Bulletin No. 1998–51

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Bulletin No. 1998–51

December 21, 1998

Internal Revenue

bulletin

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

ADMINISTRATIVE

Rev. Rul. 98–60, page 6.

Rev. Proc. 98–60, page 16.

REIT impermissible tenant service income. If a REIT

receives impermissible tenant service income of one percent

or less of its total income from a property, then only the

impermissible tenant service income fails to qualify as rents

from real property. If the impermissible tenant service

income exceeds one percent, then all income derived by the

REIT from that property fails to qualify as rents from real

property.

Methods of accounting; automatic consent. Procedures are provided under which a taxpayer may obtain automatic consent of the Commissioner to change certain methods of accounting.

Rev. Rul. 98–61, page 8.

Interest rates; underpayments and overpayments. The

rate of interest determined under section 6621 of the Code

for the calendar quarter beginning January 1, 1999, will be

7 percent for overpayment (6 percent in the case of a corporation), 7 percent for underpayments, and 9 percent for

large corporate underpayments. The rate of interest paid on

the portion of a corporate overpayment exceeding $10,000

is 4.5 percent.

Rev. Rul. 98–62, page 4.

Notice 98–61, page 13.

Innocent spouse equitable relief. Interim guidance is provided for taxpayers seeking equitable relief from federal tax

liability under section 6015(f) or 66(c) of the Code.

Notice 98–62, page 15.

The Service has the option of serving a continuous levy

under section 6331(h) of the Code, although no levies have

been served at this time. When such levies are served in the

future, procedures will require that they be identified as section 6331(h) levies.

Notice 98–63, page 15.

LIFO; price indexes; department stores. The October

1998 Bureau of Labor Statistics price indexes are accepted

for use by department stores employing the retail inventory

and last-in, first-out inventory methods for valuing inventories

for tax years ended on, or with reference to, October 31,

1998.

Return preparers; identifying numbers. Individual income tax return preparers are reminded that, until the Service implements a system of providing alternative identifying

numbers, they must continue to provide their social security

numbers on returns and claims for refund prepared by them

to satisfy the identifying number requirement of section

6109 of the Code.

EXEMPT ORGANIZATIONS

Announcement 98–113, page 48.

Announcement 98–112, page 46.

A list is given of organizations now classified as private foundations.

Finding Lists begin on page 50.

Department of the Treasury

Internal Revenue Service

The printed version of Announcement 98–106, 1998–48

I.R.B. 9, relating to changes to codes for Roth IRAs on Form

1099–R, is corrected in its entirety.

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The IRS Mission

and by applying the tax law with integrity and fairness to

all.

Provide America’s taxpayers top quality service by helping them understand and meet their tax responsibilities

Statement of Principles

of Internal Revenue

Tax Administration

The Service also has the responsibility of applying and

administering the law in a reasonable, practical manner.

Issues should only be raised by examining officers when

they have merit, never arbitrarily or for trading purposes.

At the same time, the examining officer should never hesitate to raise a meritorious issue. It is also important that

care be exercised not to raise an issue or to ask a court to

adopt a position inconsistent with an established Service

position.

The function of the Internal Revenue Service is to administer the Internal Revenue Code. Tax policy for raising revenue

is determined by Congress.

With this in mind, it is the duty of the Service to carry out that

policy by correctly applying the laws enacted by Congress;

to determine the reasonable meaning of various Code provisions in light of the Congressional purpose in enacting them;

and to perform this work in a fair and impartial manner, with

neither a government nor a taxpayer point of view.

Administration should be both reasonable and vigorous. It

should be conducted with as little delay as possible and

with great courtesy and considerateness. It should never

try to overreach, and should be reasonable within the

bounds of law and sound administration. It should, however, be vigorous in requiring compliance with law and it

should be relentless in its attack on unreal tax devices and

fraud.

At the heart of administration is interpretation of the Code. It

is the responsibility of each person in the Service, charged

with the duty of interpreting the law, to try to find the true

meaning of the statutory provision and not to adopt a

strained construction in the belief that he or she is “protecting the revenue.” The revenue is properly protected only

when we ascertain and apply the true meaning of the statute.

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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

Conventions, legislation, court decisions, and other items of

general interest. It is published weekly and may be obtained

from the Superintendent of Documents on a subscription

basis. Bulletin contents of a permanent nature are consolidated semiannually into Cumulative Bulletins, which are sold

on a single-copy basis.

dures 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.

It is the policy of the Service to publish in the Bulletin all substantive rulings necessary to promote a uniform application

of the tax laws, including all rulings that supersede, revoke,

modify, or amend any of those previously published in the

Bulletin. All published rulings apply retroactively unless otherwise indicated. Procedures relating solely to matters of internal management are not published; however, statements

of internal practices and procedures that affect the rights

and duties of taxpayers are published.

Part II.—Treaties and Tax Legislation.

This part is divided into two subparts as follows: Subpart A,

Tax Conventions, and Subpart B, Legislation and Related

Committee Reports.

Part III.—Administrative, Procedural, and Miscellaneous.

To the extent practicable, pertinent cross references to

these subjects are contained in the other Parts and Subparts. Also included in this part are Bank Secrecy Act Administrative Rulings. Bank Secrecy Act Administrative Rulings

are issued by the Department of the Treasury’s Office of the

Assistant Secretary (Enforcement).

Revenue rulings represent the conclusions of the Service on

the application of the law to the pivotal facts stated in the

revenue ruling. In those based on positions taken in rulings

to taxpayers or technical advice to Service field offices,

identifying details and information of a confidential nature

are deleted to prevent unwarranted invasions of privacy and

to comply with statutory requirements.

Part IV.—Items of General Interest.

With the exception of the Notice of Proposed Rulemaking

and the disbarment and suspension list included in this part,

none of these announcements are consolidated in the Cumulative Bulletins.

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 proce-

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.

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Part I. Rulings and Decisions Under the Internal Revenue Code of 1986

Section 162.—Trade or

Business Expenses

Section 197.—Amortization of

Goodwill and Other Intangibles

Section 455.—Prepaid

Subscription Income

What procedures must a lawyer, handling cases

on a contingent fee basis, use to obtain automatic

consent of the Commissioner to change its method

of accounting for advances paid to clients. See Rev.

Proc. 98–60, page 16.

What procedures must a taxpayer use to obtain

automatic consent of the Commissioner to change

its method of accounting for amortization. See Rev.

Proc. 98–60, page 16.

26 CFR 1.455–6: Time and manner of making election.

Section 165.—Losses

Section 263.—Capital

Expenditures

26 CFR 1.263(a)–2: Examples of capital expenditures.

26 CFR 1.165–2: Obsolescence of nondepreciable

property.

What procedures must a taxpayer use to obtain

automatic consent of the Commissioner to change

its method of accounting for package design costs.

See Rev. Proc. 98–60, page 16.

Section 166.—Bad Debts

What procedures must a taxpayer use to obtain

automatic consent of the Commissioner to change

from the § 585 reserve method of accounting to the

§ 166 specific charge-off method. See Rev. Proc.

98–60, page 16.

Section 167.—Depreciation

26 CFR 1.167(a)–11: Depreciation based on class

lives and asset depreciation ranges for property

placed in service after December 31, 1970.

26 CFR 1.167(e)–1: Change in method.

What procedures must a taxpayer use to obtain

automatic consent of the Commissioner to change

its method of accounting for package design costs.

See Rev. Proc. 98–60, page 16.

Section 263A.—Capitalization

and Inclusion in Inventory Costs

of Certain Expenses

26 CFR 1.263A–1: Uniform capitalization of costs.

What procedures must a taxpayer use to obtain

automatic consent of the Commissioner to change

its method of accounting. See Rev. Proc. 98–60,

page 16.

26 CFR 1.471–1: Need for inventories.

26 CFR 1.471–2: Valuation of inventories.

26 CFR 1.471–3: Inventories at cost.

26 CFR 1.472-1: Last-in, first-out inventories.

What procedures must a taxpayer use to obtain

automatic consent of the Commissioner to change

its method of accounting for depreciation. See Rev.

Proc. 98–60, page 16.

Section 451.—General Rule for

Taxable Year of Inclusion

26 CFR 1.446–1: General rule for methods of accounting.

What procedures must a taxpayer use to obtain automatic consent of the Commissioner to change its

method of accounting for the income from an advance

payment related to the sale of a multi-year service

warranty contract. See Rev. Proc. 98–60, page 16.

26 CFR 1.174–1: Research and exprimental

expenditures in general.

December 21, 1998

Section 471.—General Rule for

Inventories

Section 472.—Last-in, First-out

Inventories

What procedures must a taxpayer use to obtain

automatic consent of the Commissioner to change

its method of accounting for package design costs.

See Rev. Proc. 98–60, page 16.

What procedures must a taxpayer use to obtain

automatic consent of the Commissioner to change

its method of accounting for research and experimental expenditures. See Rev. Proc. 98–60, page 16.

What procedures must a taxpayer use to obtain

automatic consent of the Commissioner to change

its method of accounting. See Rev. Proc. 98–60,

page 16.

What procedures must a taxpayer use to obtain

automatic consent of the Commissioner to change

its method of accounting. See Rev. Proc. 98–60,

page 16.

Section 168.—Accelerated Cost

Recovery System

26 CFR 1.174–4: Treatment as deferred expenses.

26 CFR 1.461–4: Economic performance.

26 CFR 1.263A–3: Rules relating to property

acquired for resale.

Section 446.—General Rule for

Methods of Accounting

26 CFR 1.174–3: Treatment as expenses.

Section 461.—General Rule for

Taxable Year of Deduction

What procedures must a taxpayer use to obtain

automatic consent of the Commissioner to change

its method of accounting for certain cash discounts.

See Rev. Proc. 98–60, page 16.

What procedures must a taxpayer use to obtain

automatic consent of the Commissioner to change

its method of accounting for depreciation. See Rev.

Proc. 98–60, page 16.

Section 174.—Research and

Experimental Expenditures

What procedures must a taxpayer use to obtain

automatic consent of the Commissioner to change

its method of accounting for prepaid subscription income. See Rev. Proc. 98–60, page 16.

Section 454.—Obligations

Issued at a Discount

26 CFR 1.454–1: Obligations issued at a discount.

What procedures must a taxpayer use to obtain

automatic consent of the Commissioner to change

its method of accounting for the interest income on

Series E or EE U.S. savings bonds. See Rev. Proc.

98–60, page 16.

LIFO; price indexes; department

stores. The October 1998 Bureau of

Labor Statistics price indexes are accepted for use by department stores employing the retail inventory and last-in,

first-out inventory methods for valuing

inventories for tax years ended on, or with

reference to, October 31, 1998.

Rev. Rul. 98–62

The following Department Store Inventory Price Indexes for October 1998 were

issued by the Bureau of Labor Statistics.

The indexes are accepted by the Internal

Revenue Service, under § 1.472–1(k) of

the Income Tax Regulations and Rev.

Proc. 86–46, 1986–2 C.B. 739, for appropriate application to inventories of department stores employing the retail inventory and last-in, first-out inventory

methods for tax years ended on, or with

reference to, October 31, 1998.

The Department Store Inventory Price

Indexes are prepared on a national basis

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and include (a) 23 major groups of departments, (b) three special combinations of

the major groups - soft goods, durable

goods, and miscellaneous goods, and (c) a

store total, which covers all departments,

including some not listed separately, ex-

cept for the following: candy, food,

liquor, tobacco, and contract departments

BUREAU OF LABOR STATISTICS, DEPARTMENT STORE

INVENTORY PRICE INDEXES BY DEPARTMENT GROUPS

(January 1941 = 100, unless otherwise noted)

Oct.

1997

Oct.

1998

Percent Change

from Oct.1997

to Oct. 19981

1. Piece Goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 534.5

2. Domestics and Draperies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 638.4

3. Women’s and Children’s Shoes . . . . . . . . . . . . . . . . . . . . . . . . . . . 672.2

4. Men’s Shoes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 910.2

5. Infants’ Wear . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 615.5

6. Women’s Underwear . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 560.1

7. Women’s Hosiery. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 301.6

8. Women’s and Girls’ Accessories . . . . . . . . . . . . . . . . . . . . . . . . . . 541.7

9. Women’s Outerwear and Girls’ Wear. . . . . . . . . . . . . . . . . . . . . . . 431.3

10. Men’s Clothing. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 625.3

11. Men’s Furnishings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 601.0

12. Boys’ Clothing and Furnishings. . . . . . . . . . . . . . . . . . . . . . . . . . . 505.9

13. Jewelry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 995.5

14. Notions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 844.4

15. Toilet Articles and Drugs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 916.4

16. Furniture and Bedding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 666.2

17. Floor Coverings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 578.2

18. Housewares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 812.1

19. Major Appliances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 243.3

20. Radio and Television. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74.5

21. Recreation and Education2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 108.6

22. Home Improvements2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 132.7

23. Auto Accessories2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107.9

548.9

637.5

679.2

921.6

640.2

572.6

308.9

551.6

423.5

620.1

607.8

521.0

982.7

757.6

946.4

673.7

601.0

817.1

238.3

70.6

102.8

129.5

107.9

2.7

–0.1

1.0

1.3

4.0

2.2

2.4

1.8

–1.8

–0.8

1.1

3.0

–1.3

–10.3

3.3

1.1

3.9

0.6

–2.1

–5.2

–5.3

–2.4

0.0

Groups 1 – 15: Soft Goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 610.1

612.7

0.4

Groups 16 – 20: Durable Goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 463.9

460.5

–0.7

Groups 21 – 23: Misc. Goods2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 111.6

107.3

–3.9

Store Total3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 558.5

556.9

–0.3

Groups

1Absence of a minus sign before percentage change in this column signifies price increase.

2Indexes on a January 1986 = 100 base.

3The store total index covers all departments, including some not listed separately, except for the following: candy, food, liquor, to-

bacco, and contract departments.

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DRAFTING INFORMATION

The principal author of this revenue

ruling is Stan Michaels of the Office of

Assistant Chief Counsel (Income Tax and

Accounting). For further information regarding this revenue ruling, contact Mr.

Michaels on (202) 622-4970 (not a tollfree call).

automatic consent of the Commissioner to change

its method of accounting for OID income. See Rev.

Proc. 98–60, page 16.

Section 1273.—Determination

of Amount of Original Issue

Discount

26 CFR 1.1273–1: Definition of OID.

26 CFR 1.1273–2: Determination of issue price and

issue date.

26 CFR 1.472–6: Change from LIFO inventory

method.

26 CFR 1.472–8: Dollar value method of pricing

LIFO inventories.

