Bulletin No. 2021–35

HIGHLIGHTS

OF THIS ISSUE





Bulletin No. 2021–35

August 30, 2021

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.

ADMINISTRATIVE

INCOME TAX

Rev. Proc. 2021-36, page 357.

Notice 2021-43, page 332.

This revenue procedure provides the applicable percentage

table in § 36B(b)(3)(A) of the Internal Revenue Code for taxable years beginning in calendar year 2022. This table is

used to calculate an individual’s premium tax credit under §

36B. This revenue procedure also provides the indexing adjustment for the required contribution percentage in § 36B(c)

(2)(C)(i)(II) for plan years beginning in calendar year 2022.

This percentage is used to determine whether an individual is

eligible for affordable employer-sponsored minimum essential coverage.

EMPLOYEE PLANS

Notice 2021-50, page 333.

This notice sets forth updates on the corporate bond monthly yield curve, the corresponding spot segment rates for August 2021 used under § 417(e)(3)(D), the 24-month average

segment rates applicable for August 2021, and the 30-year

Treasury rates, as reflected by the application of § 430(h)(2)

(C)(iv).

ESTATE TAX

Rev. Rul. 2021-15, page 331.

Special Use Value: Farms: Interest Rates. The 2021 interest

rates to be used in computing the special use value of farm

real property for which an election is made under section

2032A of the Code are listed for estate of decedents.

Finding Lists begin on page ii.

The notice provides transition relief related to the work opportunity credit by giving employers additional time to submit

a certification request to a Designated Local Agency for the

targeted groups described in section 51(d)(5) and (7) of the

Internal Revenue Code.

Rev. Proc. 2021-34, page 337.

Rev. Proc. 2021-34 modifies Rev. Proc. 2019-43, 2019-48

I.R.B. 1107, to provide procedures under § 446 of the Internal Revenue Code (Code) and § 1.446-1(e) of the Income Tax

Regulations to obtain automatic consent of the Commissioner of Internal Revenue (Commissioner) to change methods of

accounting to comply with final regulations under §§ 1.4513, 1.451-8, and 1.1275-2(l) and to change methods of accounting for certain inventory costs to comply with §§ 263A,

461, and 471 if such changes are made in connection with

a change to comply with § 1.451-3 and/or § 1.451-8, as

applicable. This revenue procedure also modifies Rev. Proc.

2015-13, 2015-5 I.R.B. 419, as clarified and modified by

Rev. Proc. 2015-33, 2015-24 I.R.B. 1067, and further modified by Rev. Proc. 2016-1, 2016-1 I.R.B. 1, Rev. Proc. 201759, 2017-48 I.R.B. 543, and Rev. Proc. 2021-26, 2021-22

I.R.B. 1163, to provide procedures for a taxpayer to obtain

the consent of the Commissioner to change its method of

accounting to comply with §§ 1.451-3 and/or 1.451-8, as

applicable, by providing rules related to cost offset method

changes.

Rev. Proc. 2021-35, page 355.

Rev. Proc. 2021-35 modifies Rev. Proc. 2013-26, 2013-22

I.R.B. 1160, to reflect changes made to the treatment of certain credit card fees by section 451(b) and sections 1.451-3

and 1.1275-2(l). Rev. Proc. 2013-26 describes the proportional method of accounting for original issue discount on a

pool of credit card receivables.

The IRS Mission

Provide America’s taxpayers top-quality service by helping

them understand and meet their tax responsibilities and enforce the law with integrity and fairness to all.

Introduction

The Internal Revenue Bulletin is the authoritative instrument

of the Commissioner of Internal Revenue for announcing official rulings and procedures of the Internal Revenue Service

and for publishing Treasury Decisions, Executive Orders, Tax

Conventions, legislation, court decisions, and other items of

general interest. It is published weekly.

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.

Revenue rulings represent the conclusions of the Service

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

the revenue ruling. In those based on positions taken in rulings to taxpayers or technical advice to Service field offices,

identifying details and information of a confidential nature are

deleted to prevent unwarranted invasions of privacy and to

comply with statutory requirements.

Rulings and procedures reported in the Bulletin do not have the

force and effect of Treasury Department Regulations, but they

may be used as precedents. Unpublished rulings will not be

relied on, used, or cited as precedents by Service personnel in

the disposition of other cases. In applying published rulings and

procedures, the effect of subsequent legislation, regulations,

court decisions, rulings, and procedures must be considered,

and Service personnel and others concerned are cautioned

against reaching the same conclusions in other cases unless

the facts and circumstances are substantially the same.

The Bulletin is divided into four parts as follows:

Part I.—1986 Code.

This part includes rulings and decisions based on provisions

of the Internal Revenue Code of 1986.

Part II.—Treaties and Tax Legislation.

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

Tax Conventions and Other Related Items, and Subpart B,

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).

Part IV.—Items of General Interest.

This part includes notices of proposed rulemakings, disbarment and suspension lists, and announcements.

The last 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 last Bulletin of each semiannual period.

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.

August 30, 2021 

Bulletin No. 2021–35

Part I

Section 2032A.—Valuation

of Certain Farm, Etc.,

Real Property

26 CFR 20.2032A-4: Method of valuing farm real

property.

Rev. Rul. 2021-15

This revenue ruling contains a list of

the average annual effective interest rates

on new loans under the Farm Credit System. This revenue ruling also contains a

list of the states within each Farm Credit

System Bank Territory.

Under § 2032A(e)(7)(A)(ii) of the Internal Revenue Code, rates on new Farm

Credit System Bank loans are used in

computing the special use value of real

property used as a farm for which an election is made under § 2032A. The rates

in Table 1 of this revenue ruling may be

used by estates that value farmland under

§ 2032A as of a date in 2021.

Average annual effective interest

rates, calculated in accordance with

§ 2032A(e)(7)(A) and § 20.2032A-4(e)

of the Estate Tax Regulations, to be used

under § 2032A(e)(7)(A)(ii), are set forth

in the accompanying Table of Interest

Rates (Table 1). The states within each

Farm Credit System Bank Territory are

set forth in the accompanying Table of

Farm Credit System Bank Territories

(Table 2).

Rev. Rul. 81-170, 1981-1 C.B. 454,

contains an illustrative computation of

an average annual effective interest rate.

The rates applicable for valuation in 2020

are in Rev. Rul. 2020-17, 2020-37 I.R.B.

552. For rate information for years prior

to 2020, see Rev. Rul. 2019-18, 2019-35

I.R.B. 668, and other revenue rulings that

are referenced therein.

DRAFTING INFORMATION

The principal author of this revenue ruling

is Lane Damazo of the Office of the Associate Chief Counsel (Passthroughs and Special

Industries). For further information regarding

this revenue ruling, contact Lane Damazo at

(202) 317-4628 (not a toll-free number).

REV. RUL. 2021-15 TABLE 1

TABLE OF INTEREST RATES

(Year of Valuation 2021)

Farm Credit System Bank Servicing State in Which Property is Located

AgFirst, FCB .........................

AgriBank, FCB .........................

CoBank, ACB ..........................

Texas, FCB ...........................

Rate

5.25

4.62

4.49

5.02

REV. RUL. 2021-15 TABLE 2

TABLES OF FARM CREDIT SYSTEM BANK TERRITORIES

Farm Credit System Bank

Location of Property

AgFirst, FCB................

AgriBank, FCB...............

CoBank, ACB................

Texas, FCB................

Bulletin No. 2021–35

Delaware, District of Columbia, Florida, Georgia, Maryland,

North Carolina, Pennsylvania, South Carolina, Virginia,

West Virginia.

Arkansas, Illinois, Indiana, Iowa, Kentucky, Michigan,

Minnesota, Missouri, Nebraska, North Dakota, Ohio, South

Dakota, Tennessee, Wisconsin, Wyoming.

Alaska, Arizona, California, Colorado, Connecticut,

Hawaii, Idaho, Kansas, Maine, Massachusetts, Montana,

New Hampshire, New Jersey, New Mexico, New York,

Nevada, Oklahoma, Oregon, Rhode Island, Utah, Vermont,

Washington.

Alabama, Louisiana, Mississippi, Texas.

331

August 30, 2021

Part III

Work Opportunity Tax

Credit (WOTC) Transition

Relief under Internal

Revenue Code § 51

Notice 2021-43

I. PURPOSE

This notice provides transition relief

for certain employers claiming the Work

Opportunity Tax Credit (WOTC) under

§ 51 of the Internal Revenue Code (Code)

for certain employees beginning work after December 31, 2020, in response to legislation permitting the designation of an

Empowerment Zone, defined in § 1393(b)

of the Code, to be extended from December 31, 2020, through December 31, 2025.

