizes 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).

.05 Rev. Proc. 97-27, 1997-1 C.B. 680, (as modified and amplified by Rev. Proc.
2002-19, 2002-1 C.B. 696, as amplified and clarified by Rev. Proc. 2002-54, 2002-2
C.B. 432), provides procedures for obtaining the consent of the Commissioner to
change a method of accounting for federal income tax purposes. In general, under
these procedures a taxpayer must file a Form 3115 during the year of change and may
not request or make a retroactive change in method of accounting unless specifically

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authorized by the Commissioner. Rev. Proc. 97-27, sections 5.01, 2.04. In addition,
under these procedures a taxpayer generally takes into account a positive § 481(a)
adjustment resulting from the change in method of accounting ratably over four taxable
years and receives audit protection for taxable years prior to the year of change. Rev.
Proc. 97-27, sections 5.02(3)(a), 9.01. However, section 8.01 of Rev. Proc. 97-27
states that the Service reserves the right to decline to process a Form 3115 “in
situations in which it would not be in the best interest of sound tax administration to
permit the requested change. In this regard, the Service will consider whether the
change in method of accounting would clearly and directly frustrate compliance efforts
of the Service in administering the income tax laws.”

.06 Rev. Rul. 90-38, 1990-1 C.B. 57, provides that, if a taxpayer uses an
erroneous method of accounting for two or more consecutive taxable years, the
taxpayer has adopted a method of accounting. The ruling further provides that a
taxpayer may not, without the Commissioner’s consent, retroactively change from an
erroneous to a permissible method of accounting by filing an amended return.

.07 A change from deducting an asserted liability in the taxable year of transfer of
money or other property to a trust described in Notice 2003-77 to deducting the liability
in the taxable year of payment to the claimant is a change in method of accounting.
The Service has determined that it is not in the best interest of sound tax administration
to permit a prospective change in method of accounting for such deductions in
transactions that are required to be disclosed as listed transactions under § 1.6011-4.
In addition, in the interest of sound tax administration, the Service has determined that
the terms and conditions set forth in Rev. Proc. 97-27 should be modified for changes in
methods of accounting for such deductions in transactions that are not required to be
disclosed as listed transactions under § 1.6011-4.

SECTION 3. SCOPE

This revenue procedure applies to taxpayers that desire to change a method of
accounting for transactions described in section 2.02 of this revenue procedure.

SECTION 4. APPLICATION

.01 Change in method of accounting for transactions described in Notice 2003-
77 that are required to be disclosed as listed transactions under § 1.6011-4. The
Service will not process applications for changes in method of accounting filed for
transactions within the scope of this revenue procedure that are required to be
disclosed under § 1.6011-4. Taxpayers may change their method of accounting for
these transactions by filing an amended return in accordance with section 4.04 of this
revenue procedure.

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.02 Change in method of accounting for transactions described in Notice 2003-
77 that are not required to be disclosed as listed transactions under § 1.6011-4.
Taxpayers that desire to change a method of accounting for transactions within the
scope of this revenue procedure that are not required to be disclosed under § 1.6011-4
may change their method of accounting for these transactions by filing an amended
return in accordance with section 4.04 of this revenue procedure or may request a
change in method of accounting in accordance with the advance consent procedures of
Rev. Proc. 97-27 with the following modifications:

(1) In lieu of the four year spread period for positive § 481(a) adjustments
provided in section 5.02(3)(a) of Rev. Proc. 97-27, the taxpayer must take into account
the entire amount of a positive § 481(a) adjustment in the taxable year of change; and

(2) The taxpayer must describe each transaction, explain in the Form
3115 why the transaction is not required to be disclosed under § 1.6011-4, and state the
amount of § 481(a) adjustment for that transaction.

.03 Change in method of accounting by taxpayers that have engaged in multiple
transactions described in Notice 2003-77, some of which are required to be disclosed
as listed transactions under § 1.6011-4
. A taxpayer changing its method of accounting
for multiple transactions within the scope of this revenue procedure, some of which are
required to be disclosed under § 1.6011-4 and some of which are not required to be
disclosed under § 1.6011-4:

(1) May change its method of accounting for transactions that are not
required to be disclosed under § 1.6011-4 in accordance with section 4.02 of this
revenue procedure, but must take into account in computing the § 481(a) adjustment
only amounts attributable to those transactions; and

(2) Must file amended returns in accordance with sections 4.01 and 4.04
of this revenue procedure to change its method of accounting for all transactions
required to be disclosed under § 1.6011-4 prior to filing the Form 3115 for transactions
not required to be disclosed.

.04 Change in method of accounting by filing amended return
.

(1) In accordance with § 1.446-1(e)(3)(ii) and Rev. Rul. 90-38, consent is
hereby granted for any taxpayer that has engaged in a transaction within the scope of
this revenue procedure to file amended returns to retroactively change an impermissible
method of accounting for amounts transferred to trusts purported to qualify under
§ 461(f) to a method that complies with § 461(f) and the regulations thereunder. This
consent is granted only if the taxpayer files such amended returns for the first taxable
year in which the taxpayer used the impermissible method of accounting for these

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transactions (or if the period of limitations has expired for such taxable year, for the first
taxable year for which the period of limitations has not expired) and for each
subsequent taxable year in which the taxpayer’s use of the impermissible method of
accounting for these transactions reduced the taxpayer’s taxable income. If the period
of limitations has expired for the first taxable year in which a taxpayer used the
impermissible method of accounting for these transactions and the taxpayer files
amended returns pursuant to this consent, the amended return for the first taxable year
for which the period of limitations has not expired must include the entire amount of the
§ 481(a) adjustment attributable to the change in accounting method.

(2) A taxpayer that complies with section 4.04(1) of this revenue
procedure also may file amended returns for any taxable years in which the taxpayer’s
use of the impermissible method of accounting for these transactions increased its
taxable income.

(3) Taxpayers filing amended returns under this revenue procedure must
write “FILED UNDER REVENUE PROCEDURE 2004-31” at the top of the amended
return. Taxpayers also must comply with the requirements of § 1.6011-4 including, but
not limited to, attaching to the amended return any disclosure statements that may be
required in accordance with § 1.6011-4(a) and (e).

SECTION 5. EFFECTIVE DATE

This revenue procedure is effective on May 6, 2004.

DRAFTING INFORMATION

The principal author of this revenue procedure is Norma Rotunno of the Office of the
Associate Chief Counsel (Income Tax & Accounting). For further information regarding
this notice, contact Ms. Rotunno at (202) 622-7900 (not a toll-free number).