What procedures must a taxpayer use to obtain

automatic consent of the Commissioner to change

from the LIFO method of accounting for all its LIFO

inventory, or to change to an alternate LIFO inventory method. See Rev. Proc. 98–60, page 16.

Section 475.—Mark to Market

Accounting Method for Dealers

in Securities

What procedures must a taxpayer use to obtain

automatic consent of the Commissioner to change

its method of accounting for certain mark to market

items for dealers in securities. See Rev. Proc. 98–60,

page 16.

Section 481.—Adjustments

Required by Changes in

Methods of Accounting

26 CFR 1.481–1: Adjustments in general.

26 CFR 1.481–4: Adjustments taken into account

with consent.

What procedures must a taxpayer use to obtain

automatic consent of the Commissioner to change

a method of accounting. See Rev. Proc. 98–60,

page 16.

Section 585.—Reserves for

Losses on Loans of Banks

What procedures must a taxpayer use to obtain

automatic consent of the Commissioner to change

from the § 585 reserve method of accounting to the

§ 166 specific charge-off method. See Rev. Proc.

98–60, page 16.

Section 1272.—Current

Inclusion in Income of Original

Issue Discount

26 CFR 1.1272–1: Current inclusion of OID in

income.

What procedures must a taxpayer use to obtain

December 21, 1998

What procedures must a taxpayer use to obtain

automatic consent of the Commissioner to change its

method of accounting for certain de minimis original

issue discount. See Rev. Proc. 98–60, page 16.

Section 1281.—Current

Inclusion in Income of Discount

on Certain Short-term

Obligations

What procedures must a taxpayer use to obtain

automatic consent of the Commissioner to change

its method of accounting for interest income on

short-term obligations, or for stated interest on

short-term loans of cash method banks in the

Eighth Circuit. See Rev. Proc. 98–60, page 16.

Section 1363.—Effect of

Election on Corporation

What procedures must a taxpayer use to obtain

automatic consent of the Commissioner to change

its method of accounting. See Rev. Proc. 98–60,

page 16.

Section 856.—Definition of Real

Estate Investment Trust

26 CFR 1.856–1: Definition of a real estate

investment trust.

REIT impermissible tenant service

income. If a REIT receives impermissible

tenant service income equal to or less than

one percent of its total income from a

property, then only the impermissible tenant service income fails to qualify as rents

from real property. If the impermissible

tenant service income exceeds one percent, then all income derived by the REIT

from that property fails to qualify as rents

from real property.

Rev. Rul. 98–60

ISSUE

If a real estate investment trust (REIT)

receives “impermissible tenant service income” within the meaning of § 856(d)(7)

of the Internal Revenue Code for services

rendered by the REIT to one or more tenants of a multi-tenant property, in what

situations will other amounts received by

the REIT with respect to the property continue to qualify as “rents from real property” under § 856(d)?

FACTS

Situation 1

Y, a REIT that files its returns on a calendar year basis, owns a high-rise apartment building, Building P. Building P

has 100 apartments, of which 95 are standard, unfurnished apartments rented on an

annual basis. The remaining five apartments are guest apartments. A guest

apartment is a furnished apartment available for lease on a short-term basis to

guests of tenants. Employees of Y render

maid service in connection with the lease

of guest apartments. Y also provides heat

and light to all of the tenants in Building

P. Y does not render any other services to

the tenants of Building P or engage in any

other activity at Building P that could

give rise to impermissible tenant service

income.

For 1998, Y derives a total of $1,000x

from all the tenants of Building P, of

which $90x is from visitors who rented

guest apartments. Of the $90x received

from tenants of the guest apartments, the

amount received with respect to maid service is $9x, which is greater than 150 percent of the direct costs of Y in rendering

the service. Of the $1,000x received from

all the tenants, the amount paid to Y for

heat and light is $100x ($1x for each unit,

including the guest units), which also is

greater than 150 percent of the direct

costs of Y for providing heat and light.

The amount of rent attributable to personal property leased in connection with

the rental of each guest apartment in

Building P for 1998 does not exceed 15

percent of the total rent for such apartment attributable to both the real property

and the personal property as provided in

§ 856(d)(1).

Situation 2

The facts are the same as those in Situation 1 except that Y derives $110x from

visitors who rented guest apartments. Of

the $110x received from tenants of the

guest apartments, the amount received

with respect to maid service is $11x,

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Page 7

which is greater than 150 percent of the

direct costs of Y in rendering the service.

LAW AND ANALYSIS

For an entity to qualify as a REIT, the

entity must derive at least 95 percent of its

gross income from certain sources described in § 856(c)(2) and at least 75 percent of its gross income from certain

sources described in § 856(c)(3). Rents

from real property are among the sources

described in both § 856(c)(2) and

§ 856(c)(3).

Section 856(d)(1) provides that rents

from real property include (subject to the

exclusions in § 856(d)(2)): (i) rents from

interests in real property, (ii) charges for

services customarily furnished or rendered in connection with the rental of real

property (whether or not the charges are

separately stated), and (iii) rent attributable to personal property that is leased

under, or in connection with, a lease of

real property, but only if the rent attributable to the personal property for the taxable year does not exceed 15 percent of

the total rent for the year attributable to

both the real and personal property leased

under, or in connection with, the lease.

Section 856(d)(2)(C) (as modified by

the Taxpayer Relief Act of 1997) excludes

from the definition of rents from real

property any impermissible tenant service

income as defined in § 856(d)(7). Section

856(d)(7)(A) provides that impermissible

tenant service income means, with respect

to any real or personal property, any

amount received or accrued directly or indirectly by a REIT for furnishing or rendering services to the tenants of the property or managing or operating the

property.

Section 856(d)(7)(C)(i) excludes from

impermissible tenant service income

amounts received for services furnished

or rendered, or management or operation

provided, through an independent contractor from whom the REIT itself does

not derive or receive any income.

Section 856(d)(7)(C)(ii) excludes from

the definition of impermissible tenant service income any amount that would be

excluded from unrelated business taxable

income (UBTI) under § 512(b)(3) if received by an organization described in

§ 511(a)(2). Section 512(b)(3)(A)(i) excludes rents from real property from

UBTI. Section 1.512(b)–1(c)(5) of the

1998–51 I.R.B.

Income Tax Regulations provides, however, that payments for the occupancy of

space where services are also rendered to

the occupant are not rents from real property. Generally, services are considered

rendered to the occupant if they are primarily for the occupant’s convenience

and are other than those usually or customarily rendered in connection with the

rental of space for occupancy only.

Under § 1.512(b)–1(c)(5), the provision

of maid service is given as an example of

a service that is considered rendered to

the occupant. Maid service provided by

an employee of a REIT is, therefore, an

impermissible tenant service that gives

rise to impermissible tenant service income under § 856(d)(7). Conversely,

under § 1.512(b)–1(c)(5), the provision of

heat and light is given as an example of a

service that is not considered rendered to

the occupant. Accordingly, the provision

of heat and light by a REIT is a permissible tenant service.

Section 1.512(b)–1(c)(5) taints all payments received under a lease as other than

rents from real property where any impermissible tenant service is provided to the

tenant. Accordingly, a strict application

of § 1.512(b)–1(c) in the context of

§ 856(d)(7)(C)(ii) could cause all tenant

service income (that is, service income

and income from management and operations) derived under a lease to fail to qualify for this exception where any impermissible tenant service is rendered to the

tenant. However, the legislative history

discussing § 856(d)(7) indicates that only

income attributable to impermissible tenant services should be treated as impermissible tenant service income after the

application of § 856(d)(7)(C)(ii) (unless

§ 856(d)(7)(B) applies). H.R. Conf. Rep.

No. 105–220, 105th Cong., 1st Sess. 696

(1997) (“The value of the impermissible

services may not exceed one percent of

the gross income from the property” (emphasis added)). Accordingly, under

§ 856(d)(7)(C)(ii), an amount attributable

to a service or activity is excluded from

impermissible tenant service income unless the service or activity to which that

amount relates would cause the related

rents to be treated as UBTI if received by

an organization described in § 511(a)(2).

Section 856(d)(7)(D) provides that the

amount treated as received for any service

(or management or operation) must not be

less than 150 percent of the direct cost of

the REIT in furnishing or rendering the

service (or providing the management or

operation).

Section 856(d)(7)(B) provides that, if

the amount of impermissible tenant service income with respect to a property for

any taxable year exceeds one percent of

all amounts received or accrued during

such taxable year directly or indirectly by

the REIT with respect to the property, the

impermissible tenant service income of

the REIT with respect to the property includes all such amounts.

In Situation 1, the $9x attributable to

the impermissible tenant services rendered to tenants of the guest apartments is

impermissible tenant service income

within the meaning of § 856(d)(7). Thus,

pursuant to § 856(d)(2)(C), the $9x fails

to qualify as rents from real property. Because the provision of heat and light is a

permissible tenant service, no amount attributable to this service (including

amounts paid by tenants of the guest

units) is treated as impermissible tenant

service income in applying the one percent de minimis rule. The $9x of impermissible tenant service income received

by Y from Building P for 1998 does not

exceed one percent of the $1,000x received or accrued directly or indirectly by

Y with respect to Building P. Therefore,

the rendering of impermissible tenant services to tenants of the guest apartments

does not prevent otherwise qualifying

amounts received by Y from the tenants of

Building P (including tenants of the guest

apartments) from qualifying as rents from

real property under § 856(d), and the total

impermissible tenant service income received with respect to Building P is $9x.

In Situation 2, the $11x attributable to

the impermissible tenant services rendered to tenants of the guest apartments is

impermissible tenant service income

within the meaning of § 856(d)(7). The

$11x of impermissible tenant service income received by Y from Building P for

1998 exceeds one percent of the $1,000x

received or accrued directly or indirectly

by Y with respect to Building P. Therefore, all $1,000x derived by Y from Building P is impermissible tenant service income that, pursuant to § 856(d)(2)(C),

fails to qualify as rents from real property.

Rev. Rul. 72–353, 1972–2 C.B. 413, illustrates how § 856(d)(2)(A), which ex-

December 21, 1998

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Page 8

cludes rents derived under net profit

leases from the definition of rents from

real property, is applied in a multiple tenant situation. In Rev. Rul. 72–353, a

REIT leased office space in a building to

10 different tenants under separate leases.

Nine of the leases provided for a fixedsum rental. The tenth lease, however,

provided for a rental based on a percentage of the tenant’s net profits. Rev. Rul.

72–353 holds that the payments by the

tenth tenant to the REIT, which do not

qualify as rents from real property, do not

prevent amounts paid to the REIT by the

other tenants of the office building that

otherwise qualified as rents from real

property from so qualifying.

Section 856(d)(7)(B) allows a REIT to

provide a limited amount of impermissible tenant services with respect to property without causing all of the income

from the property to fail to qualify as

rents from real property. In the case of

many of the services that Congress intended to cover, it would be very difficult

to allocate the services to particular tenants. Consistent with this intent,

§ 856(d)(7)(B) expressly applies on a

property-by-property basis. Consequently, the one-percent limitation in that

section is applied to aggregate amounts

received with respect to a property.

Rev. Rul. 72–353, which makes a determination under § 856(d)(2)(A) on a

lease-by-lease basis, is distinguishable.

Section 856(d)(2)(A) relates to contingent

rents determined by reference to any person’s income or profits derived from a

property. In contrast to amounts allocable

to tenant services, the presence or absence

of contingent rents can be determined on

a lease-by-lease basis in all cases.

HOLDING

(1) In Situation 1, only the $9x attributable to the impermissible tenant services rendered to tenants of the guest

apartments fails to qualify as rents from

real property.

(2) In Situation 2, all $1,000x of income derived from Building P fails to

qualify as rents from real property.

EFFECT ON OTHER REVENUE

RULINGS

Rev. Rul. 72–353 is distinguished.

December 21, 1998

DRAFTING INFORMATION

The principal author of this revenue

ruling is Eric E. Boody of the Office of

Assistant Chief Counsel (Financial Institutions and Products). For further information regarding this revenue ruling contact Mr. Boody on (202) 622-3960 (not a

toll-free call).

Section 6621.— Determination

of Interest Rate

26 CFR 301.6621–1: Interest rate.

Interest rates; underpayments and

overpayments. The rate of interest determined under section 6621 of the Code for

the calendar quarter beginning January 1,

1999, will be 7 percent for overpayment

(6 percent in the case of a corporation),

7 percent for underpayments, and 9 percent for large corporate underpayments.

The rate of interest paid on the portion of

a corporate overpayment exceeding

$10,000 is 4.5 percent.

Rev. Rul. 98–61

Section 6621 of the Internal Revenue

Code establishes the rates for interest on

tax overpayments and tax underpayments.

Under § 6621(a)(1), the overpayment rate

beginning January 1, 1999, is the sum of

the federal short-term rate plus 3 percentage points (2 percentage points in the case

of a corporation), except the rate for the

portion of a corporate overpayment of tax

exceeding $10,000 for a taxable period is

the sum of the federal short-term rate plus

0.5 of a percentage point for interest computations made after December 31, 1994.

Under § 6621(a)(2), the underpayment

rate is the sum of the federal short-term

rate plus 3 percentage points.

Section 6621(c) provides that for purposes of interest payable under § 6601 on

any large corporate underpayment, the

underpayment rate under § 6621(a)(2) is

determined by substituting “5 percentage

points” for “3 percentage points.” See §

6621(c) and § 301.6621–3 of the Regulations on Procedure and Administration for

the definition of a large corporate underpayment and for the rules for determining

the applicable date. Section 6621(c) and

§ 301.6621–3 are generally effective for

periods after December 31, 1990.

Section 6621(b)(1) provides that the

Secretary will determine the federal shortterm rate for the first month in each calendar quarter.

Section 6621(b)(2)(A) provides that the

federal short-term rate determined under

§ 6621(b)(1) for any month applies during

the first calendar quarter beginning after

such month.

Section 6621(b)(2)(B) provides that in

determining the addition to tax under §

6654 for failure to pay estimated tax for

any taxable year, the federal short-term

rate that applies during the third month

following such taxable year also applies

during the first 15 days of the fourth

month following such taxable year.

Section 6621(b)(3) provides that the

federal short-term rate for any month is

the federal short-term rate determined

during such month by the Secretary in accordance with § 1274(d), rounded to the

nearest full percent (or, if a multiple of

1/2 of 1 percent, the rate is increased to

the next highest full percent).

Notice 88–59, 1988– C.B. 546, announced that, in determining the quarterly

interest rates to be used for overpayments

and underpayments of tax under § 6621,

the Internal Revenue Service will use the

federal short-term rate based on daily

compounding because that rate is most

consistent with § 6621 which, pursuant to

§ 6622, is subject to daily compounding.