Specifically, section IV of this notice provides transition relief by extending the

28-day deadline for employers to request

certification from a designated local agency (DLA)1 that an individual who begins

work on or after January 1, 2021, and before October 9, 2021, is a member of the

Designated Community Resident targeted

group or the Qualified Summer Youth Employee targeted group.2

II. BACKGROUND

Section 51(a) of the Code provides the

WOTC to employers based on a percentage of qualified wages paid during the taxable year. Section 51(b) defines “qualified

wages” as wages paid or incurred by an

employer during the taxable year to an

individual who is certified as a member

of a targeted group. Section 51(d)(1) lists

the targeted groups, which include Designated Community Residents, defined in

§ 51(d)(5), and Qualified Summer Youth

Employees, defined in § 51(d)(7).

Pursuant to § 51(d)(13)(A), an individual is not treated as a member of a

targeted group unless (1) on or before

the day the individual begins work, the

employer obtains certification from the

DLA that the individual is a member of

a targeted group, or (2) the employer

completes a pre-screening notice on or

before the day the individual is offered

employment and submits such notice

to the DLA to request certification that

the individual is a member of a targeted group not later than 28 days after the

individual begins work. The Form 8850,

Pre-Screening Notice and Certification

Request for the Work Opportunity Credit,

is the pre-screening notice that must be

submitted by the employer to the DLA to

request certification that an individual is

a member of a targeted group.

To be certified as a Designated Community Resident or a Qualified Summer

Youth Employee, an individual must be

certified by the DLA as having a principal

place of residence within an Empowerment Zone where the individual continuously resides. For such individuals, any

wages paid to or incurred on behalf of the

individual for services rendered while the

individual is not living at a residence within an Empowerment Zone do not qualify

for the WOTC.

III. TAXPAYER CERTAINTY AND

DISASTER TAX RELIEF ACT OF

2020 AMENDMENTS

The WOTC has been subject to several legislative extensions and modifications since its enactment by § 1201

of the Small Business Job Protection

Act of 1996, Pub. L. 104-188, 110 Stat.

1755 (August 20, 1996). Most recently, § 113 of the Taxpayer Certainty and

Disaster Tax Relief Act of 2020 (Act),

enacted as Division EE of the Consolidated Appropriations Act, 2021, Pub. L.

116-260, 134 Stat. 1182 (December 27,

2020), amended § 51(c)(4) of the Code

to extend the effective date of WOTC.

As amended by the Act, § 51(c)(4) provides that WOTC applies to wages paid

or incurred with respect to members of

a targeted group who begin work after

December 31, 2020, and before January

1, 2026. In addition, § 118(a) of the Act

amended § 1391(d)(1) of the Code to

provide that any designation of an Empowerment Zone ends on the earliest of

(1) December 31, 2025, (2) the termination date designated by the State and local governments as provided for in their

nomination, or (3) the date the “Appropriate Secretary”3 revokes the designation. Section 118(d) of the Act provides

that where a nomination of an Empowerment Zone included a termination

date of December 31, 2020, § 1391(d)

(1)(B) of the Code will not apply with

respect to such designation if, after the

date of the enactment of the Act, the entity that made such nomination amends

the nomination, in such manner as the

Secretary of the Treasury or her designee may provide, to provide for a new

termination date. The amendment made

by § 118(a) of the Act applies to taxable years beginning after December

31, 2020.

On March 26, 2021, the Department

of the Treasury (Treasury Department)

and the Internal Revenue Service (IRS)

released Revenue Procedure 2021-18,

2021-15 I.R.B. 1007 (April 12, 2021), to

explain how a State or local government

is deemed to extend the termination date

designated in an Empowerment Zone

nomination until December 31, 2025.

Revenue Procedure 2021-18 provides that

if a State or local government did not submit a written declination to extend an Empowerment Zone to the IRS by May 25,

2021, and if the Appropriate Secretary did

not revoke the Empowerment Zone designation, then the termination date provided

in that Empowerment Zone nomination is

automatically extended to December 31,

2025.

Section 51(d)(12) provides that a “DLA” is a State employment security agency (sometimes referred to as a State Workforce Agency) established in accordance with 29 U.S.C. §§ 49-49n.

For purposes of this notice, the terms “Designated Community Resident” and “Qualified Summer Youth Employee” refer to those individuals certified by a DLA as having a principal place

of residence within an Empowerment Zone.

3

Section 1393(a)(1) of the Code provides that the “Appropriate Secretary” is the Secretary of Housing and Urban Development (in the case of any nominated area designated under § 1391

that is located in an urban area as defined in § 1393(a)(3)), or the Secretary of Agriculture (in the case of any nominated area designated under § 1391 that is located in a rural area as defined

in § 1393(a)(2)).

1

2

August 30, 2021

332

Bulletin No. 2021–35

IV. GRANT OF RELIEF

As explained below, because the Act

extended the WOTC and the period for

which Empowerment Zone designations

are in effect through December 31, 2025,

employers may need additional time to

comply with the certification requirements

of § 51(d)(13)(A)(ii).

The Treasury Department and the IRS

understand that, because the termination

dates designated in Empowerment Zone

nominations are not automatically extended until after the deadline set forth

in Revenue Procedure 2021-18 for submitting a written declination has passed,

employers that hired an individual who is

a Designated Community Resident or a

Qualified Summer Youth Employee and

who began work for that employer on

or after January 1, 2021, may not have

submitted Form 8850 to the DLA within 28 days of the individual beginning

work. To be eligible for the relief provided by this notice, an employer that did

not submit Form 8850 to the DLA within

28 days of an individual beginning work

must submit the completed Form 8850 to

the DLA by the date set forth in section

IV.A of this notice.

In addition, the Treasury Department

and the IRS are aware that some employers that hired individuals who are Designated Community Residents or Qualified Summer Youth Employees may

have submitted Form 8850 to the DLA

within 28 days of the individual beginning work, regardless of the expiration

of the Empowerment Zone designations.

To be eligible for the relief provided by

this notice, an employer that submitted

Form 8850 to the DLA and subsequently received a denial letter from the DLA

due to the expiration of the Empowerment Zone designations must re-submit

the completed Form 8850 by the date set

forth in section IV.A of this notice. If an

employer submitted Form 8850 to the

DLA and was not issued a denial letter

by the DLA, the employer does not need

to re-submit Form 8850 to be eligible for

the relief provided in this notice.

For these reasons, the Treasury Department and the IRS are providing employers

with additional time to submit Form 8850

to the DLAs in accordance with the following timeframe.

A. Additional time for employers

hiring individuals who are Designated

Community Residents or Qualified

Summer Youth Employees who begin

work on or after January 1, 2021, and

before October 9, 2021, to submit a

completed Form 8850 to the DLA no

later than November 8, 2021.

An employer that hires or hired an individual who is a Designated Community

Resident or a Qualified Summer Youth

Employee and who begins or began work

for that employer on or after January 1,

2021, and before October 9, 2021, will be

considered to have satisfied the requirements of § 51(d)(13)(A)(ii), whether or

not the employer submitted the completed

Form 8850 to the DLA within 28 days of

the individual beginning work for the employer, if the employer submits the completed Form 8850 to the DLA to request

certification no later than November 8,

2021. If an employer hired an individual

who is a Designated Community Resident

or a Qualified Summer Youth Employee

who began work on or after January 1,

2021, and before May 26, 2021, and the

employer submitted Form 8850 to the

DLA but either was not issued a denial

notification by the DLA or was issued a

certification, then the employer does not

need to re-submit Form 8850 to request

certification from the DLA.

B. Application of 28-day requirement

to individuals who begin work on or

after October 9, 2021.

An employer that hires an individual

who is a Designated Community Resident

or a Qualified Summer Youth Employee

and who begins work for the employer on

or after October 9, 2021, is not eligible for

the transition relief described in this notice with respect to that new employee.

V. EFFECTIVE DATE

The effective date of this notice is August 10, 2021.

VI. DRAFTING INFORMATION

The principal author of this notice is

Christopher Dellana of the Office of Associate Chief Counsel (Employee Benefits,

Exempt Organizations, and Employment

Taxes). For further information regarding

the WOTC, contact Mr. Dellana at (202)

317-5500 (not a toll-free number).

Update for Weighted

Average Interest Rates,

Yield Curves, and Segment

Rates

Notice 2021-50

This notice provides guidance on the

corporate bond monthly yield curve, the

corresponding spot segment rates used

under § 417(e)(3), and the 24-month average segment rates under § 430(h)(2) of the

Internal Revenue Code. In addition, this

notice provides guidance as to the interest

rate on 30-year Treasury securities under

§ 417(e)(3)(A)(ii)(II) as in effect for plan

years beginning before 2008 and the 30year Treasury weighted average rate under

§ 431(c)(6)(E)(ii)(I).