Rounded to the nearest full percent, the

federal short- term rate based on daily

compounding determined during the

month of October 1998 is 4 percent. Accordingly, an overpayment rate of 7 percent (6 percent in the case of a corporation) and an underpayment rate of 7

percent are established for the calendar

quarter beginning January 1, 1999. The

overpayment rate for the portion of a corporate overpayment exceeding $10,000

for the calendar quarter beginning January 1, 1999, is 4.5 percent. The underpayment rate for large corporate underpayments for the calendar quarter beginning

January 1, 1999, is 9 percent. These rates

apply to amounts bearing interest during

that calendar quarter.

The 7 percent rate also applies to estimated tax underpayments for the first calendar quarter in 1999 and for the first 15

days in April 1999.

Interest factors for daily compound in-

1998–51 I.R.B.

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Page 9

terest for annual rates of 7 percent, 6 percent, 4.5 percent, and 9 percent are published in Tables 19, 17, 14, and 23 of Rev.

Proc. 95–7, 1995–1 C.B. 556, 573, 571,

568, and 577.

Annual interest rates to be compounded

daily pursuant to § 6622 that apply for

prior periods are set forth in the tables accompanying this revenue ruling.

DRAFTING INFORMATION

The principal author of this revenue

ruling is Raymond Bailey of the Office of

Assistant Chief Counsel (Income Tax and

Accounting). For further information regarding this revenue ruling, contact Mr.

Bailey on (202) 622-6226 (not a toll-free

call).

TABLE OF INTEREST RATES

PERIODS BEFORE JUL. 1, 1975 – PERIODS ENDING DEC. 31, 1986

OVERPAYMENTS AND UNDERPAYMENTS

PERIOD

RATE

In 1995–1 C.B.

DAILY RATE TABLE

Before Jul. 1, 1975

Jul. 1, 1975—Jan. 31, 1976

Feb. 1, 1976—Jan. 31, 1978

Feb. 1, 1978—Jan. 31, 1980

Feb. 1, 1980—Jan. 31, 1982

Feb. 1, 1982—Dec. 31, 1982

Jan. 1, 1983—Jun. 30, 1983

Jul. 1, 1983—Dec. 31, 1983

Jan. 1, 1984—Jun. 30, 1984

Jul. 1, 1984—Dec. 31, 1984

Jan. 1, 1985—Jun. 30, 1985

Jul. 1, 1985—Dec. 31, 1985

Jan. 1, 1986—Jun. 30, 1986

Jul. 1, 1986—Dec. 31, 1986

12%

20%

16%

11%

13%

11%

10%

Table 2, pg. 557

Table 4, pg. 559

Table 3, pg. 558

Table 2, pg. 557

Table 5, pg. 560

Table 6, pg. 560

Table 37, pg. 591

Table 27, pg. 581

Table 75, pg. 629

Table 31, pg. 585

Table 27, pg. 581

Table 25 pg. 579

Table 23, pg. 577

TABLE OF INTEREST RATES

FROM JAN. 1, 1987 – Dec. 31, 1998

Jan. 1, 1987—Mar. 31, 1987

Apr. 1, 1987—Jun. 30, 1987

Jul. 1, 1987—Sep. 30, 1987

Oct. 1, 1987—Dec. 31, 1987

Jan. 1, 1988—Mar. 31, 1988

Apr. 1, 1988—Jun. 30, 1988

Jul. 1, 1988—Sep. 30, 1988

Oct. 1, 1988—Dec. 31, 1988

Jan. 1, 1989—Mar. 31, 1989

Apr. 1, 1989—Jun. 30, 1989

Jul. 1, 1989—Sep. 30, 1989

Oct. 1, 1989—Dec. 31, 1989

Jan. 1, 1990—Mar. 31, 1990

Apr. 1, 1990—Jun. 30, 1990

Jul. 1, 1990—Sep. 30, 1990

Oct. 1, 1990—Dec. 31, 1990

Jan. 1, 1991—Mar. 31, 1991

1998–51 I.R.B.

OVERPAYMENTS

UNDERPAYMENTS

1995–1 C.B.

RATE TABLE PG

1995–1 C.B.

RATE TABLE PG

10%

11%

10%

575

577

627

625

627

579

581

579

10%

11%

10%

11%

12%

11%

577

579

629

627

629

581

583

581

December 21, 1998

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Page 10

TABLE OF INTEREST RATES (Continued)

FROM JAN. 1, 1987 – Dec. 31, 1998

Apr. 1, 1991—Jun. 30, 1991

Jul. 1, 1991—Sep. 30, 1991

Oct. 1, 1991—Dec. 31, 1991

Jan. 1, 1992—Mar. 31, 1992

Apr. 1, 1992—Jun. 30, 1992

Jul. 1, 1992—Sep. 30, 1992

Oct. 1, 1992—Dec. 31, 1992

Jan. 1, 1993—Mar. 31, 1993

Apr. 1, 1993—Jun. 30, 1993

Jul. 1, 1993—Sep. 30, 1993

Oct. 1, 1993—Dec. 31, 1993

Jan. 1, 1994—Mar. 31, 1994

Apr. 1, 1994—Jun. 30, 1994

Jul. 1, 1994—Sep. 30, 1994

Oct. 1, 1994—Dec. 31, 1994

Jan. 1, 1995—Mar. 31, 1995

Apr. 1, 1995—Jun. 30, 1995

Jul. 1, 1995—Sep. 30, 1995

Oct. 1, 1995—Dec. 31, 1995

Jan. 1, 1996—Mar. 31, 1996

Apr. 1, 1996—Jun. 30, 1996

Jul. 1, 1996—Sep. 30, 1996

Oct. 1, 1996—Dec. 31, 1996

Jan. 1, 1997—Mar. 31, 1997

Apr. 1, 1997—Jun. 30, 1997

Jul. 1, 1997—Sep. 30, 1997

Oct. 1, 1997—Dec. 31, 1997

Jan. 1, 1998—Mar. 31, 1998

Apr. 1, 1998—Jun. 30, 1998

Jul. 1, 1998—Sep. 30, 1998

Oct. 1, 1998—Dec. 31, 1998

OVERPAYMENTS

UNDERPAYMENTS

1995–1 C.B.

RATE TABLE PG

1995–1 C.B.

RATE TABLE PG

577

623

621

619

571

573

575

577

575

623

621

623

575

573

10%

579

625

623

621

573

575

577

579

577

625

623

625

577

575

TABLE OF INTEREST RATES

FROM JANUARY 1, 1999 – PRESENT

NONCORPORATE OVERPAYMENTS AND UNDERPAYMENTS

Jan. 1, 1999—Mar. 31, 1999

December 21, 1998

RATE

1995–1 C.B.

TABLE

PAGE

573

1998–51 I.R.B.

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Page 11

TABLE OF INTEREST RATES

FROM JANUARY. 1, 1999 – PRESENT

CORPORATE OVERPAYMENTS AND UNDERPAYMENTS

Jan. 1, 1999—Mar. 31, 1999

OVERPAYMENTS

UNDERPAYMENTS

1995–1 C.B.

RATE TABLE PG

1995–1 C.B.

RATE TABLE PG

17%

571

573

TABLE OF INTEREST RATES FOR LARGE CORPORATE UNDERPAYMENTS

FROM JANUARY 1, 1991 – PRESENT

1995–1 C.B.

Jan. 1, 1991—Mar. 31, 1991

Apr. 1, 1991—Jun. 30, 1991

Jul. 1, 1991—Sep. 30, 1991

Oct. 1, 1991—Dec. 31, 1991

Jan. 1, 1992—Mar. 31, 1992

Apr. 1, 1992—Jun. 30, 1992

Jul. 1, 1992—Sep. 30, 1992

Oct. 1, 1992—Dec. 31, 1992

Jan. 1, 1993—Mar. 31, 1993

Apr. 1, 1993—Jun. 30, 1993

Jul. 1, 1993—Sep. 30, 1993

Oct. 1, 1993—Dec. 31, 1993

Jan. 1, 1994—Mar. 31, 1994

Apr. 1, 1994—Jun. 30, 1994

Jul. 1, 1994—Sep. 30, 1994

Oct. 1, 1994—Dec. 31, 1994

Jan. 1, 1995—Mar. 31, 1995

Apr. 1, 1995—Jun. 30, 1995

Jul. 1, 1995—Sep. 30, 1995

Oct. 1, 1995—Dec. 31, 1995

Jan. 1, 1996—Mar. 31, 1996

Apr. 1, 1996—Jun. 30, 1996

Jul. 1, 1996—Sep. 30, 1996

Oct. 1, 1996—Dec. 31, 1996

Jan. 1, 1997—Mar. 31, 1997

Apr. 1, 1997—Jun. 30, 1997

Jul. 1, 1997—Sep. 30, 1997

Oct. 1, 1997—Dec. 31, 1997

Jan. 1, 1998—Mar. 31, 1998

Apr. 1, 1998—Jun. 30, 1998

Jul. 1, 1998—Sep. 30, 1998

Oct. 1, 1998—Dec. 31, 1998

Jan. 1, 1999—Mar. 31, 1999

1998–51 I.R.B.

RATE

TABLE

13%

12%

11%

10%

11%

12%

11%

10%

11%

10%

585

583

629

627

625

577

579

581

583

581

629

627

629

581

579

577

December 21, 1998

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Page 12

TABLE OF INTEREST RATES FOR CORPORATE

OVERPAYMENTS EXCEEDING $10,000

FROM JANUARY 1, 1995 – PRESENT

Jan. 1, 1995—Mar. 31, 1995

Apr. 1, 1995—Jun. 30, 1995

Jul. 1, 1995—Sep. 30, 1995

Oct. 1, 1995—Dec. 31, 1995

Jan. 1, 1996—Mar. 31, 1996

Apr. 1, 1996—Jun. 30, 1996

Jul. 1, 1996—Sep. 30, 1996

Oct. 1, 1996—Dec. 31, 1996

Jan. 1, 1997—Mar. 31, 1997

Apr. 1, 1997—Jun. 30, 1997

Jul. 1, 1997—Sep. 30, 1997

Oct. 1, 1997—Dec. 31, 1997

Jan. 1, 1998—Mar. 31, 1998

Apr. 1, 1998—Jun. 30, 1998

Jul. 1. 1998—Sep. 30, 1998

Oct. 1, 1998—Dec. 31, 1998

Jan. 1, 1999—Mar. 31, 1999

December 21, 1998

RATE

1995–1 C.B.

TABLE

6.5%

7.5%

6.5%

5.5%

6.5%

5.5%

4.5%

572

574

572

620

618

620

572

570

568

1998–51 I.R.B.

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Page 13

Part III. Administrative, Procedural, and Miscellaneous

Interim Guidance for Equitable

Relief From Joint and Several

Liability

Notice 98–61

SECTION 1. PURPOSE

The Treasury Department and the Internal Revenue Service are in the process of

developing guidance for taxpayers seeking equitable relief from federal tax liability under § 6015(f) or 66(c) of the Internal

Revenue Code. This notice provides interim guidance. The Treasury Department and the Service also request comments from the public to aid in the

development of final guidance.

SECTION 2. BACKGROUND

.01 Section 3201(a) of the Internal Revenue Service Restructuring and Reform

Act of 1998, Pub. L. No. 105–206, 112

Stat.742 (RRA), enacted new § 6015,

which provides for relief in certain circumstances from joint and several liability

for tax, interest, penalties and other

amounts arising from a federal joint income tax return. (Any reference hereinafter to “tax” includes interest, penalties

and other amounts.) Sections 6015(b) and

6015(c) specify two sets of circumstances

under which relief is available. In addition, where relief is not available under §

6015(b) or 6015(c), § 6015(f) authorizes

the Secretary to grant relief if, taking into

account all the facts and circumstances, it

is inequitable to hold a taxpayer liable for

any unpaid tax or any deficiency. Section

3201(b) of RRA amended § 66(c) to add

an equitable relief provision similar to §

6015(f). Section 66(c) applies to married

individuals with community property income, and provides certain conditions

under which an individual can be relieved

from separate return liability for items of

community income attributable to his or

her spouse. The enactment of § 6015 and

the amendment of § 66(c) are effective

with respect to any liability for tax arising

after July 22, 1998, and any liability for

tax arising on or before July 22, 1998, that

is unpaid on that date.

.02 Under § 6015(b), relief with respect to a deficiency will be granted to an

1998–51 I.R.B.

individual if the following five conditions

are met: (1) a joint return was made; (2)

there was an understatement of tax attributable to erroneous items of the individual’s spouse; (3) in signing the return, the

individual did not know, and had no reason to know, that there was an understatement of tax; (4) taking into account all the

facts and circumstances, it is inequitable

to hold the individual liable for the deficiency in tax; and (5) the individual elects

to apply for relief no later than two years

after the date of the Service’s first collection activity after July 22, 1998, with respect to the individual. If all five conditions would be met except for the fact that

the individual did not know and had no

reason to know of only a portion of the

deficiency, then the individual can be

granted relief to the extent that the liability is attributable to such portion.

.03 Relief with respect to a deficiency

allocable to the other spouse will be

granted to an individual under § 6015(c)

if the following four conditions are met:

(1) a joint return was made; (2) at the time

relief is elected, the individual is no

longer married to, is legally separated

from, or has been living apart at all times

for at least 12 months from his or her

spouse or former spouse; (3) the individual elects to apply for relief no later than

two years after the date of the Service’s

first collection activity after July 22,

1998, with respect to the individual; and

(4) the liability remains unpaid at the time

relief is elected. Relief under § 6015(c) is

subject to several limitations. First, relief

under § 6015(c) is not available if assets

were transferred between the spouses as

part of a fraudulent scheme. Second, if an

individual has actual knowledge that an

item on a return is incorrect, relief is not

available to the extent any deficiency is

attributable to such item. Third, relief

will only be available to the extent that

the liability exceeds the value of any disqualified assets transferred to the individual by the nonrequesting spouse. See

§ 6015(c)(4)(B).

.04 Section 6015 provides for relief

only from joint and several liabilities arising from a joint return. If an individual

signed a joint return involuntarily while

under duress, the signature is not valid

and a joint return was not made. The in-

dividual is not jointly and severally liable

for liabilities arising from such a return

and, therefore, § 6015 does not apply.

.05 Under both §§ 6015(b) and

6015(c), relief is limited to relief from liability for proposed or assessed deficiencies. Neither § 6015(b) nor § 6015(c) authorizes relief from liabilities that were

properly reported on the return but not

paid. However, equitable relief under

§ 6015(f) may be available for such liabilities. The legislative history of the RRA

indicates that Congress intended the Secretary to exercise the equitable relief authority under § 6015(f) when a spouse

“does not know, and had no reason to

know, that funds intended for the payment

of tax were instead taken by the other

spouse for such other spouse’s benefit.”

H.R. Conf. Rep. No. 599, 105th Cong., 2d

Sess. 254 (1998). Congress also intended

for the Secretary to exercise the equitable

relief authority under § 6015(f) in other

situations where, “taking into account all

the facts and circumstances, it is inequitable to hold an individual liable for

all or part of any unpaid tax or deficiency

arising from a joint return.” House Conf.

Rep. No. 599 at 254.

SECTION 3. INTERIM GUIDANCE

FOR EQUITABLE RELIEF UNDER

SECTION 6015(f)

This notice provides interim guidance

to taxpayers seeking equitable relief

under § 6015(f) in three areas. First, section 3.01 of this notice provides threshold

conditions that must be satisfied in order

for an individual to be considered for relief under § 6015(f). Second, section 3.02

of this notice sets forth the circumstances

in which relief under § 6015(f) will ordinarily be granted in the situation where an

individual did not know, and had no reason to know, that funds intended for the

payment of tax were instead taken by the

spouse for the spouse’s benefit. Third, for

all other requests for relief under

§ 6015(f), and all requests for relief under

§ 66(c), section 3.03 of this notice provides a partial list of factors to be considered in determining whether it would be

inequitable to hold an individual liable for

a deficiency or unpaid liability.

.01 Eligibility to be considered for eq-

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Page 14

uitable relief. All the following threshold

conditions must be met for an individual

to be considered for relief under § 6015(f)

from liability for tax. These threshold

conditions apply to all requests for relief

under § 6015(f) (i.e., those relating to liabilities for deficiencies and those relating

to liabilities that were properly reported

on the return but not paid):

(1) The individual made a joint return for the taxable year for which relief is

sought;

(2) Relief is not available to the individual under § 6015(b) or 6015(c);

(3) The individual applies for relief

no later than two years after the date of the

Service’s first collection activity after July

22, 1998, with respect to the individual;

(4) Except as provided in the next

sentence, the liability remains unpaid at

the time relief is requested. An individual

is eligible to be considered for relief in the

form of a refund of liabilities for: (a)

amounts paid on or after July 22, 1998,

and on or before April 15, 1999; and (b)

installment payments, made after July 22,

1998, pursuant to an installment agreement entered into with the Service and

with respect to which an individual is not

in default, that are made after the claim

for relief is requested;

(5) No assets were transferred between the individuals filing the joint return as part of a fraudulent scheme by

such individuals;

(6) There were no disqualified assets

transferred to the individual by the nonrequesting spouse. If there were disqualified assets transferred to the individual by

the nonrequesting spouse, relief will be

available only to the extent that the liability exceeds the value of such disqualified

assets. For this purpose, the term “disqualified asset” has the meaning given

such term by § 6015(c)(4)(B); and

(7) The individual did not file the

joint return with fraudulent intent.

An individual satisfying all the above

threshold conditions may be relieved of

the liability under § 6015(f) if, taking into

account all the facts and circumstances, it

is inequitable to hold the individual liable

for all or part of a tax liability. See section 3.02 of this notice for circumstances

under which relief will ordinarily be

granted, and section 3.03 of this notice for

factors used to determine whether to grant

equitable relief.

December 21, 1998

.02 Circumstances under which equitable relief will ordinarily be granted.

The following are the circumstances

under which equitable relief from tax liability for a taxable year will ordinarily be

granted to an individual requesting relief

under § 6015(f):

(1) The liability reported on a joint

return for such year was unpaid at the

time such return was filed;

(2) At the time relief is requested, the

individual is no longer married to, or is

legally separated from, the spouse with

whom such individual filed the joint return to which the request for relief relates,

or has at no time during the 12-month period ending on the date relief is requested,

been a member of the same household as

the spouse with whom such joint return

was filed;

(3) At the time the return was filed,

the individual did not know, and had no

reason to know, that the tax would not be

paid. The individual must establish that it

was reasonable for such individual to believe that the nonrequesting spouse would

pay the reported liability. If an individual

would otherwise qualify for relief under

section 3.02 of this notice, except for the

fact that the individual did not know, and

had no reason to know, of only a portion

of the unpaid liability, then the individual

will be granted relief to the extent that the

liability is attributable to such portion;

and

(4) The individual would suffer

undue hardship if relief from the liability

were not granted. For this purpose, the

term “undue hardship” has the meaning

given to such term under § 1.6161–1(b)

of the Income Tax Regulations.

Relief under section 3.02 of this notice is

subject to the following limitations: (a) if

the return is or has been adjusted to reflect

an understatement of tax, relief will be

available only to the extent of the liability

shown on the return prior to any such adjustment; and (b) relief will only be available to the extent that the unpaid liability

is attributable to the nonrequesting

spouse.

.03 Factors for determining whether to

grant equitable relief. Section 3.03 of

this notice applies to married individuals

filing separate returns in community

property states who request relief under

§ 66(c), and individuals who meet the

threshold conditions of section 3.01 of

this notice but who do not qualify for relief under section 3.02 of this notice.

Such individuals may qualify for relief

from tax liability for a taxable year under

§ 6015(f) or 66(c) if, taking into account

all the facts and circumstances, it is inequitable to hold the individual liable for

the unpaid liability or deficiency. The following are partial lists of the positive and

negative factors that will be taken into account in determining whether to grant equitable relief under § 6015(f) or 66(c).

The list is not intended to be exhaustive.

(1) Factors weighing in favor of relief:

(a) Marital status. The individual requesting relief is separated (whether

legally separated or living apart) or divorced from the nonrequesting spouse;

(b) Hardship. The individual requesting relief will suffer hardship if the

relief is not granted, even if such hardship

does not constitute undue hardship within

the meaning of § 1.6161-1(b);

spouse (but such abuse did not amount to

duress); and

(d) Spouse’s legal obligation.

The nonrequesting spouse has a legal

obligation pursuant to a divorce decree or

agreement to pay the liability.

(2) Factors weighing against relief:

(a) Attribution. If any unpaid liability or item giving rise to a deficiency

is attributable to the individual requesting

relief, that is a factor weighing against relief from such unpaid liability or deficiency;

(b) Knowledge, or reason to

know. An individual’s knowledge or reason to know of an unpaid liability or deficiency is an extremely strong factor

weighing against relief. Nonetheless,

when the factors in favor of equitable relief are unusually strong, it may be appropriate to grant relief under § 6015(f) in

limited situations where an individual

knew or had reason to know of an unpaid

liability, and in very limited situations

where an individual knew or had reason

to know of a deficiency; and

benefitted (beyond normal support) from

the unpaid liability or items giving rise to

the deficiency. See, for example,

§ 1.6013–5(b).

1998–51 I.R.B.

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Page 15

(d) Individual’s legal obligation.

The individual requesting relief has a

legal obligation pursuant to a divorce decree or agreement to pay the liability.

SECTION 4. REQUEST FOR

COMMENTS

The Treasury Department and the Service invite public comment on the matters

addressed by this notice, particularly regarding the following specific topics: (1)

the circumstances set forth in section 3.02

of this notice under which § 6015(f) relief

will ordinarily be available; (2) the factors

set forth in section 3.03 of this notice to

be taken into account in determining

whether § 6015(f) equitable relief may be

available; (3) situations in which relief

under § 6015(f) or 66(c) should be available even though an individual knew, or

had reason to know of, a deficiency or unpaid liability; and (4) situations in which

relief under § 6015(f) or 66(c) should be

available even though the unpaid liability

or item giving rise to the deficiency is attributable to the individual requesting relief. Written comments should be submitted by April 30, 1999, either to:

Internal Revenue Service

P.O. Box 7604

Ben Franklin Station

Washington, DC 20044

Attn: CC:DOM:CORP:R, Room 5228

(IT&A:Br4)

or electronically via:

http://www.irs.ustreas.gov/prod/tax_re

gs/comments.html

(the Service’s Internet site).

SECTION 5. EFFECTIVE DATE

The interim guidance contained in this

notice is effective on December 7, 1998,

and may be relied upon until permanent

guidance is issued. No inference should

be made that the interim guidance contained in this notice will, or will not, be

incorporated into the permanent guidance.

DRAFTING INFORMATION

The principal author of this notice is

Bridget E. Finkenaur of the Office of Assistant Chief Counsel (Income Tax and

Accounting). For further information regarding this notice, contact Ms. Finkenaur

on (202) 622-4940 (not a toll-free call).

1998–51 I.R.B.

Notice 98–62

This Notice provides information about

Internal Revenue Service procedures

under section 6331(h) of the Internal Revenue Code of 1986.

The Taxpayer Relief Act of 1997 added

section 6331(h) to the Code in order to

provide for a continuous levy of up to 15

percent of any “specified payment due to

or received by a taxpayer.” I.R.C.

§ 6331(h)(1). Section 6331(h)(2) defines

a specified payment as: any Federal payment other than a payment for which eligibility is based on income or assets (or

both) of a payee; unemployment compensation; workmen’s compensation; wages,

salary, or other income to the extent they

do not exceed minimum exemptions for

an I.R.S. levy; supplemental security income for the aged, blind, and disabled

under Social Security; state or local public welfare programs based on needs or

income; and any annuity or pension under

the Railroad Retirement Act or benefit

under the Railroad Unemployment Insurance Act.

The Service has received questions as

to whether levies are currently being

served under section 6331(h). Section

6331(h) is effective for levies issued after

August 5, 1997. Section 6010(f) of the

Internal Revenue Service Restructuring

and Reform Act of 1998 clarifies that the

new continuous levy is an option for collection that is exercised at the Service’s

discretion. As of this date, the Service has

no procedures for serving levies under

section 6331(h), and no such levies have

been issued. Procedures will be announced before any levies are issued

under section 6331(h).

Because section 6331(h) does not identify a format for serving a continuous

levy, there may be confusion as to

whether the levy is a continuous levy

under section 6331(h) or an ordinary form

of levy under sections 6331(a) or 6331(e).

When the continuous levy procedures are

issued, they will require that any levy intended to be issued under section 6331(h)

must be clearly identified, on the face of

the levy, as a levy made pursuant to section 6331(h). Any levy that is not clearly

identified, on the face of the levy, as a

section 6331(h) levy will be treated as an

ordinary levy under sections 6331(a) or

6331(e).

The principal author of this notice is

Walter Ryan of the Office of Assistant

Chief Counsel (General Litigation). For

further information regarding this notice

contact Mr. Ryan at 202-622-3610 (not a

toll-free call).

Alternative Identifying Numbers

for Income Tax Return

Preparers

Notice 98–63

PURPOSE

This notice informs income tax return

preparers of the Service’s intention to develop a system of providing alternative

identifying numbers for preparers, as authorized by § 3710 of the Internal Revenue Service Restructuring and Reform

Act of 1998, Pub. L. No. 105–206, 112

Stat. 685 (the “Act”). Individual preparers are reminded of their continuing responsibility to furnish their social security

numbers (“SSNs”) on returns or claims

for refund prepared by them.

LAW PRIOR TO AMENDMENT BY

THE ACT

Section 6109(a)(4) of the Internal Revenue Code provides that any return or

claim for refund prepared by an income

tax return preparer must bear the identifying number of the preparer as required

under regulations prescribed by the Secretary. Prior to its amendment by § 3710 of

the Act, § 6109(a) of the Code provided

that the identifying number of an individual preparer was that individual’s SSN.

Section 1.6109–2 of the Income Tax

Regulations provides that each return or

claim for refund prepared by an income

tax return preparer must bear the identifying number of the preparer, which, for an

individual preparer, is that individual’s

SSN.

EFFECT OF THE ACT

Under § 6109(a), as amended by

§ 3710 of the Act, the identifying number

required for a return preparer need not be

the preparer’s SSN. Instead, the Secretary may issue regulations providing alternatives to the SSN for purposes of

identifying individual preparers. See

§ 6109(d).

December 21, 1998

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To implement this change, the Service

intends to develop a system for assigning

alternative identifying numbers to individual preparers. These alternative identifying numbers are scheduled to be available for the filing season beginning

January 1, 2000. The Secretary intends to

amend § 1.6109–2 to allow individual

preparers the option of electing alternative identifying numbers in lieu of their

SSNs.

Until the alternative identifying numbers are available, § 1.6109–2 requires

that individual preparers continue to furnish their SSNs as their identifying numbers. However, as provided by Rev. Rul.

78–317, 1978–2 C.B. 335, preparers may

omit their SSNs from copies of returns

furnished to taxpayers under § 6107(a).

The Service will continue to monitor

returns and claims for refund for the presence of preparer SSNs. Income tax return

preparers failing to furnish their SSNs on

returns or claims for refund are subject to

a penalty of $50 for each such failure, as

provided by § 6695(c).

DRAFTING INFORMATION

The principal author of this notice is Andrew J. Keyso of the Office of the Assistant Chief Counsel (Income Tax and Accounting). Preparers may obtain updates

on the status of the system for assigning alternative identifying numbers by calling

(202) 622-4405 (not a toll-free call).

26 CFR 601.204: Changes in accounting periods

and in methods of accounting.

(Also Part I, §§ 162, 165, 166, 167, 168, 174, 197,

263, 263A, 446, 451, 454, 455, 461, 471, 472, 475,

481, 585, 1272, 1273, 1281, 1363; 1.165–2,

1.167(a)–11, 1.167(e)–1, 1.174–1, 1.174–3,

1.174–4, 1.263(a)–2, 1.263A–1, 1.263A–3, 1.446–1,

1.446–2, 1.454–1, 1.455–6, 1.461–4, 1.461–5,

1.471–1, 1.471–2, 1.471-3, 1.472–6, 1.472–8,

1.481–1, 1.481–4, 1.1272–1, 1.1273–1, 1.1273–2.)