YIELD CURVE AND SEGMENT

RATES

Section 430 specifies the minimum

funding requirements that apply to single-employer plans (except for CSEC

plans under § 414(y)) pursuant to § 412.

Section 430(h)(2) specifies the interest rates that must be used to determine

a plan’s target normal cost and funding

target. Under this provision, present value is generally determined using three

24-month average interest rates (“segment

rates”), each of which applies to cash

flows during specified periods. To the extent provided under § 430(h)(2)(C)(iv),

these segment rates are adjusted by the applicable percentage of the 25-year average

segment rates for the period ending September 30 of the year preceding the calendar year in which the plan year begins.1

Pursuant to § 433(h)(3)(A), the 3rd segment rate determined under § 430(h)(2)(C) is used to determine the current liability of a CSEC plan (which is used to calculate the minimum amount

of the full funding limitation under § 433(c)(7)(C)).

1

Bulletin No. 2021–35

333

August 30, 2021

However, an election may be made under § 430(h)(2)(D)(ii) to use the monthly

yield curve in place of the segment rates.

Notice 2007-81, 2007-44 I.R.B. 899,

provides guidelines for determining the

monthly corporate bond yield curve, and

the 24-month average corporate bond

segment rates used to compute the target

normal cost and the funding target. Consistent with the methodology specified in

Notice 2007-81, the monthly corporate

bond yield curve derived from July 2021

data is in Table 2021-7 at the end of this

Applicable Month

August 2021

I.R.B. 866, and Notice 2020-72, 2020-40

I.R.B. 789, respectively.

24-MONTH AVERAGE CORPORATE

BOND SEGMENT RATES

The three 24-month average corporate

bond segment rates applicable for August

2021 without adjustment for the 25-year

average segment rate limits are as follows:

24-Month Average Segment Rates Without 25-Year Average Adjustment

First Segment

Second Segment

1.13

2.70

25-YEAR AVERAGE SEGMENT

RATES

Section 9706(a) of the American Rescue Plan Act of 2021, Pub. L. No. 117-2

(ARP), which was enacted on March 11,

2021, changes the 25-year average segment rates and the applicable minimum

and maximum percentages used under

§ 430(h)(3)(C)(iv) of the Code to adjust

the 24-month average segment rates.

Prior to this change, the applicable minimum and maximum percentages were

90% and 110% for a plan year beginning

in 2020, and 85% and 115% for a plan

For Plan Years

Beginning In

notice. The spot first, second, and third

segment rates for the month of July 2021

are, respectively, 0.63, 2.51, and 3.10.

The 24-month average segment rates

determined

under

§ 430(h)(2)(C)(i)

through (iii) must be adjusted pursuant to

§ 430(h)(2)(C)(iv) to be within the applicable minimum and maximum percentages of the corresponding 25-year average

segment rates.

The 25-year average segment rates for

plan years beginning in 2020 and 2021

were published Notice 2019-51, 2019-41

year beginning in 2021, respectively. After this change, the applicable minimum

and maximum percentages are 95% and

105% for a plan year beginning in 2020

or 2021. In addition, pursuant to this

change, any 25-year average segment

rate that is less than 5% is deemed to

be 5%.2

Pursuant to § 9706(c)(1) of ARP, these

changes apply with respect to plan years

beginning on or after January 1, 2020.

However, § 9706(c)(2) of ARP provides

that a plan sponsor may elect not to have

these changes apply to any plan year beginning before January 1, 2022.3

Third Segment

3.38

The adjusted 24-month average segment rates set forth in the chart below

reflect § 430(h)(2)(C)(iv) of the Code as

amended by § 9706(a) of ARP. These adjusted 24-month average segment rates

apply only for plan years for which an

election under § 9706(c)(2) of ARP is not

in effect. For a plan year for which such an

election does not apply, the 24-month averages applicable for August 2021, adjusted to be within the applicable minimum

and maximum percentages of the corresponding 25-year average segment rates

in accordance with § 430(h)(2)(C)(iv) of

the Code, are as follows:

Adjusted 24-Month Average Segment Rates

Applicable

First

Second

Month

Segment

Segment

Third

Segment

2020

August 2021

4.75

5.50

6.27

2021

August 2021

4.75

5.36

6.11

The adjusted 24-month average segment rates set forth in the chart below do

not reflect the changes to § 430(h)(2)(C)

(iv) of the Code made by § 9706(a) of

ARP. These adjusted 24-month average

segment rates apply only for plan years for

which an election under § 9706(c)(2) of

ARP is in effect. For a plan year for which

such an election applies, the 24-month av-

Pursuant to this change, the 25-year averages of the first segment rate for 2020 and 2021 are increased to 5.00% because those 25-year averages as originally published are below 5.00%.

This election may be made either for all purposes for which the amendments under § 9706 of ARP apply or solely for purposes of determining the adjusted funding target attainment percentage under § 436 of the Code for the plan year.

2

3

August 30, 2021

334

Bulletin No. 2021–35

erages applicable for August 2021, adjusted to be within the applicable minimum

For Plan Years

Beginning In

and maximum percentages of the corresponding 25-year average segment rates

in accordance with § 430(h)(2)(C)(iv) of

the Code, are as follows:

Pre-ARP Adjusted 24-Month Average Segment Rates

Applicable

First

Second

Month

Segment

Segment

Third

Segment

2020

August 2021

3.64

5.21

5.94

2021

August 2021

3.32

4.79

5.47

30-YEAR TREASURY SECURITIES

INTEREST RATES

Section 431 specifies the minimum

funding requirements that apply to multiemployer plans pursuant to § 412. Section

431(c)(6)(B) specifies a minimum amount

for the full-funding limitation described in

§ 431(c)(6)(A), based on the plan’s current

liability. Section 431(c)(6)(E)(ii)(I) pro-

vides that the interest rate used to calculate

current liability for this purpose must be

no more than 5 percent above and no more

than 10 percent below the weighted average of the rates of interest on 30-year Treasury securities during the four-year period

ending on the last day before the beginning

of the plan year. Notice 88-73, 1988-2 C.B.

383, provides guidelines for determining

the weighted average interest rate. The rate

of interest on 30-year Treasury securities

for July 2021 is 1.94 percent. The Service

determined this rate as the average of the

daily determinations of yield on the 30year Treasury bond maturing in May 2051.

For plan years beginning in August 2021,

the weighted average of the rates of interest on 30-year Treasury securities and the

permissible range of rates used to calculate

current liability are as follows:

For Plan Years

Beginning In

Treasury Weighted Average Rates

30-Year Treasury

Weighted Average

Permissible Range

90% to 105%

July 2021

2.20

1.98 to 2.31

under § 417(e)(3)(D) are segment rates

computed without regard to a 24-month

average. Notice 2007-81 provides guidelines for determining the minimum pres-

ent value segment rates. Pursuant to that

notice, the minimum present value segment rates determined for July 2021 are

as follows:

MINIMUM PRESENT VALUE

SEGMENT RATES

In general, the applicable interest rates

Month

August 2021

Minimum Present Value Segment Rates

First Segment

Second Segment

0.63

2.51

DRAFTING INFORMATION

The principal author of this notice is

Tom Morgan of the Office of the Asso-

Bulletin No. 2021–35

ciate Chief Counsel (Employee Benefits,

Exempt Organizations, and Employment

Taxes). However, other personnel from

the IRS participated in the development

335

Third Segment

3.10

of this guidance. For further information

regarding this notice, contact Mr. Morgan

at 202-317-6700 or Paul Stern at 202-3178702 (not toll-free numbers).