Rev. Proc. 98-60

TABLE OF CONTENTS

PAGE

SECTION 1. PURPOSE . . . . . . . . . . . 17

SECTION 2. BACKGROUND

AND CHANGES . . . . . . . . . . . . . . . . 17

.01 Change in method of

accounting defined . . . . . . . . . 17

December 21, 1998

.02 Securing permission to make

a method change . . . . . . . . . . . 17

.03 Terms and conditions of a

method change . . . . . . . . . . . . 17

.04 No retroactive method

change . . . . . . . . . . . . . . . . . . . 18

.05 Method change with a

§ 481(a) adjustment . . . . . . . . 18

(1) Need for adjustment . . . . . . 18

(2) Adjustment period . . . . . . . . 18

.06 Method change using a

cut-off method . . . . . . . . . . . . . 18

.07 Consistency and clear

reflection of income . . . . . . . . 18

.08 Separate trades or

businesses . . . . . . . . . . . . . . . . 18

.09 Penalties . . . . . . . . . . . . . . . . . 18

.10 Change made as part of

an examination . . . . . . . . . . . . 18

.11 Significant changes . . . . . . . . . 18

SECTION 3. DEFINITIONS . . . . . . . 19

.01 Application . . . . . . . . . . . . . . . 19

.02 Taxpayer . . . . . . . . . . . . . . . . . 19

(1) In general . . . . . . . . . . . . . . 19

(2) Consolidated group . . . . . . . 19

.03 Filed . . . . . . . . . . . . . . . . . . . . 19

.04 Mailed . . . . . . . . . . . . . . . . . . . 19

.05 Timely performance of acts . . . 19

.06 Year of change . . . . . . . . . . . . 19

.07 Section 481(a) adjustment

period . . . . . . . . . . . . . . . . . . . 19

.08 Under examination . . . . . . . . . 19

(1) In general . . . . . . . . . . . . . . 19

(2) Partnerships and S

corporations subject to

TEFRA . . . . . . . . . . . . . . . . . 20

.09 Issue under consideration . . . . 20

(1) Under examination . . . . . . . 20

(2) Before an appeals office . . . 20

(3) Before a federal court . . . . . 20

.10 Change within the LIFO

inventory method . . . . . . . . . . 20

SECTION 4. SCOPE . . . . . . . . . . . . . 20

.01 Applicability . . . . . . . . . . . . . . 20

.02 Inapplicability . . . . . . . . . . . . . 20

(1) Under examination . . . . . . . 20

(2) Before an appeals office . . . 20

(3) Before a federal court . . . . . 20

(4) Consolidated group

member . . . . . . . . . . . . . . . . 20

(5) Partnerships and S

corporations . . . . . . . . . . . . 21

(6) Prior change . . . . . . . . . . . . 21

(7) Section 381(a) transaction . 21

.03 Nonautomatic changes . . . . . . 21

SECTION 5. TERMS AND

CONDITIONS OF CHANGE . . . . . . 21

.01 In general . . . . . . . . . . . . . . . . . 21

.02 Year of change . . . . . . . . . . . . . 21

.03 Section 481(a) adjustment . . . . 21

.04 Section 481(a) adjustment

period . . . . . . . . . . . . . . . . . . . . 21

(1) In general . . . . . . . . . . . . . . 21

(2) Short period as a separate

taxable year . . . . . . . . . . . . . 21

(3) Shortened or accelerated

adjustment periods . . . . . . . 21

.05 NOL carryback limitation for

taxpayer subject to criminal

investigation . . . . . . . . . . . . . . . 22

.06 Change treated as initiated

by the taxpayer . . . . . . . . . . . . . 22

SECTION 6. GENERAL

APPLICATION PROCEDURES . . . . 22

.01 Consent . . . . . . . . . . . . . . . . . . 22

.02 Filing requirements . . . . . . . . . 22

(1) Waiver of taxable year

filing requirement . . . . . . . . 22

(2) Timely duplicate filing

requirement . . . . . . . . . . . . . 22

(3) Label . . . . . . . . . . . . . . . . . . 23

(4) Signature requirements . . . . 23

(5) Additional statement

required . . . . . . . . . . . . . . . . 23

(6) Where to file copy . . . . . . . . 23

(7) No user fee . . . . . . . . . . . . . . 23

(8) Single application for

certain consolidated

groups . . . . . . . . . . . . . . . . . 23

.03 Taxpayer under

examination . . . . . . . . . . . . . . 24

(1) In general . . . . . . . . . . . . . . 24

(2) 90-day window period . . . . . 24

(3) 120-day window period . . . . 24

(4) Consent of district

director . . . . . . . . . . . . . . . . 24

.04 Taxpayer before an appeals

office . . . . . . . . . . . . . . . . . . . . 24

.05 Taxpayer before a federal

court . . . . . . . . . . . . . . . . . . . . 24

.06 Compliance with

provisions . . . . . . . . . . . . . . . . 24

SECTION 7. AUDIT PROTECTION

FOR TAXABLE YEARS PRIOR TO

YEAR OF CHANGE . . . . . . . . . . . . . 25

.01 In general . . . . . . . . . . . . . . . . 25

.02 Exceptions . . . . . . . . . . . . . . . . 25

(1) Change not made or

made improperly . . . . . . . . . 25

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(2) Change in sub-method . . . . . 25

(3) Prior year Service-initiated

change . . . . . . . . . . . . . . . . .25

(4) Criminal investigation . . . . .25

SECTION 8. EFFECT OF

CONSENT . . . . . . . . . . . . . . . . . . . . . 25

.01 In general . . . . . . . . . . . . . . . . 25

.02 Retroactive change or

modification . . . . . . . . . . . . . . 25

SECTION 9. REVIEW BY

DISTRICT DIRECTOR . . . . . . . . . . . 25

.01 In general . . . . . . . . . . . . . . . . 25

.02 National office

consideration . . . . . . . . . . . . . 25

SECTION 10. REVIEW BY

NATIONAL OFFICE . . . . . . . . . . . . . 26

.01 In general . . . . . . . . . . . . . . . . 26

.02 Incomplete application—

21 day rule . . . . . . . . . . . . . . . 26

.03 Conference in the national

office . . . . . . . . . . . . . . . . . . . 26

.04 National office

determination . . . . . . . . . . . . . 26

(1) Consent not granted . . . . . . 26

(2) Application changed . . . . . . 26

SECTION 11. APPLICABILITY OF

REV. PROCS. 98–1 AND 98–4 . . . . . 26

SECTION 12. INQUIRIES . . . . . . . . 26

SECTION 13. EFFECTIVE DATE . . 26

.01 In general . . . . . . . . . . . . . . . . 26

.02 Transition rules . . . . . . . . . . . . 26

.03 Special rules . . . . . . . . . . . . . . 26

(1) Change in method of

accounting for

depreciation . . . . . . . . . . . . . 26

(2) Change in method of

accounting to discontinue

the mark-to-market method

of accounting . . . . . . . . . . . . 26

(3) Change in method of

accounting for a pool of

debt instruments . . . . . . . . . 26

SECTION 14. EFFECT ON OTHER

DOCUMENTS . . . . . . . . . . . . . . . . . . 27

SECTION 15. PAPERWORK

REDUCTION ACT . . . . . . . . . . . . . . 27

DRAFTING INFORMATION . . . . . . 27

APPENDIX (TABLE OF

CONTENTS) . . . . . . . . . . . . . . . . . . . 27

1998–51 I.R.B.

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, modifies, amplifies, and supersedes Rev. Proc.

97–37, 1997–2 C.B. 455. It also consolidates automatic consent procedures for

changes in several methods of accounting

that were published subsequent to the

publication of Rev. Proc. 97–37, and provides new automatic consent procedures

for changes in several other methods of

accounting. A taxpayer complying with

all the applicable provisions of this revenue 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 thereunder.

SECTION 2. BACKGROUND AND

CHANGES

.01 Change in method of accounting

defined.

(1) Section 1.446–1(e)(2)(ii)(a) of

the Income Tax Regulations provides that

a change in method of accounting 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 taxpayer’s lifetime income, but does or could

change the taxable year in which income

is reported, it involves timing and is

therefore a method of accounting. See

Rev. Proc. 91–31, 1991–1 C.B. 566.

(2) Although a method of accounting

may exist under this definition without a

pattern of consistent treatment of an item,

a method of accounting is not adopted in

most instances without consistent treatment. 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). See Rev. 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 treating the item as a deposit is a change in

method of accounting. See Rev. Proc.

91–31.

(4) A change in method of accounting does not include correction of mathematical or posting errors, or errors in the

computation 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).

.02 Securing 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 consent of the Commissioner before changing 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.

.03 Terms and conditions of a method

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). The terms

and conditions the Commissioner may

prescribe include the year of change,

whether the change is to be made with a

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§ 481(a) adjustment or on a cut-off basis,

and the § 481(a) adjustment period.

.04 No retroactive method change.

Unless specifically authorized by the

Commissioner, a taxpayer may not request, or otherwise make, a retroactive

change in method of accounting, regardless of whether the change is from a permissible or an impermissible method. See

generally Rev. Rul. 90–38.

.05 Method change with a § 481(a) adjustment.

(1) Need for adjustment. Section

481(a) requires those adjustments necessary to prevent amounts from being duplicated 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 compute 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 accounting

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

disbursements 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 positive § 481(a)

adjustment of $20,000 ($120,000 accounts receivable less $100,000 accounts payable) is required as a

result of the change.

(2) Adjustment period. Section

481(c) and §§ 1.446–1(e)(3)(ii) and

1.481–4 provide that the adjustment required by § 481(a) may be taken into account in determining taxable income in

the manner and subject to the conditions

agreed to by the Commissioner and the

taxpayer. Generally, in the absence of

such an agreement, the § 481(a) adjustment is taken into account completely in

the year of change, subject to § 481(b)

which limits the amount of tax where the

§ 481(a) adjustment is substantial. However, under the Commissioner’s authority

in § 1.446–1(e)(3)(ii) to prescribe terms

December 21, 1998

and conditions for changes in methods of

accounting, this revenue procedure provides specific adjustment periods that are

intended to achieve an appropriate balance between the goals of mitigating distortions of income that result from accounting method changes and providing

appropriate incentives for voluntary compliance.

.06 Method change using a cut-off

method. The Commissioner may determine that certain changes in methods of

accounting will be made without a

§ 481(a) adjustment, using a “cut-off

method.” Under a cut-off method, only

the items arising on or after the beginning

of the year of change (or other operative

date) are accounted for under the new

method of accounting. Any items arising

before the year of change (or other operative date) continue to be accounted for

under the taxpayer’s former method of accounting. See, for example, § 263A

(which generally applies to costs incurred

after December 31, 1986, for noninventory property), § 461(h) (which generally

applies to amounts incurred on or after

July 18, 1984), and § 1.446–3 (which applies to notional principal contracts entered into on or after December 13, 1993).

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.

.07 Consistency and clear reflection of

income. Methods of accounting should

clearly reflect income on a continuing

basis, and the Internal Revenue Service

exercises its discretion under §§ 446(e)

and 481(c) in a manner that generally

minimizes distortions of income across

taxable years and on an annual basis.

.08 Separate trades or businesses.

(1) Sections 1.446–1(d)(1) and (2)

provide that when a taxpayer has two or

more separate and distinct trades or businesses, 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 business. 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.

.09 Penalties. Any otherwise applicable penalty for the failure of a taxpayer to

change its method of accounting (for example, the accuracy-related penalty under

§ 6662 or the fraud penalty under § 6663)

may be imposed if the taxpayer does not

timely file a request to change a method

of accounting. See § 446(f). Additionally, the taxpayer’s return preparer may

also be subject to the preparer penalty

under § 6694. However, penalties will

not be imposed when a taxpayer changes

from an impermissible method of accounting to a permissible one by complying with all applicable provisions of this

revenue procedure.

.10 Change made as part of an examination. Sections 446(b) and 1.446–

1(b)(1) provide that if a taxpayer does not

regularly employ a method of accounting

that clearly reflects its income, the computation of taxable income must be made

in a manner that, in the opinion of the

Commissioner, does clearly reflect income. If a taxpayer under examination is

not eligible to change a method of accounting under this revenue procedure,

the change may be made by the district director. A change resulting in a positive

§ 481(a) adjustment will ordinarily be

made in the earliest taxable year under examination with a one-year § 481(a) adjustment period.

.11 Significant changes. Significant

changes to Rev. Proc. 97–37 include:

(1) Section 4.02(6) clarifies that the

year of change is included within the fiveyear prohibition regarding prior changes;

(2) Section 6.02(2) clarifies that the

automatic extension of 6 months from the

due date of the return provided in

§ 301.9100-2 is applicable;

(3) Section 9.01 clarifies that the district director is to ascertain if a change in

method of accounting was made in compliance with all the applicable provisions

of this revenue procedure;

(4) Section 10.04 clarifies that an ap-

1998–51 I.R.B.

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plication reviewed and changed by the national office is subject to review by the

district director as provided in section 9 of

this revenue procedure;

(5) Section 13.03 provides that the

effective date of this revenue procedure is

December 21, 1998, for applications or

copies of applications filed with the national office under section 2.01 or 2.02 of

the APPENDIX;

(6) Section 2.01 of the APPENDIX

provides that this revenue procedure is the

exclusive procedure for making that

change, includes property for which excess depreciation was claimed, excludes

property for which depreciation is determined under § 1.167(a)–11, and requires

additional information for any public utility property;

(7) Section 2.02 of the APPENDIX

requires additional information for any

public utility property;

(8) Section 3.01 of the APPENDIX

is modified to provide that the 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;

(9) Section 10.01 of the APPENDIX

provides that a taxpayer is not required to

file a Form 3115 to re-elect the LIFO inventory method after a period of five taxable years beginning with the year of

change;

(10) Section 10.04 of the APPENDIX provides that a taxpayer wanting to

make an IPIC change where a bulk bargain purchase previously occurred must

first comply with Hamilton Industries,

Inc. v. Commissioner, 97 T.C. 120 (1991),

and compute a § 481(a) adjustment for the

bargain purchase part of the change;

(11) The following changes in methods of accounting have been added to the

APPENDIX of this revenue procedure:

(a) Section 1.02 of the APPENDIX regarding Year 2000 costs;

(b) Section 2A.01 of the APPENDIX regarding research and experimental

expenditures;

gas;

(d) Section 5.04 of the APPENDIX regarding the Rule of 78s;

(e) Section 8.05 of the APPENDIX regarding cooperative advertising;

1998–51 I.R.B.

(f) Section 9.02 of the APPENDIX regarding estimating inventory

shrinkage;

(g) Section 10A.01 of the APPENDIX regarding the mark-to-market

method of accounting for a taxpayer’s

first taxable year ending after July 22,

1998; and

(h) Section 12.02 of the APPENDIX regarding pool of debt instruments

for the taxpayer’s first taxable year beginning after August 5, 1997.

SECTION 3. DEFINITIONS

.01 Application. The term “application” includes a Form 3115, or any statement that is authorized under the APPENDIX of this revenue procedure to be filed

in lieu of a Form 3115, and any attachments.

.02 Taxpayer.

(1) In general. The term “taxpayer”

has the same meaning as the term “person” defined in § 7701(a)(1) (rather than

the meaning of the term “taxpayer” defined in § 7701(a)(14)).

(2) Consolidated group. For purposes of (a) sections 3.08(1), 3.09(1), and

4.02(1) of this revenue procedure (taxpayer under examination), (b) sections

3.09(2) and 4.02(2) of this revenue procedure (taxpayer before an appeals office),

or (c) sections 3.09(3) and 4.02(3) of this

revenue procedure (taxpayer before a federal court), the term “taxpayer” includes a

consolidated group.