August 30, 2021

Table 2021-7

Monthly Yield Curve for July 2021

Derived from July 2021 Data

Maturity

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

5.5

6.0

6.5

7.0

7.5

8.0

8.5

9.0

9.5

10.0

10.5

11.0

11.5

12.0

12.5

13.0

13.5

14.0

14.5

15.0

15.5

16.0

16.5

17.0

17.5

18.0

18.5

19.0

19.5

20.0

Yield

0.13

0.25

0.37

0.48

0.58

0.68

0.79

0.90

1.02

1.14

1.27

1.40

1.54

1.67

1.80

1.93

2.05

2.16

2.26

2.36

2.44

2.52

2.59

2.65

2.71

2.76

2.80

2.83

2.86

2.89

2.91

2.93

2.95

2.96

2.97

2.98

2.99

2.99

3.00

3.00

August 30, 2021

Maturity

20.5

21.0

21.5

22.0

22.5

23.0

23.5

24.0

24.5

25.0

25.5

26.0

26.5

27.0

27.5

28.0

28.5

29.0

29.5

30.0

30.5

31.0

31.5

32.0

32.5

33.0

33.5

34.0

34.5

35.0

35.5

36.0

36.5

37.0

37.5

38.0

38.5

39.0

39.5

40.0

Yield

3.01

3.01

3.01

3.02

3.02

3.02

3.03

3.03

3.03

3.03

3.04

3.04

3.04

3.04

3.05

3.05

3.05

3.06

3.06

3.06

3.07

3.07

3.07

3.07

3.08

3.08

3.08

3.08

3.08

3.09

3.09

3.09

3.09

3.09

3.10

3.10

3.10

3.10

3.10

3.11

Maturity

40.5

41.0

41.5

42.0

42.5

43.0

43.5

44.0

44.5

45.0

45.5

46.0

46.5

47.0

47.5

48.0

48.5

49.0

49.5

50.0

50.5

51.0

51.5

52.0

52.5

53.0

53.5

54.0

54.5

55.0

55.5

56.0

56.5

57.0

57.5

58.0

58.5

59.0

59.5

60.0

Yield

3.11

3.11

3.11

3.11

3.11

3.11

3.12

3.12

3.12

3.12

3.12

3.12

3.12

3.12

3.13

3.13

3.13

3.13

3.13

3.13

3.13

3.13

3.13

3.14

3.14

3.14

3.14

3.14

3.14

3.14

3.14

3.14

3.14

3.14

3.14

3.15

3.15

3.15

3.15

3.15

336

Maturity

60.5

61.0

61.5

62.0

62.5

63.0

63.5

64.0

64.5

65.0

65.5

66.0

66.5

67.0

67.5

68.0

68.5

69.0

69.5

70.0

70.5

71.0

71.5

72.0

72.5

73.0

73.5

74.0

74.5

75.0

75.5

76.0

76.5

77.0

77.5

78.0

78.5

79.0

79.5

80.0

Yield

3.15

3.15

3.15

3.15

3.15

3.15

3.15

3.15

3.15

3.15

3.16

3.16

3.16

3.16

3.16

3.16

3.16

3.16

3.16

3.16

3.16

3.16

3.16

3.16

3.16

3.16

3.16

3.16

3.17

3.17

3.17

3.17

3.17

3.17

3.17

3.17

3.17

3.17

3.17

3.17

Maturity

80.5

81.0

81.5

82.0

82.5

83.0

83.5

84.0

84.5

85.0

85.5

86.0

86.5

87.0

87.5

88.0

88.5

89.0

89.5

90.0

90.5

91.0

91.5

92.0

92.5

93.0

93.5

94.0

94.5

95.0

95.5

96.0

96.5

97.0

97.5

98.0

98.5

99.0

99.5

100.0

Yield

3.17

3.17

3.17

3.17

3.17

3.17

3.17

3.17

3.17

3.17

3.17

3.17

3.17

3.18

3.18

3.18

3.18

3.18

3.18

3.18

3.18

3.18

3.18

3.18

3.18

3.18

3.18

3.18

3.18

3.18

3.18

3.18

3.18

3.18

3.18

3.18

3.18

3.18

3.18

3.18

Bulletin No. 2021–35

26 CFR 601.204: Changes in accounting periods

and in methods of accounting.

(Also: Part I, Sections 446, 451, 1275; 1.451-1,

1.451-3, 1.451-8, 1.1275-2.)

Rev. Proc. 2021-34

SECTION 1. PURPOSE

This revenue procedure modifies Rev.

Proc. 2019-43, 2019-48 I.R.B. 1107, to

provide procedures under § 446 of the Internal Revenue Code (Code) and § 1.4461(e) of the Income Tax Regulations to

obtain automatic consent of the Commissioner of Internal Revenue (Commissioner) to change methods of accounting

to comply with final regulations under

§§ 1.451-3, 1.451-8, and 1.1275-2(l) and

to change methods of accounting for

certain inventory costs to comply with

§§ 263A, 461, and 471 if such changes

are made in connection with a change to

comply with § 1.451-3 and/or § 1.4518, as applicable. This revenue procedure

also modifies Rev. Proc. 2015-13, 20155 I.R.B. 419, as clarified and modified by

Rev. Proc. 2015-33, 2015-24 I.R.B. 1067,

and further modified by Rev. Proc. 20161, 2016-1 I.R.B. 1, Rev. Proc. 2017-59,

2017-48 I.R.B. 543, and Rev. Proc. 202126, 2021-22 I.R.B. 1163, to provide procedures for a taxpayer to obtain the consent

of the Commissioner to change its method

of accounting to comply with §§ 1.451-3

and/or 1.451-8, as applicable, by providing rules related to cost offset method

changes.

SECTION 2. BACKGROUND

.01 On December 22, 2017, §§ 451(b)

and (c) were amended by section 13221 of

Public Law 115-97, 131 Stat. 2054, 2113,

commonly referred to as the Tax Cuts

and Jobs Act (TCJA). Section 451(b) was

amended to provide that, for a taxpayer

using an accrual method of accounting,

the all events test for any item of gross income, or portion thereof, is met no later

than when that item, or portion thereof,

is taken into account as revenue in an applicable financial statement (AFS) (AFS

Income Inclusion Rule). Section 451(b)

also overturned the historical Federal income tax treatment of credit card late fees,

credit card cash advance fees, and inter-

Bulletin No. 2021–35

change fees by subjecting the fees to the

AFS Income Inclusion Rule instead of the

original issue discount (OID) timing rules.

Section 451(c) was amended to provide

that an accrual method taxpayer may use

the deferral method of accounting provided in § 451(c) for advance payments.

.02 On April 12, 2018, the Department

of Treasury (Treasury Department) and

the Internal Revenue Service (IRS) issued

Notice 2018-35, 2018-18 I.R.B. 520, to

provide transitional guidance relating to

advance payments under Rev. Proc. 200434, 2004-1 C.B. 991, as modified and clarified by Rev. Proc. 2011-18, 2011 5 I.R.B.

443, and Rev. Proc. 2013-29, 2013-33

I.R.B. 141, and as modified by Rev. Proc.

2011-14, 2011-4 I.R.B. 330. The notice

provides that the Treasury Department

and the IRS expect to issue future guidance regarding the treatment of advance

payments incorporating the TCJA amendments to § 451(c) and that until such guidance is applicable, taxpayers may continue to rely on Rev. Proc. 2004-34 for the

treatment of advance payments. Notice

2018-35 is obsolete for taxable years beginning on or after January 1, 2021. See

TD 9941, 86 FR 810 (January 6, 2021),

corrected by 86 FR 126 (January 8, 2021)

and 86 FR 2974 (January 14, 2021) (as so

corrected, TD 9941).

.03 On May 29, 2018, the Treasury

Department and the IRS issued Rev. Proc.

2018-29, 2018-22 I.R.B. 634, modified by

Rev. Proc. 2018-49, 2018-41 I.R.B. 548,

which added section 16.11 to the List of

Automatic Changes, as defined in section

3.09 of Rev. Proc. 2015-13, to provide

procedures for a taxpayer to change its

method of accounting for the recognition

of income for Federal income tax purposes to a method of accounting described in

the new financial accounting standards on

revenue from contracts with customers

issued by the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB)

(New Standards) if such change is made

for the taxable year in which the taxpayer adopts the New Standards. A change

under this section required that the taxpayer’s method comply with § 451, as

amended by the TCJA. Rev. Proc. 201829 indicated that the IRS expected to issue future guidance addressing the TCJA

amendments to § 451.

337

.04 On December 17, 2018, the Treasury Department and the IRS issued Rev.

Proc. 2018-60, 2018-51 I.R.B. 1045,

which added section 16.12 to the List

of Automatic Changes for a taxpayer to

change its method of accounting for the

timing of income recognition for Federal income tax purposes to comply with

§ 451(b) for taxable years beginning after December 31, 2017 (or, December 31,

2018, in the case of income from a debt instrument having OID). Rev. Proc. 2018-60

permits a taxpayer to change its method of

accounting to comply with § 451(b) using

streamlined method change procedures if

the change results in a zero § 481(a) adjustment or if the taxpayer requesting the

change is a small business taxpayer, as defined in the guidance.

.05 On September 9, 2019, the Treasury

Department and the IRS published proposed regulations under § 1.451-3 (REG104870-18; 84 FR 47205) (proposed

§ 1.451-3), § 1.451-8 (REG-104554-18;

84 FR 47191) (proposed § 1.451-8), and

§ 1.1275-2(l) (REG-104870-18; 84 FR

47205) (proposed § 1.1275-2(l)). Proposed § 1.451-3 provided rules relating to

the taxable year of inclusion in gross income under § 451(b). Proposed §1.451-8

provided rules relating to the use of the deferral method for advance payments under

§ 451(c). Proposed § 1.1275-2(l) provides

rules clarifying that an item of income

that is subject to the timing rules in proposed § 1.451-3, such as specified credit card fees, is not taken into account in

determining the amount of OID on a debt

instrument. Concurrent with the issuance

of the proposed regulations, the Treasury

Department and the IRS issued Rev. Proc.

2019-37, 2019-39 I.R.B. 731, which modified sections 16.10, 16.11, and 16.12 in

the List of Automatic Changes to provide

procedures for a taxpayer to obtain the

automatic consent of the Commissioner

to make a method change to comply with

§ 451(b), proposed § 1.451-3, proposed

§ 1.451-8, and proposed § 1.1275-2(l), as

applicable.

.06 On December 30, 2020, the Treasury Department and the IRS issued final

regulations under § 1.451-3, § 1.451-8,

and § 1.1275-2(l). See TD 9941. The regulations are generally applicable for taxable years beginning on or after January 1,

2021. However, the rules in § 1.451-3(j)

August 30, 2021

and § 1.1275-2(l)(1) for specified fees

that are not specified credit card fees, as

defined in § 1.451-3(j)(2), apply for taxable years beginning on or after January

6, 2022.

.07 However, a taxpayer and its related

parties, within the meaning of §§ 267(b)

and 707(b), may choose to apply both the

rules in § 1.451-3 and, to the extent relevant, the rules in § 1.451-8 for a taxable

year beginning after December 31, 2017

and before January 1, 2021, provided the

rules in § 1.451-3 and, to the extent relevant, the rules in § 1.451-8 are applied in

their entirety and in a consistent manner

for such taxable year and all subsequent

years. In addition, for specified credit

card fees, a taxpayer and its related parties may apply both the rules in §§ 1.4513 and 1.1275-2(l) that apply to specified

credit card fees for a taxable year beginning after December 31, 2018 and before

January 1, 2021, provided that the rules

in §§ 1.451-3 and 1.1275-2(l) that apply

to specified credit card fees are applied in

their entirety and in a consistent manner

for such taxable year and all subsequent

taxable years.

.08 Alternatively, a taxpayer may rely

on proposed § 1.451-3, proposed § 1.4518, and/or proposed § 1.1275-2(l), as applicable, for taxable years beginning after

December 31, 2017 (or December 31,

2018, in the case of specified credit card

fees) and before January 1, 2021. For a

specified fee that is not a specified credit

card fee, a taxpayer may neither choose

to apply the final regulations to, nor rely

on the proposed regulations for, a taxable

year beginning before January 6, 2022.

.09 The final regulations obsolete Rev.

Proc. 2004-33, 2004-1 C.B. 989, Rev.

Proc. 2004-34, Rev. Proc. 2005-47, 20052 C.B. 269, Rev. Proc. 2011-18, Rev.

Proc. 2013-29, and Notice 2018-35 for

taxable years beginning on or after January 1, 2021. A taxpayer that relied on the

now obsoleted guidance must determine

whether a change in method of accounting

occurs once it ceases to use the obsoleted

guidance.

.10 A change to comply with the final regulations under §§ 1.451-3, 1.4518, and/or 1.1275-2(l), as applicable, is a

change in method of accounting to which

the provisions of §§ 446 and 481 and the

accompanying regulations apply. Except

August 30, 2021

as otherwise provided by the Code or the

regulations, § 446(e) and § 1.446-1(e)(2)

require a taxpayer to secure the consent

of the Commissioner before changing a

method of accounting for Federal income

tax purposes. Section 1.446-1(e)(3)(ii)

authorizes the Commissioner to prescribe

administrative procedures that provide

the terms and conditions necessary for a

taxpayer to obtain consent to a change in

method of accounting. Rev. Proc. 2015-13

provides the general procedures by which

a taxpayer may obtain automatic consent

of the Commissioner to a change in method of accounting described in the List of

Automatic Changes. Section 6.03(1) of

Rev. Proc. 2015-13 sets forth the application procedures for timely filing a change

in method of accounting under the automatic change procedures. Such procedural

guidance provides that a taxpayer may not

request, or otherwise make, a retroactive

change in method of accounting on an

amended Federal income tax return, unless specifically authorized by the Commissioner or by statute. See section 2.05

of Rev. Proc. 2015-13, 2015-5 I.R.B 419,

425. A taxpayer that chooses to early apply the final regulations under §§ 1.451-3,

1.451-8, and/or 1.1275-2(l), as applicable,

to a taxable year beginning before January

1, 2021, must follow the rules for changes

in method of accounting under § 446, the

accompanying regulations, and the applicable procedural guidance, as described

above. Accordingly, such taxpayer cannot change its method(s) of accounting

to early apply the final regulations under

§§ 1.451-3, 1.451-8, and/or 1.1275-2(l),

as applicable, on an amended Federal income tax return.

.11 Because a change to comply with

§§ 1.451-3, 1.451-8, and/or 1.1275-2(l),

as applicable, is a change in method of accounting to which the provisions of § 446

and the accompanying regulations apply,

the item being changed to comply with

§§ 1.451-3, 1.451-8, and/or 1.1275-2(l),

as applicable, is determined by applying

§ 446 and the accompanying regulations.

See §§ 1.451-3(l)(1) and 1.451-8(g)(2). In

that regard, while §§ 451(b) and (c) and

the final regulations use the term “item of

gross income” to generally refer to income

that arises under a specific contract, the

term “item of gross income” is not synonymous with the terms “item” or “material

338

item” as used throughout the regulations

under § 446.

.12 Rev. Proc. 2013-26, 2013-22 I.R.B.

1160, describes the proportional method

of accounting for OID on a pool of credit card receivables. Under § 1.1275-2(l),

OID no longer includes a specified fee,

such as a specified credit card fee, that is

subject to the timing rules of § 1.451-3.

Therefore, Rev. Proc. 2021-35, 2021-35

I.R.B. 355, modifies Rev. Proc. 2013-26

to make clear that the proportional method

no longer applies to a specified fee, including a specified credit card fee. See section

16.12 of Rev. Proc. 2019-43, as modified

by this revenue procedure, for the procedures by which a taxpayer, including a

taxpayer using the proportional method

of accounting, can change its method of

accounting for specified credit card fees

to comply with § 451(b), as amended by

the TCJA, and §§1.451-3 and 1.1275-2(l).

Pursuant to that change, a taxpayer that

is already using the proportional method

of accounting is required to remove any

specified credit card fees from its pools

of credit card receivables. See Rev. Proc.

2021-35.

.13 Rev. Proc. 2019-43 provides the

current List of Automatic Changes to

which the automatic change procedures in

Rev. Proc. 2015-13 apply. Section 3 of this

revenue procedure modifies Rev. Proc.

2019-43 to provide procedures for a taxpayer to obtain the automatic consent of

the Commissioner to change its methods

of accounting to comply with §§ 1.451-3,

1.451-8, and/or 1.1275-2(l), as applicable,

including special terms and conditions for

certain changes to comply with §§ 1.4513, 1.451-8, and/or 1.1275-2(l), as applicable. Section 3 of this revenue procedure

also makes changes to the current automatic changes in Rev. Proc. 2019-43 by:

(1) modifying sections 12.01, 12.02,

22.05, 22.11, and 22.18 of Rev. Proc.

2019-43 to temporarily waive the eligibility rule in section 5.01(f) of Rev. Proc.

2015-13 for certain inventory changes

made in connection with changes to comply with §§ 1.451-3 and 1.451-8.