.03 Filed. Any form (including an application), statement, or other document

required to be filed under this revenue

procedure is filed on the date it is mailed

to the proper address (or an address similar enough to complete delivery). If the

form, statement, or other document is not

mailed (or the date it is mailed cannot be

reasonably determined), it is filed on the

date it is delivered to the Service.

.04 Mailed. The date of mailing will

be determined under the rules of § 7502.

For example, the date of mailing is the

date of the U.S. postmark or the applicable date recorded or marked by a designated private delivery service. See Notice

98–47, 1998–37 I.R.B. 8.

.05 Timely performance of acts. The

rules of § 7503 apply when the last day

for the taxpayer’s timely performance of

any act (for example, filing an application

or submitting additional information) falls

on a Saturday, Sunday, or legal holiday.

The performance of any act is timely if

the act is performed on the next succeeding day that is not a Saturday, Sunday, or

legal holiday.

.06 Year of change. The year of

change is the taxable year for which a

change in method of accounting is 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.

.07 Section 481(a) adjustment period.

The § 481(a) adjustment period is the applicable number of taxable years for taking into account the § 481(a) adjustment

required as a result of the change in

method of accounting. The year of

change is the first taxable year in the adjustment period and the § 481(a) adjustment is taken into account ratably over

the number of taxable years in the adjustment period. The applicable adjustment

periods are set forth in section 5.04 of this

revenue procedure.

.08 Under examination.

(1) In general.

(a) Except as provided in section

3.08(2) of this revenue procedure, an examination of a taxpayer with respect to a

federal income tax return begins on the

date the taxpayer is contacted in any manner by a representative of the Service for

the purpose of scheduling any type of examination of the return. An examination

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

taxpayer;

(ii) in a fully agreed case, on the

earliest of the date the taxpayer executes a

waiver of restrictions on assessment or

acceptance of overassessment (for example, Form 870, 4549, or 4605), the date

the taxpayer makes a payment of tax that

equals or exceeds the proposed deficiency, or the date of the “closing” letter

(for example, Letter 891 or 987) 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 to Appeals from Examination,

the date the taxpayer files a petition in the

Tax Court, the date on which the period

for filing a petition with the Tax Court ex-

December 21, 1998

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Page 20

pires, or the date of the notice of claim

disallowance.

(b) An examination does not end

as a result of the early referral of an issue

to Appeals under the provisions of Rev.

Proc. 96–9, 1996–1 C.B. 575.

the date the taxpayer (or its representative) is notified by Appeals (or otherwise)

that the case has been referred to Examination for reconsideration.

(2) Partnerships and S corporations

subject to TEFRA. For an entity (including a limited liability company), treated

as a partnership or an S corporation for

federal income tax purposes, that is subject to the TEFRA unified audit and litigation 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;

agreed case, on the earliest of the date the

TMP (or its representative) is notified by

Appeals that the case has been referred to

Appeals from Examination, the date the

TMP (or a partner, member, or shareholder) requests judicial review, or the

date on which the period for requesting

judicial review expires.

But see section 4.02(5) of this revenue

procedure for certain rules that preclude

an entity from requesting a change in 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).

.09 Issue 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,

December 21, 1998

by examination plan, information document 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 consideration. 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 consideration 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 documentation supporting the amount of cost of

goods sold reported on the return. The

question of whether a method of accounting is an issue under consideration may be

referred to the national office as a request

for technical advice under the provisions

of Rev. Proc. 98–2, 1998–1 I.R.B. 74 (or

any successor).

(2) Before an appeals office. A taxpayer’s method of accounting for an item

is an issue under consideration for the taxable 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 specifically

identified in writing to the taxpayer by

Appeals.

(3) Before a federal court. A taxpayer’s method of accounting for an item

is an issue under consideration for the taxable years before a federal court if the

treatment of the item is included in the

statutory notice of deficiency, the notice

of claim disallowance, the notice of final

administrative adjustment, the pleadings

(for example, the petition, complaint, or

answer) or amendments thereto, or is

specifically identified in writing to the

taxpayer by the counsel for the government.

.10 Change within the LIFO inventory

method. A change within the LIFO inventory 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 inventory 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).

SECTION 4. SCOPE

.01 Applicability. This revenue procedure 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.

.02 Inapplicability. Except as otherwise provided in the APPENDIX of this

revenue procedure (see, for example, sections 4.01, 5.04, 8.05, 9.02, 10A.01,

12.01, and 12.02 of the APPENDIX of

this revenue 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 provided in section 3.08 of this revenue procedure), except as provided in

sections 6.03(2) (90-day window),

6.03(3) (120-day window), and 6.03(4)

(district director consent) of this revenue

procedure;

(2) Before an appeals office. If, on

the date the taxpayer would otherwise file

a copy of the application with the 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 section 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 section 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

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sections 4.02(1), (2), and (3) of this revenue procedure) if the consolidated group

is under examination, before an appeals

office, or before a federal court for a taxable 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 purposes, if, on the date the entity would otherwise 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 partner, member, or shareholder’s federal income tax return or an issue under consideration 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 (including the year of change), (a) has made a

change in the same method of accounting

(with or without obtaining the Commissioner’s consent), or (b) has applied to

change the same method of accounting

without effecting the change (whether, for

example, the application to change was

withdrawn, not perfected, not granted, or

denied); or

(7) Section 381(a) transaction. 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)).

.03 Nonautomatic changes. If a taxpayer is precluded by other than sections

4.02(1) through 4.02(5) of this revenue

procedure from using this revenue procedure 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 Rev.

Proc. 97–27, 1997–1 C.B. 680 (or any

other applicable Code, regulation, or administrative provision).

.02 Year 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(2).

.03 Section 481(a) adjustment. Unless

otherwise provided in this revenue procedure, a taxpayer making a change in

method of accounting under this revenue

procedure must take into account a

§ 481(a) adjustment in the manner provided in section 5.04 of this revenue procedure.

.04 Section 481(a) adjustment period.

(1) In general. Except as otherwise

provided in section 5.04(3) or the APPENDIX of this revenue procedure, the

§ 481(a) adjustment period for positive

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. See Rev. Rul.

78–165, 1978–1 C.B. 276.

SECTION 5. TERMS AND

CONDITIONS OF CHANGE

(3) Shortened or accelerated adjustment 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

.01 In general. An accounting method

change filed under this revenue procedure

must be made pursuant to the terms and

conditions provided in this revenue procedure.

1998–51 I.R.B.

Example 1. A calendar year taxpayer received

permission to change an accounting method beginning with the 1998 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, 1999. The taxpayer must

include $7,500 of the § 481(a) adjustment in gross

income for the short period from January 1, 1999,

through September 30, 1999.

Example 2. Corporation X, a calendar year taxpayer, received permission to change an accounting

method beginning with the 1998 calendar year. The

§ 481(a) adjustment is $30,000 and the adjustment

period is four taxable years. On July 1, 2000, Corporation Z acquires Corporation X in a transaction to

which § 381(a) applies. Corporation Z is a calendar

year taxpayer that uses the same method of accounting to which Corporation X changed in 1998. Corporation X must include $7,500 of the § 481(a) adjustment in gross income for its short period income

tax return for January 1, 2000, through June 30,

2000. In addition, Corporation Z must include

$7,500 of the § 481(a) adjustment in gross income in

its income tax return for calendar year 2000.

period in lieu of the § 481(a) adjustment

period otherwise provided by this revenue

procedure if the entire § 481(a) adjustment is less than $25,000 (either positive

or negative). A taxpayer makes an election under this de minimis rule by so indicating on the application. For example,

for a taxpayer filing a Form 3115, the taxpayer must complete the appropriate line

on the Form 3115 to elect this de 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. See

Rev. Rul. 79–45, 1979–1 C.B. 284.

or business.

(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) adjustment relating to the trade or business into

account in computing taxable income in

the taxable year of the cessation or termination. Except as provided in sections

5.04(3)(c)(iv) and (v) of this revenue procedure, a taxpayer is treated as ceasing to

engage in a trade or business if the operations of the trade or business cease or substantially all the assets of the trade or

business are transferred to another taxpayer. 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

purposes of accelerating the § 481(a) adjustment under section 5.04(3)(c) of this

revenue procedure:

(A) the trade or business to

which the § 481(a) adjustment relates is

incorporated;

(B) the trade or business to

which the § 481(a) adjustment relates is

purchased by another taxpayer in a transaction to which § 1060 applies;

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 busi-

December 21, 1998

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ness to which the § 481(a) adjustment relates; or

(E) the assets of a trade or

business to which the § 481(a) adjustment

relates are contributed to a partnership.

(iii) Conversion to or from S

corporation status. Except as provided in

section 10.01 of the APPENDIX of this

revenue procedure, no acceleration of a

§ 481(a) adjustment is required under section 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 section 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

procedure when one member of an affiliated group filing a consolidated return

transfers substantially all the assets of the

trade or business that gave rise to the

§ 481(a) adjustment to another member of

the same consolidated group in an exchange qualifying under § 351 and the

transferee member adopts and uses the

same method of accounting (the change to

which gave rise to the § 481(a) adjustment) used by the transferor member.

The transferor member must continue to

take the § 481(a) adjustment into account

pursuant to the terms and conditions set

forth in this revenue procedure. The

transferor member must take into account

activities of the transferee member (or

any successor) in determining whether acceleration of the § 481(a) adjustment is

required. For example, except as pro-

December 21, 1998

vided in the following sentence, the transferor member 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

transferor 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 taxable year any transferee member

owning substantially all the assets of the

trade or business which gave rise to the

§ 481(a) adjustment ceases to be a member of the group; or (3) a separate return

year of the common parent of the group.

In applying the preceding sentence, the

rules of paragraphs (j)(2), (j)(5), and (j)(6)

of § 1.1502–13 apply, but only if the

method of accounting to which the transferor member changed and to which the §

481(a) adjustment relates is adopted, 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 member ceases to be a member of a consolidated group by reason of an acquisition to

which § 381(a) applies and the acquiring

corporation (1) is a member of the same

group as the transferor member, and (2)

continues, under § 381(c)(4) and the 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.

.05 NOL carryback limitation for taxpayer subject to criminal investigation.

Generally, no portion of any net operating

loss that is attributable to a negative

§ 481(a) adjustment may be carried back

to a taxable year prior to the year of

change that is the subject of any pending

or future criminal investigation or proceeding concerning (1) directly or indirectly, any issue relating to the taxpayer’s

federal tax liability, or (2) the possibility

of false or fraudulent statements made by

the taxpayer with respect to any issue relating to its federal tax liability.

.06 Change treated as initiated by the

taxpayer. For purposes of § 481, a change

in method of accounting made under this

revenue procedure is a change in method

of accounting initiated by the taxpayer.

SECTION 6. GENERAL APPLICATION

PROCEDURES

.01 Consent. Pursuant to § 1.446–

1(e)(2)(i), the consent of the Commissioner is hereby granted to any taxpayer

within the scope of this revenue procedure to change a method of accounting,

provided the taxpayer complies with all

the applicable provisions of this revenue

procedure.

.02 Filing requirements.

(1) Waiver of taxable year filing requirement. The requirement under

§ 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).

(2) Timely duplicate filing requirement.

(a) In general. A taxpayer changing a method of accounting pursuant to

this revenue procedure must complete and

file an application in duplicate. Except as

otherwise provided in the APPENDIX of

this revenue procedure (see, for example,

section 12.02 of the APPENDIX of this

revenue procedure), the original must be

attached to the taxpayer’s timely filed (including extensions) original federal income tax return for the year of change,

and a copy 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 automatic extension of 6 months from the

due date of the return for the year of

change (excluding extensions) is granted

1998–51 I.R.B.

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to file an application, provided the taxpayer (A) timely filed (including extensions) its federal 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 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(2)(a) or 6.02(2)(b)(i) of this revenue

procedure will not be granted an extension of time to file under § 301.9100 of

the Procedure and Administration Regulations, except in unusual and compelling

circumstances. See § 301.9100–3(c)(2).

(3) Label.

(a) In order to assist in processing

an application under this revenue procedure, the section of the APPENDIX of

this revenue 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. 98-60”

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.

(4) Signature requirements. 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 authorized officer of the

1998–51 I.R.B.

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 correspondence concerning the application, or perform any

other act(s) regarding the application filed

on behalf of the taxpayer, a power of attorney reflecting such authorization(s)

must be attached to the application. A

taxpayer’s representative without a power

of attorney to represent the taxpayer as indicated in this section will not be given

any information regarding the application.

(5) Additional statement required. In

addition to providing all the information

that is required by the application, a taxpayer must attach to the application a

written statement providing as follows:

(a) the taxpayer agrees to all of the

terms and conditions in this revenue procedure; and

(b) if a § 481(a) adjustment is required, the reason for claiming the

§ 481(a) adjustment period over which

the taxpayer agrees to take the applicable

§ 481(a) adjustment into account.

(6) Where to file 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:DOM:IT&A (Automatic Rulings

Branch), P.O. Box 7604, Benjamin

Franklin Station, Washington, D.C. 20044

(or, in the case of a designated private delivery service: Commissioner of Internal

Revenue, Attention: CC:DOM:IT&A

(Automatic Rulings Branch), 1111 Constitution Avenue, NW, Washington, D.C.

20224).

(b) For an exempt organization,

the copy of the application must be addressed to the Assistant Commissioner

(Employee Plans and Exempt Organizations), Attention: E:EO, P.O. Box 120,

Benjamin Franklin Station, Washington,

D.C. 20044 (or, in the case of a designated private delivery service: Assistant

Commissioner (Employee Plans and Exempt Organizations), Attention: E:EO,

1111 Constitution Avenue, NW, Washington, D.C. 20224).

may also be hand delivered:

(i) To the drop box at the 12th

Street entrance of 1111 Constitution Avenue, NW, Washington, D.C. No receipt

will be given at the drop box. For a taxpayer other than an exempt organization,

the copy of the application must be addressed to the Commissioner of Internal

Revenue, Attention: CC:DOM:IT&A

(Automatic Rulings Branch), 1111 Constitution Avenue, NW, Washington, D.C.

20224. For an exempt organization, the

copy of the application must be addressed

to the Assistant Commissioner (Employee

Plans and Exempt Organizations), Attention: E:EO, 1111 Constitution Avenue,

NW, Washington, D.C. 20224; or

(ii) Between the hours of 8:15

a.m. and 5:00 p.m., to the courier’s desk

at the main entrance of 1111 Constitution

Avenue, NW, Washington, 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:DOM:IT&A

(Automatic Rulings Branch), 1111 Constitution Avenue, NW, Washington, D.C.