(2) modifying the change in overall

method of accounting from the cash method to an accrual method in section 15.01

for taxpayers with an AFS;

(3) removing the automatic change for

credit card late fees in section 16.06;

Bulletin No. 2021–35

(4) modifying the automatic change for

advance payments under section 16.07 by

making the change inapplicable for a year

of change beginning on or after January

1, 2021;

(5) removing the automatic change for

credit card cash advance fees in section

16.08;

(6) modifying section 16.11 to make it

inapplicable for changes to comply with

§§ 451(b) and (c) and the regulations

thereunder, and modifying sections 16.10

and 16.12 to provide terms and conditions

that are similar to those provided under

section 16.11 for certain changes made in

the year in which the taxpayer adopts the

New Standards that are no longer permitted to be made under section 16.11 and

that are now made under sections 16.10 or

16.12;

(7) modifying section 16.12 to remove

the automatic change to comply with

§ 451(b);

(8) correcting sections 16.11 and 16.12

of Rev. Proc. 2019-43 by providing that

changes in method of accounting made

under sections 16.11 and 16.12 with regard

to taxpayers who are members of consolidated groups generally are governed by

sections 16.11 and 16.12, as applicable,

rather than by § 1.1502-17(b)(2), which

is applicable to changes in the application

of the timing rules of § 1.1502-13 in accounting for intercompany transactions

within the meaning of § 1.1502-13(b)(1)

(i). See § 1.1502-17(a) and (b)(1);

(9) modifying section 16.12 to provide

that the rules for netting the § 481(a) adjustment provided in section 16.12(4)(b)

(iii) of Rev. Proc. 2019-43, as modified by

this revenue procedure, generally apply to

certain changes related to the cost offset

methods under §§ 1.451-3(c) and § 1.4518(e) that are required to be filed under the

non-automatic change procedures;

(10) modifying section 20 to provide

a temporary automatic change under new

section 20.13 for a taxpayer to change

its method of accounting for inventory

costs to comply with §§ 1.461-1(a)(2) and

1.461-4(d)(4) if the taxpayer: (a) presently

takes inventory costs into account in a taxable year prior to the taxable year in which

such costs are incurred under § 461 and

the regulations thereunder; (b) recovers

such costs in a taxable year prior to the

taxable year in which ownership of inven-

Bulletin No. 2021–35

tory is transferred to the customer to offset

income inclusions under § 451(b) and/or

§ 451(c); and (c) meets certain other requirements; and

(11) modifying the automatic change

for OID on a pool of credit card receivables in section 30.02 (proportional method).

.14 Section 4 of this revenue procedure

modifies Rev. Proc. 2015-13 to provide

procedures for a taxpayer to obtain the

consent of the Commissioner to change

its method of accounting to comply with

§§ 1.451-3 and/or 1.451-8, as applicable,

by:

(1) adding a new automatic change

eligibility rule under section 5.01(1)(g)

that requires certain taxpayers making

a cost-offset related inventory method

change, as defined in new section 5.06, to

also make the corresponding cost offset

change for the same year of change; and

(2) adding concurrent automatic method change language in section 6.03(1)(b)

to provide for certain taxpayers to make

one or more cost-offset related inventory

method changes and one or more corresponding cost offset changes on the same

Form 3115, Application for Change in Accounting Method.

SECTION 3. MODIFICATIONS TO

REV. PROC. 2019-43

.01 Modification to section 12.01 of

Rev. Proc. 2019-43, relating to certain

uniform capitalization (UNICAP) methods

used by resellers and reseller-producers.

Section 12.01(2) of Rev. Proc. 2019-43 is

modified by adding new subparagraph (c)

to read as follows:

(c) Eligibility rule temporarily inapplicable for certain changes related to cost

offset method. The eligibility rule in section 5.01(1)(f) of Rev. Proc. 2015-13 does

not apply to a method change under this

section 12.01 if:

(i) the taxpayer made or requested to

make a change during any of the five taxable years ending with the year of change

to recover inventory costs in a taxable

year prior to the taxable year in which

ownership of the inventory is transferred

to the customer to offset inclusions under

§ 451(b) and/or 451(c), as applicable;

(ii) in the case of a taxpayer with an

applicable financial statement (AFS), as

339

defined in section 16.12(1)(b) of this revenue procedure, the taxpayer makes, for the

same year of change, a change in method

of accounting for income from the sale of

inventory under section 16.12(2)(a)(iii) of

this revenue procedure and, to the extent

the taxpayer receives advance payments

for the sale of inventory, section 16.12(2)

(a)(iv) of this revenue procedure, or in the

case of a taxpayer that does not have an

AFS, the taxpayer concurrently changes its method of accounting for advance

payments from the sale of inventory under

section 16.12(2)(b)(ii) of this revenue procedure; and

(iii) the taxpayer makes the change under this section 12.01 for its early application year, as defined in section 16.12(4)

(c)(i) of this revenue procedure, or if a

taxpayer does not apply § 1.451-3 and/

or § 1.451-8 for a taxable year beginning

before January 1, 2021, for the taxpayer’s

first taxable year beginning on or after

January 1, 2021.

.02 Modification to section 12.02 of

Rev. Proc. 2019-43, relating to certain

uniform capitalization (UNICAP) methods used by producers and reseller-producers. Section 12.02(4) of Rev. Proc.

2019-43 is modified to read as follows:

(4) Eligibility rule temporarily inapplicable.

(a) In general. The eligibility rule in

section 5.01(1)(f) of Rev. Proc. 2015-13,

2015-5 I.R.B. 419, does not apply to the

changes described in this section 12.02 for

the taxpayer’s first, second, or third taxable year ending on or after November 20,

2018.

(b) Eligibility rule temporarily inapplicable for certain changes related to cost

offset method. The eligibility rule in section 5.01(1)(f) of Rev. Proc. 2015-13 does

not apply to a method change under this

section 12.02 if:

(i) the taxpayer made or requested to

make a change during any of the five taxable years ending with the year of change

to recover inventory costs in a taxable

year prior to the taxable year in which

ownership of the inventory is transferred

to the customer to offset inclusions under

§ 451(b) and/or 451(c), as applicable;

(ii) in the case of a taxpayer with an

applicable financial statement (AFS), as

defined in section 16.12(1)(b) of this revenue procedure, the taxpayer makes, for the

August 30, 2021

same year of change, a change in method

of accounting for income from the sale of

inventory under section 16.12(2)(a)(iii) of

this revenue procedure and, to the extent

the taxpayer receives advance payments

for the sale of inventory, section 16.12(2)

(a)(iv) of this revenue procedure, or in the

case of a taxpayer that does not have an

AFS, the taxpayer concurrently changes its method of accounting for advance

payments from the sale of inventory under

section 16.12(2)(b)(ii) of this revenue procedure; and

(iii) the taxpayer makes the change under this section 12.02 for its early application year, as defined in section 16.12(4)

(c)(i) of this revenue procedure, or if a

taxpayer does not apply § 1.451-3 and/or

§ 1.451-8, as applicable, for a taxable year

beginning before January 1, 2021, for the

taxpayer’s first taxable year beginning on

or after January 1, 2021.

.03 Modifications to section 15.01 of

Rev. Proc. 2019-43, relating to changes

in overall method of accounting from the

cash method to an accrual method.

(1) Section 15.01(1)(a) of Rev. Proc.

2019-43 is modified by replacing the last

paragraph thereof with the following:

Lastly, for a taxable year beginning after December 31, 2017, or December 31,

2018 in the case of specified credit card

fees, as defined in § 1.451-3(j)(2), and before January 1, 2021, a taxpayer with an

applicable financial statement (AFS) that

is changing its overall method of accounting from the cash method to an accrual

method qualifies to use this section 15.01

to comply with § 451(b)(1), and, if applicable, § 451(b)(4), or the proposed regulations under § 1.451-3 (REG-104870-18;

84 FR 47191) (proposed § 1.451-3). For a

taxable year beginning after December 31,

2017, or December 31, 2018 in the case of

specified credit card fees, a taxpayer with

an AFS that is changing its overall method

of accounting from the cash method to an

accrual method qualifies to use this section 15.01 to comply with § 1.451-3. For

purposes of this section 15.01, the term

“AFS” is defined under: § 451(b)(3) for a

taxpayer making a change to comply with

§ 451(b); proposed § 1.451-3(c)(1) for a

taxpayer making a change to comply with

proposed § 1.451-3; or § 1.451-3(b)(5) for

a taxpayer making a change to comply

with § 1.451-3.

August 30, 2021

A taxpayer that uses this section 15.01

to comply with § 1.451-3 must attach a

statement to its Form 3115 that provides

a description of the proposed method(s)

under § 1.451-3 to which it is changing.

For example, a taxpayer that chooses to

apply the alternative AFS revenue method in § 1.451-3(b)(2)(ii) must indicate in

the statement attached to its Form 3115

that it is choosing to comply with the AFS

income inclusion rule in § 1.451-3(b)(1)

by applying the alternative AFS revenue

method described in § 1.451-3(b)(2)(ii).

(2) Section 15.01(1)(b) of Rev. Proc.