20224. For an exempt organization, the

copy of the application must be addressed

to the Assistant Commissioner (Employee

Plans and Exempt Organizations), Attention: E:EO, 1111 Constitution 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)(ii) of this revenue procedure, the receipt of an application filed under this revenue procedure

will not be acknowledged.

(8) Single application for certain

consolidated 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

consolidated 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

consolidated tax return, and they must be

changing from the identical present

method of accounting to the identical proposed method of accounting. All aspects

of the change in method of accounting,

including the present and proposed methods, the underlying facts, and the authority for the change, must be identical, except for the § 481(a) adjustment. See

December 21, 1998

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Page 24

section 15.07(3) of Rev. Proc. 98–1,

1998–1 I.R.B. at 54 (or any successor),

for the information required to be submitted with the application.

.03 Taxpayer under examination.

(1) In general. Except as otherwise

provided in the APPENDIX of this revenue procedure (see, for example, sections 4.01, 5.04, 8.05, 9.02, 10A.01,

12.01, and 12.02 of the APPENDIX of

this revenue procedure), a taxpayer that is

under examination may file an application

to change a method of accounting under

section 6 of this revenue procedure only if

the taxpayer is within the provisions of

section 6.03(2) (90-day window), 6.03(3)

(120-day window), or 6.03(4) (district director consent) of this revenue procedure.

A taxpayer that files an application beyond the time periods provided in the 90day 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 90days 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 consideration at the time the copy of the

application 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

contain the name(s) and telephone number(s) of the examining agent(s). The taxpayer must attach to the application a separate statement signed by the taxpayer

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

December 21, 1998

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 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 120-day window

must provide a copy of the application to

the examining agent(s) for any examination that is in process at the same time it

files the copy of the application with the

national office. The application must

contain the name(s) and telephone number(s) of the examining agent(s). The taxpayer must attach to the application a separate statement signed by the taxpayer

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 district director.

(a) A taxpayer under examination

may change its method of accounting

under this revenue procedure if the district director consents to the change. The

district director will consent to the change

unless, in the opinion of the district director, the method of accounting to be

changed would ordinarily be included as

an item of adjustment in the year(s) for

which the taxpayer is under examination.

For example, the district director will

consent to a change from a clearly permissible method of accounting. The district director will also consent to a change

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 taxpayer 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. 98–2 (or any successor).

(b) A taxpayer changing a method

of accounting under this revenue procedure with the consent of the district direc-

tor must attach to the application a statement from the district director consenting

to the change. The taxpayer must provide

a copy of the application to the district 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 number(s) of the examining agent(s).

.04 Taxpayer before an appeals office.

Except as otherwise provided in the APPENDIX of this revenue procedure (see,

for example, sections 4.01, 5.04, 8.05,

9.02, 10A.01, 12.01, and 12.02 of the APPENDIX of this revenue procedure), a

taxpayer that is before an appeals office

must attach to the application a separate

statement signed by the taxpayer 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 application with the national

office. The application must contain the

name and telephone number of the appeals officer.

.05 Taxpayer before a federal court.

Except as otherwise provided in the APPENDIX of this revenue procedure (see,

for example, sections 4.01, 5.04, 8.05,

9.02, 10A.01, 12.01, and 12.02 of the APPENDIX of this revenue procedure), a

taxpayer that is before a federal court

must attach to the application a separate

statement signed by the taxpayer 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 government at the same time it

files a copy of the application with the national office. The application must contain the name and telephone number of

the counsel for the government.

.06 Compliance with provisions. If a

taxpayer to which this revenue procedure

applies changes to a method of accounting without complying with all the applicable provisions of this revenue procedure

(for example, the taxpayer changes to a

method of accounting that varies from the

applicable accounting method described

in this revenue procedure or the taxpayer

is outside the scope of this revenue procedure), the taxpayer has initiated a change

1998–51 I.R.B.

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in method of accounting without obtaining the consent of the Commissioner as

required by § 446(e). Upon examination,

a taxpayer that has initiated an unauthorized change in method of accounting

may be denied the change. Alternatively,

such a taxpayer may be required to effect

the change in an earlier or later taxable

year and may be denied the benefit of

spreading the § 481(a) adjustment over

the number of taxable years otherwise

prescribed by this revenue procedure.

SECTION 7. AUDIT PROTECTION

FOR TAXABLE YEARS PRIOR TO

YEAR OF CHANGE

.01 In general. Except as provided in

section 7.02 or the APPENDIX of this

revenue procedure, when a taxpayer

timely files a copy of the application with

the national office in compliance with all

the applicable provisions of this revenue

procedure, the Service will not require the

taxpayer to change its method of accounting for the same item for a taxable year

prior to the year of change.

.02 Exceptions.

(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 comply with all the applicable provisions of

this revenue procedure, or (c) the method

of accounting is changed or modified because there has been a misstatement or

omission of material facts (see section

8.02(2) of this revenue procedure).

(2) Change in sub-method. The Service 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 propose to

terminate the taxpayer’s use of the LIFO

inventory method during a prior taxable

year even though the taxpayer changes its

method of valuing increments in the current year.

(3) Prior year Service-initiated

change. The Service may make adjustments to the taxpayer’s returns for the

same item for taxable years prior to the

requested year of change to reflect a prior

year Service-initiated change.

(4) Criminal investigation. The Ser-

1998–51 I.R.B.

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 investigation 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

.01 In 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 accounting for the following reasons:

(1) the enactment of legislation;

(2) a decision of the United States

Supreme Court;

(3) the issuance of temporary or final

regulations;

(4) the issuance of a revenue ruling,

revenue procedure, notice, or other statement published in the Internal Revenue

Bulletin;

(5) the issuance of written notice to

the taxpayer that the change in method of

accounting was not in compliance with all

the applicable provisions of this revenue

procedure or is not in accord with the current views of the Service; or

(6) a change in the material facts on

which the consent was based.

.02 Retroactive change or modification. Except in rare or unusual circumstances, 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 accounting, the required change or modification

will not be applied retroactively, provided

that:

(1) the taxpayer complied with all

the applicable provisions of this revenue

procedure;

(2) there has been no misstatement

or omission of material facts;

(3) there has been no change in the

material facts on which the consent was

based;

(4) there has been no change in the

applicable law; and

(5) the taxpayer to whom consent

was granted acted in good faith in relying

on the consent, and applying the change

or modification retroactively would be to

the taxpayer’s detriment.

SECTION 9. REVIEW BY DISTRICT

DIRECTOR

.01 In general. The district director

must apply a change in method of accounting made in compliance with all the

applicable provisions of this revenue procedure in determining the taxpayer’s liability, unless the district director recommends that the change in method of

accounting should be modified or revoked. (See section 6.06 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 district director will

ascertain if the change in method of accounting was made in compliance with all

the applicable provisions 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) adjustment was properly determined;

(3) the change in method of accounting was implemented in compliance with

all the applicable provisions of this revenue procedure.

The district 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.

.02 National office consideration. If

the district director recommends that a

change in method of accounting (other

than the § 481(a) adjustment) made in

compliance with all the applicable provisions of this revenue procedure should be

modified or revoked, the district director

will forward the matter to the national office for consideration 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. 98–2 (or any successor) will be

followed.

December 21, 1998

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SECTION 10. REVIEW BY NATIONAL

OFFICE

.01 In 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.

.02 Incomplete application—21 day

rule. If the Service reviews an application and determines that the application is

not properly completed in accordance

with the instructions of the Form 3115 or

the provisions of this revenue procedure,

or if supplemental information is needed,

the Service will notify the taxpayer. The

notification will specify the information

that needs to be provided, and the taxpayer will be permitted 21 days from the

date of the notification to furnish the necessary information. The Service reserves

the right to impose shorter reply periods if

subsequent requests for additional information are made. An extension of the 21day period to furnish information, not to

exceed 15 days, may be granted to a taxpayer. A request for an extension of the

21-day period must be made in writing

and submitted within the 21-day period.

If the extension request is denied, there is

no right of appeal.

.03 Conference in the national office.

If the national office tentatively determines that the taxpayer has changed its

method of accounting without complying

with all the applicable provisions of this

revenue procedure (for example, the taxpayer changed to a method of accounting

that varies from the applicable accounting

method described in this revenue procedure or the taxpayer is outside the scope

of this revenue procedure), the national

office will notify the taxpayer of its tentative 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. 98–1 (or any successor).

For conference procedures for exempt organizations, see section 12 of Rev. Proc.

98–4, 1998–1 I.R.B. 113 (or any successor).

.04 National office determination.

(1) Consent not granted. Except as

December 21, 1998

provided in section 10.04(2) of this revenue 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. See section 6.06 of this

revenue procedure.

(2) Application changed. 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, in its discretion, may

allow the taxpayer (a) to make appropriate 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 procedure is subject to review by the district director as provided in section 9 of this revenue procedure.

SECTION 11. APPLICABILITY OF

REV. PROCS. 98–1 AND 98–4

Rev. Procs. 98–1 and 98–4 (or any successors) are applicable to applications

filed under this revenue procedure, unless

specifically excluded or overridden by

other published guidance (including the

special procedures in this document).

SECTION 12. INQUIRIES

Inquiries regarding this revenue procedure may be addressed to the Commissioner of Internal Revenue, Attention:

CC:DOM:IT&A, 1111 Constitution Avenue, NW, Washington, D.C. 20224.

SECTION 13. EFFECTIVE DATE

.01 In general. Except as provided in

sections 13.02 and 13.03 of this revenue

procedure, this revenue procedure is effective for taxable years ending on or

after December 21, 1998. The Service

will return any application that is filed on

or after December 21, 1998, if the application is filed with the national office pursuant to the Code, regulations, or administrative guidance other than this revenue

procedure and the change in method of

accounting is within the scope of this revenue procedure.

.02 Transition rules. If a taxpayer filed

an application or ruling request with the

national office to make a change in

method of accounting authorized by this

revenue procedure, and the application or

ruling request is pending with the national

office on December 21, 1998, the taxpayer may make the change under this

revenue procedure. However, the national office will process the application

or ruling request in accordance with the

authority under which it was filed, unless

prior to the later of February 1, 1999, or

the issuance of the letter ruling granting

or denying consent to the change, the taxpayer notifies the national office that it

wants to make the change under this revenue procedure. If the taxpayer timely

notifies the national office that it wants to

make the method change under this revenue procedure, the national office will

require the taxpayer to make appropriate

modifications to the 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.

.03 Special rules.

(1) Change in method of accounting

for depreciation. For a change in method

of accounting described in section 2.01 or

2.02 of the APPENDIX of this revenue

procedure, this revenue procedure is effective for applications or copies of applications filed with the national office on or

after December 21, 1998.

(2) Change in method of accounting

to discontinue the mark-to-market method

of accounting. For a change in method of

accounting described in section 10A.01 of

the APPENDIX of this revenue procedure, this revenue procedure is effective

for the taxpayer’s first taxable year ending after July 22, 1998.

(3) Change in method of accounting

for a pool of debt instruments. For a

change in method of accounting described

in section 12.02 of the APPENDIX of this

revenue procedure, this revenue procedure is effective for the taxpayer’s first

taxable year beginning after August 5,

1997.

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Page 27

SECTION 14. EFFECT ON OTHER

DOCUMENTS

.01 Rev. Proc. 97–37, is clarified,

modified, amplified, and superseded.

.02 Rev. Rul. 98–39, 1998–33 I.R.B. 4

(see section 8.05 of the APPENDIX of

this revenue procedure regarding cooperative advertising), is modified.

SECTION 15. PAPERWORK

REDUCTION ACT

The collections of information contained in this revenue procedure have

been reviewed and approved by the Office of Management and Budget in accordance with the Paperwork Reduction Act

(44 U.S.C. 3507) under control number

1545–1551.

An agency may not conduct or sponsor,

and a person is not required to respond to,

a collection of information unless the collection of information displays a valid

OMB control number.

The collections of information in this

revenue procedure are in sections 6, 10,

and sections 2, 3, 5, 6, 7, 10, 10A, and 12

of the APPENDIX. This information is

necessary 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: individuals,

farms, business or other for-profit institutions, nonprofit institutions, and small

businesses or organizations.

The estimated total annual reporting

and/or recordkeeping burden is 15,514

hours.

The estimated annual burden per respondent/recordkeeper varies from 1⁄6

hour to 81⁄2 hours, depending on individual

circumstances, with an estimated average

of 11⁄2 hours. The estimated number of respondents is 13,500.

The estimated annual frequency of responses is on occasion.

Books or records relating to a collection of information must be retained as

long as their contents may become material 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

1998–51 I.R.B.

procedure is Dwight N. Mersereau of the

Office of Assistant Chief Counsel (Income Tax and Accounting). For further

information regarding this revenue procedure, contact Mr. Mersereau on (202)

622-4970 (not a toll-free call). For further information regarding the APPENDIX of this revenue procedure contact the

following individuals: (1) for changes in

methods of accounting under sections

2.01 and 2.02 of the APPENDIX of this

revenue procedure, Peter Friedman of the

Office of Assistant Chief Counsel (Passthroughs and Special Industries) on (202)

622-3110 (not a toll-free call); (2) for

changes in methods of accounting under

section 2A.01 of the APPENDIX of this

revenue procedure, Leslie H. Finlow of

the Office of Assistant Chief Counsel

(Passthroughs and Special Industries) on

(202) 622-3120 (not a toll free call); (3)

for changes in methods of accounting

under sections 5.04, 6, 12, and 13 of the

APPENDIX of this revenue procedure,

William Blanchard of the Office of Assistant Chief Counsel (Financial Institutions

and Products) on (202) 622-3950 (not a

toll-free call); (4) for changes in methods

of accounting under section 10A.01 of the

APPENDIX of this revenue procedure,

Pamela Lew of the Office of Assistant

Chief Counsel (Financial Institutions and

Products) on (202) 622-3950 (not a tollfree call); (5) for changes in methods of

accounting under section 11 of the APPENDIX of this revenue procedure, Craig

R. Wojay of the Office of Assistant Chief

Counsel (Financial Institutions and Products) on (202) 622-3920 (not a toll-free

call); and (6) for all other sections, Mr.

Mersereau on (202) 622-4970 (not a tollfree call).