2019-43 is modified by removing division (ix), and adding new divisions (ix)

through (xiii) to read as follows:

(ix) a taxpayer with an AFS that wants

to make a change in method of accounting

for allocating transaction price between

item(s) of gross income that are subject

to § 451 and item(s) of gross income that

are subject to a special method of accounting, as defined in § 451(b)(2), proposed

§ 1.451-3(c)(5), or § 1.451-3(a)(14), as

applicable, including a change to comply

with the transaction price allocation rules

in § 1.451-3(d)(5);

(x) a taxpayer with an AFS that wants

to change to use the AFS cost offset method, as defined in § 1.451-3(c), if the taxpayer receives advance payments from the

sale of inventory and does not also make

a concurrent change to apply the advance

payment cost offset method, as defined in

§ 1.451-8(e), for the same year of change

by using section 16.12 of this revenue

procedure, or a taxpayer with an AFS that

wants to change to use the advance payment cost offset method if the taxpayer

is required to include gross income from

the sale of inventory under § 1.451-3 and

does not also make a change to apply the

AFS cost offset method;

(xi) a taxpayer with an AFS that wants

to make a change in method of accounting

for specified fees, as defined in proposed

§ 1.451-3(i)(2) or § 1.451-3(j)(2), as applicable, other than specified credit card

fees;

(xii) a taxpayer that wants to make a

change in method of accounting for payments within the scope of the specified

good exception, as defined in § 1.451-8(a)

(1)(ii), if the proposed method of accounting is to include such payments in gross

income under § 1.451-3 in one or more

340

taxable years following the taxable year

of receipt; or

(xiii) a taxpayer with an AFS that

makes a change to apply § 1.451-3 for a

taxable year that begins before January 1,

2021, and fails to comply with the requirements in § 1.451-3(m)(3).

(3) Section 15.01(2)(b) of Rev. Proc.

2019-43 is modified to read as follows:

(b) Accrual method of accounting is

a method identified by § 446(c)(2) and

§§ 1.446-1(c)(1)(ii), 1.451-1(a), 1.4513, and 1.461-1(a)(2). For a taxable year

beginning after December 31, 2017, for

which the taxpayer has an AFS, the all

events test under § 451(b)(1)(C) and

§ 1.451-1(a) for any item of gross income,

or portion thereof, is met no later than

when that item, or portion thereof, is taken

into account as AFS revenue. See § 451(b)

(1) and § 1.451-3(b).

(4) Section 15.01(2)(d) of Rev. Proc.

2019-43 is modified to read as follows:

(d) Special method of accounting within the meaning of this section 15.01 is a

method of accounting, other than the cash

method, expressly permitted or required

by the Code, regulations, or in other guidance published in the IRB, that deviates

from the tax accrual accounting rules of

§§ 446, 451, 461, and the regulations

thereunder. For purposes of this section

15.01, a deferral method under section

451(c) and the regulations thereunder

is deemed to be a special method of accounting. Examples of special methods of

accounting include the installment method

of accounting under § 453, the mark-tomarket method under § 475, and a longterm contract method under § 460. In

contrast, application of the all-events test

under a specific set of facts is not a special

method of accounting. See, for example,

Rev. Rul. 69-314, 1969-1 C.B. 139 (concerning the treatment of retainages).

(5) Section 15.01(3)(a) of Rev. Proc.

2019-43 is modified by adding new division (iii) to read as follows:

(iii) Section 481(a) adjustment period

for changes relating to specified credit

card fees. In the case of income from a

specified credit card fee, the § 481(a) adjustment period for any qualified change

in method of accounting is six taxable

years (year of change and next five taxable years). For purposes of this section

15.01(3)(a)(iii), a qualified change in

Bulletin No. 2021–35

method of accounting is a change in method of accounting for income from a specified credit card fee to a method that is

required by § 451(b), as added by section

13221 of Public Law 115-97, 131 Stat.

2054 (Dec. 22, 2017), commonly referred

to as the Tax Cuts and Jobs Act (TCJA),

for such income, but only for the taxpayer’s first taxable year beginning after December 31, 2018. Accordingly, a taxpayer

that makes a qualified change in method

of accounting as part of its overall method

change under section 15.01 of this revenue procedure is required to use an adjustment period of six taxable years for the

portion of the overall § 481(a) adjustment

that is attributable to the qualified change

in method of accounting. The § 481(a) adjustment period for the remainder of the

overall § 481(a) adjustment required by

section 15.01(3)(a)(i) of this revenue procedure is determined without regard to the

qualified change in method of accounting.

(6) Section 15.01(3)(b)(ii) of Rev. Proc.

2019-43 is modified to read as follows:

(ii) Certain eligibility rule temporarily inapplicable. For a taxpayer with an

AFS that changes to an overall accrual method under this section 15.01 that

complies with § 451(b)(1), and, if applicable, § 451(b)(4), or proposed § 1.4513, the eligibility rule in section 5.01(1)

(e) of Rev. Proc. 2015-13, 2015-5 I.R.B.

419, does not apply to such change for

the taxpayer’s first, second or third taxable year beginning after December 31,

2017, provided such taxable year begins

before January 1, 2021. In addition, for a

taxpayer with an AFS that changes to an

overall accrual method under this section

15.01 that complies with § 1.451-3 for a

taxable year beginning before January 1,

2021, the eligibility rule in section 5.01(1)

(e) of Rev. Proc. 2015-13 does not apply

to such change for such taxable year. For

a taxpayer with an AFS that does not apply § 1.451-3 for a taxable year beginning

before January 1, 2021, and changes to an

overall accrual method under this section

15.01 that complies with § 1.451-3 for the

first taxable year that begins on or after

January 1, 2021, the eligibility rule in section 5.01(1)(e) of Rev. Proc. 2015-13 does

not apply to such change for such taxable

year.

(7) Section 15.01(3)(d)(i) of Rev. Proc.

2019-43, is modified to read as follows:

Bulletin No. 2021–35

(i) Concurrent automatic changes. Except as provided in section 15.01(3)(d)(ii)

of this revenue procedure, a taxpayer that

is changing from the overall cash method to an overall accrual method under

this section 15.01 and changing to one or

more special methods, as permitted under

section 15.01(1)(a)(ii), (iii), or (iv) of this

revenue procedure, must timely file a single Form 3115 for all changes and must

enter the designated automatic accounting

method change numbers for all changes

on the appropriate line of Form 3115. For

example, a taxpayer making both a change

from the overall cash method to an overall

accrual method under this section 15.01

and a change to the deferral method for

advance payments under section 16.07

or 16.12 of this revenue procedure must

timely file a single Form 3115 for both

changes and enter the designated automatic accounting method change numbers

for both changes on the appropriate line

on that Form 3115. See section 6.03(1)(b)

of Rev. Proc. 2015-13 for information on

making concurrent changes.

(8) Section 15.01(3) of Rev. Proc.

2019-43 is modified by:

(a) removing subparagraph (f), titled

“Concurrent automatic changes for a

taxpayer with an AFS that complies with

§ 451(b).”; and

(b) removing subparagraph (g), titled

“Concurrent change in the timing of recognition of income due to the New Standards.”

(9) Section 15.01(5) of Rev. Proc.

2019-43 is modified to read as follows:

(5) No ruling on method used. The

consent granted under section 9 of Rev.

Proc. 2015-13 for a change made under

this section 15.01 is not a determination

by the Commissioner that the new method

of accounting is a permissible method of

accounting under § 451(b) and does not

create a presumption that the allocation

method used under § 451(b)(4) is a permissible method of accounting. The director may ascertain whether the new method

of accounting is a permissible method of

accounting under § 451 and whether the

allocation method is permissible under

§ 451(b)(4). This section 15.01(5) does

not apply to a taxpayer with an AFS that is

making a change to a method of accounting permissible under proposed § 1.451-3

or § 1.451-3.

341

.04 Modification to section 16.06 of

Rev. Proc. 2019-43, relating to credit

card late fees. Section 16.06 of Rev. Proc.

2019-43 is modified to remove the automatic change in method of accounting in

section 16.06 for credit card late fees and

to read as follows:

.06 [Reserved]

.05 Modification to section 16.07 of

Rev. Proc. 2019-43, relating to advance

payments. Section 16.07(1) of Rev. Proc.

2019-43 is modified by: redesignating

subparagraph (b) as division (b)(i) with

a new heading that reads “In general.”;

adding a heading to subparagraph (b) that

reads “Inapplicability.”; and adding new

division (b)(ii) to read as follows:

(ii) Limited time to make change. This

change does not apply to taxable years beginning on or after January 1, 2021.

.06 Modification to section 16.08 of

Rev. Proc. 2019-43, relating to credit card

cash advance fees. Section 16.08 of Rev.

Proc. 2019-43 is modified to remove the

automatic change in method of accounting in section 16.08 for credit card cash

advance fees and to read as follows:

.08 [Reserved]

.07 Modification of section 16.10 of

Rev. Proc. 2019-43, relating to changes

in applicable financial statements for purposes of applying certain revenue recognition methods of accounting.