SECTION 2. DEPRECIATION

OR AMORTIZATION (§ 167,

168 OR 197) . . . . . . . . . . . . . . . . . . . . 29

.01 Impermissible to permissible

method of accounting for

depreciation or

amortization . . . . . . . . . . . . . . . 29

(1) Description of change . . . . . 29

(2) Scope . . . . . . . . . . . . . . . . . .29

(3) Additional requirements . . . 30

(4) Section 481(a) adjustment . . 31

(5) Basis adjustment . . . . . . . . . 31

(6) Meaning of depreciation

allowable . . . . . . . . . . . . . . . 31

.02 Permissible to permissible

method of accounting for

depreciation . . . . . . . . . . . . . . . 31

(1) Description of change . . . . . 31

(2) Scope . . . . . . . . . . . . . . . . . . 32

(3) Changes covered . . . . . . . . . 32

(4) Additional requirements . . . 32

(5) Section 481(a) adjustment . . 33

.03 Sale or lease transactions . . . . 33

(1) Description of change and

scope . . . . . . . . . . . . . . . . . . 33

(2) Manner of making the

change . . . . . . . . . . . . . . . . . 33

(3) No audit protection . . . . . . . 33

APPENDIX

SECTION 3. CAPITAL

EXPENDITURES (§ 263) . . . . . . . . . 34

.01 Package design costs . . . . . . . 34

(1) Description of change and

scope . . . . . . . . . . . . . . . . . . 34

(2) Additional requirements . . . 34

.02 Line pack gas; cushion gas . . 34

(1) Description of change

and scope . . . . . . . . . . . . . . . 34

(2) Additional requirements . . . 34

CHANGES IN METHODS OF

ACCOUNTING TO WHICH

THIS REVENUE PROCEDURE

APPLIES

SECTION 1. TRADE OR

BUSINESS EXPENSES (§ 162) . . . . 29

.01 Advances made by a lawyer

on behalf of clients —

Description of change and

scope . . . . . . . . . . . . . . . . . . . . 29

.02 Year 2000 costs —

Description of change and

scope . . . . . . . . . . . . . . . . . . . . 29

SECTION 2A. RESEARCH

AND EXPERIMENTAL

EXPENDITURES (§ 174) . . . . . . . . . 33

.01 Changes to a different

method or different

amortization period . . . . . . . . . 33

(1) Description of change . . . . . 33

(2) Scope . . . . . . . . . . . . . . . . . . 33

(3) Manner of making the

change . . . . . . . . . . . . . . . . . 34

(4) Additional requirement . . . . 34

(5) No audit protection . . . . . . . 34

.02 Reserved . . . . . . . . . . . . . . . . . 34

SECTION 4. UNIFORM

CAPITALIZATION (§ 263A) . . . . . . 34

.01 Certain uniform capitalization

(UNICAP) methods used by

December 21, 1998

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small resellers, formerly

small resellers, and resellerproducers . . . . . . . . . . . . . . . . 34

(1) Description of change

and scope . . . . . . . . . . . . . . . 34

(2) Definitions . . . . . . . . . . . . . . 35

(3) Section 481(a) adjustment . . 35

(4) No audit protection . . . . . . . 35

(5) Example . . . . . . . . . . . . . . . . 35

.02 Reserved . . . . . . . . . . . . . . . . . 36

SECTION 5. METHODS OF

ACCOUNTING (§ 446) . . . . . . . . . . . 36

.01 Cash or hybrid method to

accrual method . . . . . . . . . . . . 36

(1) Description of change

and scope . . . . . . . . . . . . . . . 36

(2) Section 481(a) adjustment . . 37

(3) Change to a special method

of accounting . . . . . . . . . . . . 37

.02 Multi-year service warranty

contracts . . . . . . . . . . . . . . . . . 37

(1) Description of change

and scope . . . . . . . . . . . . . . . 37

(2) Manner of making the

change . . . . . . . . . . . . . . . . . 37

.03 Multi-year insurance policies

for multi-year service warranty

contracts — Description of

change and scope . . . . . . . . . . 37

(1) Applicability . . . . . . . . . . . . 37

(2) Inapplicability . . . . . . . . . . . 37

(3) Description of method . . . . . 37

.04 Interest accruals on short-term

consumer loans — Rule of 78s

method . . . . . . . . . . . . . . . . . . . 37

(1) Description of change and

scope . . . . . . . . . . . . . . . . . . 37

(2) Background . . . . . . . . . . . . . 37

(3) Manner of making the

change . . . . . . . . . . . . . . . . . 38

SECTION 6. OBLIGATIONS

ISSUED AT DISCOUNT (§ 454) . . . . 38

.01 Series E or EE U.S. savings

bonds . . . . . . . . . . . . . . . . . . . . 38

(1) Description of change and

scope . . . . . . . . . . . . . . . . . . 38

(2) Manner of making the

change . . . . . . . . . . . . . . . . . 38

.02 Reserved . . . . . . . . . . . . . . . . . 38

SECTION 7. PREPAID

SUBSCRIPTION INCOME(§ 455) . . 38

.01 Prepaid subscription income . 38

(1) Description of change and

scope . . . . . . . . . . . . . . . . . . 38

December 21, 1998

(2) Manner of making the

change . . . . . . . . . . . . . . . . . 38

.02 Reserved . . . . . . . . . . . . . . . . . 38

SECTION 8. TAXABLE YEAR

OF DEDUCTION (§ 461) . . . . . . . . . 38

.01 Timing of incurring liabilities

for employee compensation . . . 38

(1) Description of change

and scope . . . . . . . . . . . . . . . 38

(2) Amounts taken into

account . . . . . . . . . . . . . . . . 39

.02 Timing of incurring liabilities

for real property taxes . . . . . . 39

(1) Description of change . . . . . 39

(2) Scope . . . . . . . . . . . . . . . . . . 39

(3) Amounts taken into

account . . . . . . . . . . . . . . . . 39

.03 Timing of incurring liabilities

under a workers’ compensation

act, tort, breach of contract, or

violation of law . . . . . . . . . . . . 39

(1) Description of change

and scope . . . . . . . . . . . . . . . 39

(2) Amounts taken into

account . . . . . . . . . . . . . . . . 39

.04 Timing of incurring liabilities

for payroll taxes . . . . . . . . . . . 39

(1) Description of change

and scope . . . . . . . . . . . . . . . 39

(2) Recurring item exception . . . 39

(3) Amounts taken into

account . . . . . . . . . . . . . . . . 39

.05 Cooperative advertising . . . . . . 39

(1) Description of change

and scope . . . . . . . . . . . . . . . 39

(2) Scope limitations

inapplicable . . . . . . . . . . . . . 40

SECTION 9. INVENTORIES

(§ 471) . . . . . . . . . . . . . . . . . . . . . . . . 40

.01 Cash discounts —

Description of change and

scope . . . . . . . . . . . . . . . . . . . . 40

.02 Estimating inventory

“shrinkage” . . . . . . . . . . . . . . 40

(1) Description of change

and scope . . . . . . . . . . . . . . . 40

(2) Scope limitations

inapplicable . . . . . . . . . . . . . 40

(3) Additional requirements . . . 40

(4) Audit protection . . . . . . . . . . 40

(5) Future change . . . . . . . . . . . 40

SECTION 10. LAST-IN, FIRST-OUT

(LIFO) INVENTORIES (§ 472) . . . . . 40

.01 Change from the LIFO

inventory method . . . . . . . . . . . 40

(1) Description of change

and scope . . . . . . . . . . . . . . . 40

(2) Limitation on LIFO

election . . . . . . . . . . . . . . . . 41

(3) Effect of subchapter S

election by corporation . . . . 41

(4) Additional requirements . . . 41

.02 Determining the cost of used

vehicles purchased or taken

as a trade-in . . . . . . . . . . . . . . 41

(1) Description of change

and scope . . . . . . . . . . . . . . . 41

(2) Manner of making the

change . . . . . . . . . . . . . . . . . 41

.03 Alternative LIFO inventory

method for retail automobile

dealers . . . . . . . . . . . . . . . . . . . 41

(1) Description of change

and scope . . . . . . . . . . . . . . . 41

(2) Manner of making the

change . . . . . . . . . . . . . . . . . 41

.04 Inventory price index

computation (IPIC) method

under the LIFO inventory

method . . . . . . . . . . . . . . . . . . . 42

(1) Description of change

and scope . . . . . . . . . . . . . . . 42

(2) Manner of making the

change . . . . . . . . . . . . . . . . . 42

(3) Bargain purchase . . . . . . . . . 42

.05 Determining current-year

cost under the LIFO inventory

method . . . . . . . . . . . . . . . . . . . 42

(1) Description of change

and scope . . . . . . . . . . . . . . . 42

(2) Manner of making the

change . . . . . . . . . . . . . . . . . 42

SECTION 10A. MARK-TOMARKET ACCOUNTING

METHOD FOR DEALERS IN

SECURITIES (§ 475) . . . . . . . . . . . . . 42

.01 Discontinuing the mark-tomarket method of accounting

for nonfinancial customer

paper . . . . . . . . . . . . . . . . . . . . 42

(1) Description of change

and scope . . . . . . . . . . . . . . . 42

(2) Additional Requirements . . . 43

(3) No audit protection . . . . . . . 43

.02 Reserved . . . . . . . . . . . . . . . . . 43

SECTION 11. BANK RESERVES

FOR BAD DEBTS (§ 585) . . . . . . . . . 43

.01 Changing from the § 585

reserve method to the § 166

specific charge-off method . . . 43

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(1) Description of change

and scope . . . . . . . . . . . . . . . 43

(2) Section 481(a) adjustment . . 43

(3) Change from § 585 required

when electing S corporation

status . . . . . . . . . . . . . . . . . . 43

.02 Reserved . . . . . . . . . . . . . . . . . 43

SECTION 12. ORIGINAL ISSUE

DISCOUNT (§§ 1272; 1273) . . . . . . . 43

.01 De minimis original issue

discount (OID) . . . . . . . . . . . . 43

(1) Description of change

and scope . . . . . . . . . . . . . . . 43

(2) Manner of making the

change . . . . . . . . . . . . . . . . . 43

(3) Additional requirements . . . 44

(4) No audit protection . . . . . . . 44

.02 Pool of debt instruments . . . . . 44

(1) Description of change

and scope . . . . . . . . . . . . . . . 44

(2) Additional requirements . . . 44

SECTION 13. SHORT-TERM

OBLIGATIONS (§ 1281) . . . . . . . . . . 44

.01 Interest income on short-term

obligations . . . . . . . . . . . . . . . 44

(1) Description of change

and scope . . . . . . . . . . . . . . . 44

(2) Section 481(a) adjustment

period . . . . . . . . . . . . . . . . . . 45

.02 Stated interest on short-term

loans of cash method banks

in the Eighth Circuit . . . . . . . . 45

(1) Description of change

and scope . . . . . . . . . . . . . . . 45

(2) Section 481(a) adjustment

period . . . . . . . . . . . . . . . . . . 45

(3) No ruling protection . . . . . . 45

SECTION 1. TRADE OR BUSINESS

EXPENSES (§ 162)

.01 Advances made by a lawyer on behalf of clients — Description of change

and scope. This change applies to a

lawyer handling cases on a contingent fee

basis that advances money to pay for

costs of litigation or for other expenses on

behalf of clients and that wants to change

the method of accounting for such advances from treating them as deductible

business expenses to treating them as

loans. See Boccardo v. United States, 12

Cl. Ct. 184 (1987); Canelo v. Commissioner, 53 T.C. 217 (1969), aff’d per curiam, 447 F.2d 484 (9th Cir. 1971).

1998–51 I.R.B.

.02 Year 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 provides

that Year 2000 costs fall within the

purview of Rev. Proc. 69–21, 1969–2

C.B. 303, and that the Service will not

disturb a taxpayer’s treatment of its Year

2000 costs as deductible expenses or capital expenditures if the taxpayer treats

these costs in accordance with Rev. Proc.

69–21.

SECTION 2. DEPRECIATION OR

AMORTIZATION (§ 167, 168, OR 197)

.01 Impermissible to permissible

method of accounting for depreciation or

amortization.

(1) Description of change.

(a) This change applies to a taxpayer that wants to change from an impermissible method of accounting for depreciation or amortization (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.

(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. Sections 1.167(e)-1(a) and 1.4461(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 account-

ing, 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 depreciation allowable);

(ii) for which depreciation is

determined under § 167, 168, 197, or 168

prior to its amendment in 1986 (former

§ 168); and

(iii) that is owned by the taxpayer at the beginning of the year of

change.

(b) Inapplicability. This change

does not apply to:

(i) any property to which

§ 1016(a)(3) (regarding property held by

a tax-exempt organization) applies;

(ii) any taxpayer that is subject

to § 263A and that is required to capitalize

the costs with respect to which the taxpayer wants to change its method of accounting under section 2.01 of this APPENDIX, if the taxpayer is not

capitalizing the costs as required;

(iii) any intangible property

subject to § 167, except for property subject to § 167(f) (regarding certain property excluded from § 197);

(iv) any property subject to

§ 167(g) (regarding property depreciated

under the income forecast method);

(v) any § 1250 property that a

taxpayer is reclassifying to an asset class

of Rev. Proc. 87–56, 1987–2 C.B. 674, or

Rev. Proc. 83–35, 1983–1 C.B. 745, as

appropriate, that does not explicitly include § 1250 property (for example, asset

class 57.0, Distributive Trades and Services);

(vi) any property for which a

taxpayer 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 intangibles). A taxpayer may request consent

to revoke or make the election by submitting a request for a letter ruling under

Rev. Proc. 98–1, 1998–1 I.R.B. 7 (or any

successor);

(vii) any property subject to §

167 (other than § 167(f), regarding certain

property excluded from § 197), for which

a taxpayer is changing only the estimated

useful life of the property. A change in

the estimated useful life of property for

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which depreciation is determined under

§ 167 (other than § 167(f)) must be made

prospectively (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 § 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 depreciation 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 videocassettes. See Rev. 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 deducting

costs of removal as an expense (provided

the costs of removal are not required to be

capitalized under any provision of the

Code, such as § 263(a)) and including salvage proceeds in taxable income (see section 2.02 of this APPENDIX for 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 service in 1990 from

nondepreciable to depreciable property

(assuming section 2.01(2)(c)(xiii) of the

December 21, 1998

APPENDIX does not apply) and the making of an election under § 168(f)(1) to depreciate this property under the unit-ofproduction 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 accounting

may have resulted in the taxpayer claiming less than or more than the depreciation 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

depreciable 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 taxpayer also must comply with the following:

(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 depreciation 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 completed 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

elsewhere 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 statement

identifying the asset class in Rev. Proc.

83-35 that applies under the taxpayer’s

former and new methods of accounting (if

none, state and explain);

(vi) if any item of property is

public 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 additional 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 regulatory

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

of filing 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

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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 containing the following representation: “For

purposes of § 168(e)(3)(E)(iii) of the Internal Revenue Code, the taxpayer represents that (A) 50 percent or more of the

gross revenue generated from the item of

§ 1250 property is from the sale of petroleum products (not including gross revenue from related services, such as the

labor cost of oil changes and gross revenue from the sale of nonpetroleum products 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

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