(1) Section 16.10 of Rev. Proc. 201943 is modified to read as follows:

.10 Change in applicable financial

statements (AFS) for purposes of applying

certain revenue recognition methods of

accounting.

(1) Description of change.

(a) Applicability.

(i) This change applies to a taxpayer

that has an applicable financial statement

(AFS), as defined in section 4.06 of Rev.

Proc. 2004-34, 2004-1 C.B. 991, as modified and clarified by Rev. Proc. 2011-18,

2011-5 I.R.B. 443, and Rev. Proc. 201329, 2013-33 I.R.B. 141, and as modified

by Rev. Proc. 2011-14, 2011-4 I.R.B. 330,

that: (A) receives advance payments, as

defined in section 4 of Rev. Proc. 2004-34,

(B) uses the deferral method described in

section 5.02(3)(a) of Rev. Proc. 2004-34

for including those advance payments in

gross income in accordance with its AFS,

(C) changes the manner in which it recognizes advance payments in revenues in its

August 30, 2021

AFS, and (D) wants to change its method

of accounting to use the new AFS method

of recognizing advance payments in revenues in its AFS for determining the extent

to which advance payments are included

in gross income under Rev. Proc. 2004-34.

See also Notice 2018-35, 2018-18 I.R.B.

520.

(ii) This change applies to a taxpayer

that has an AFS, as defined in proposed

§ 1.451-8(b)(2) (REG-104554-18; 84 FR

47191), that : (A) receives advance payments, as defined in proposed § 1.4518(b)(1); (B) uses the deferral method

described in proposed § 1.451-8(c); (C)

changes the manner in which it recognizes

advance payments in revenues in its AFS;

and (D) wants to change its method of accounting to use the new AFS method of

recognizing advance payments in revenues in its AFS for determining the extent

to which advance payments are included

in income under proposed § 1.451-8(c).

(iii) This change applies to a taxpayer

with an AFS, as defined in § 451(b)(3),

that: (A) includes amounts in income in

accordance with § 451(b); (B) changes

the manner in which the item, or portion

thereof, is taken into account in revenue in

its AFS, as defined in § 451(b)(3), including, if applicable, a change in the manner

in which transaction price is allocated to

performance obligations; and (C) wants to

change its method of accounting to use the

new AFS method of taking into account

the item, or portion thereof, in revenue in

its AFS for purposes of § 451(b)(1)(A),

including, if applicable, a change in the

manner in which transaction price is allocated for purposes of § 451(b)(4).

(iv) This change applies to a taxpayer with an AFS, as defined in proposed

§ 1.451-3(c)(1) (REG-104870-18; 84

FR 47205), that: (A) includes amounts

in income in accordance with proposed

§ 1.451-3; (B) changes the manner in

which the item, or portion thereof, is taken

into account as revenue in its AFS, including, if applicable, a change in the manner

in which transaction price is allocated to

performance obligations; and (C) wants

to change its method of accounting to use

the new AFS method of taking into account the item, or portion thereof, in revenue in its AFS for purposes of proposed

§ 1.451-3(b), including, if applicable, a

change in the manner in which transaction

August 30, 2021

price is allocated for purposes of proposed

§ 1.451-3(g).

(v) This change applies to a taxpayer

with an AFS, as defined in § 1.451-3(a)

(5), that: (A) includes amounts in income

in accordance with § 1.451-3; (B) changes

the manner in which the item, or portion

thereof, is taken into account as AFS revenue, as defined in § 1.451-3(a)(4), including, if applicable, a change in the manner

in which transaction price is allocated to

performance obligations; and (C) wants

to change its method of accounting to use

the new AFS method of taking into account the item, or portion thereof, in AFS

revenue for purposes of § 1.451-3(b)(1),

including, if applicable, a change in the

manner in which transaction price is allocated for purposes of § 1.451-3(d).

(vi) This change applies to a taxpayer

with an AFS, as defined in § 1.451-3(a)

(5), that: (A) receives an advance payment, as defined in § 1.451-8(a)(1); (B)

uses the deferral method described in

§ 1.451-8(c); (C) changes the manner in

which it recognizes advance payments in

AFS revenue, as defined in § 1.451-8(a)

(4), including, if applicable, a change in

the manner in which payments are allocated to performance obligations; and (D)

wants to change its method of accounting

to use the new AFS method of recognizing advance payments in AFS revenue

for purposes of determining the extent to

which advance payments are included in

income under § 1.451-8, including, if applicable, a change in the manner in which

payments are allocated for purposes of

§ 1.451-8(c)(8).

(b) Inapplicability.

(i) Changes relating to Rev. Proc.

2004-34. The change described in section

16.10(1)(a)(i) of this revenue procedure

does not apply to:

(A) a taxpayer that uses a present method of accounting for advance payments

that is not the deferral method described in

section 5.02(3)(a) of Rev. Proc. 2004-34.

For example, this change does not apply

to a taxpayer that uses the full inclusion

method under section 5.01 of Rev. Proc.

2004-34;

(B) a taxpayer that wants to change

its method for allocating payments under

section 5.02(4) of Rev. Proc. 2004-34; or

(C) taxable years beginning on or after

January 1, 2021.

342

(ii) Changes relating to § 451(b), proposed § 1.451-3, or proposed § 1.451-8.

A change described in section 16.10(1)(a)

(ii), (iii), or (iv) of this revenue procedure

does not apply to:

(A) a taxpayer whose present method of

accounting does not comply with § 451(b)

or proposed § 1.451-3, as applicable, for

a change described in section 16.10(1)(a)

(iii) or (iv) of this revenue procedure;

(B) a taxpayer whose present method

is not the deferral method under proposed

§ 1.451-8(c), for a change described in

section 16.10(1)(a)(ii) of this revenue procedure. For example, this change does not

apply to a taxpayer that uses the full inclusion method under § 451(c)(1)(A) or proposed § 1.451-8(a), or the non-AFS deferral method under proposed § 1.451-8(d);

(C) a taxpayer that wants to change

its method for allocating payments under

§ 451(c)(1)(D) or proposed § 1.451-8(c)

(6);

(D) a taxpayer that wants to change its

method for allocating transaction price

between performance obligations that

are accounted for under § 451(b) or proposed § 1.451-3, and performance obligations that are accounted for under a

special method of accounting, as defined

in § 451(b)(2) and proposed § 1.451-3(c)

(5); or

(E) taxable years beginning on or after

January 1, 2021.

(iii) Changes relating to § 1.451-3 or

§ 1.451-8. A change described in section

16.10(1)(a)(v) or (vi) of this revenue procedure does not apply to:

(A) a taxpayer whose present method of

accounting is not described in § 1.451-3,

for a change described in section 16.10(1)

(a)(v) of this revenue procedure. A taxpayer that wants to change to a method

of accounting described in §1.451-3 must

use section 16.12(2)(a)(v) of this revenue

procedure to make such change;

(B) a taxpayer whose present method

of accounting for advance payments is not

the deferral method under § 1.451-8(c),

for a change described in section 16.10(1)

(a)(vi) of this revenue procedure. For example, this change does not apply to a taxpayer that uses the full inclusion method

under § 1.451-8(b) or the non-AFS deferral method under § 1.451-8(d). However,

this change does apply to a taxpayer that

uses both the cost offset method under

Bulletin No. 2021–35

§ 1.451-8(e) and the deferral method under § 1.451-8(c);

(C) a taxpayer that wants to change its

method for allocating payments described

in § 1.451-8(c)(8)(iii); or

(D) a taxpayer that wants to change its

method for allocating transaction price for

contracts described in § 1.451-3(d)(5).

(c) Restatements of AFS. A taxpayer’s restatement of its AFS for financial

accounting presentation does not affect

the propriety of the taxpayer’s method of

accounting for revenue recognized in the

prior taxable year(s). For example, if the

taxpayer properly uses the deferral method described in § 1.451-8(c) for including

advance payments in gross income in accordance with its AFS, the taxpayer satisfies the requirement of section 16.10(1)(a)

(vi) of this revenue procedure even if the

AFS for that taxable year is later restated

and may change its method of accounting

under this section 16.10 if it is otherwise

eligible.

(2) Manner of making change.

(a) Cut-off basis or a § 481(a) adjustment.

(i) Cut-off basis for certain changes.

(A) In general. Except as provided in

section 16.10(2)(a)(i)(B) of this revenue

procedure, a change made under section

16.10(1)(a)(i), (ii), or (vi) of this revenue

procedure is made on a cut-off basis and

applies to advance payments received by

the taxpayer on or after the beginning of

the year of change. Accordingly, any advance payments received prior to the year

of change (prior advance payments) are

accounted for under the taxpayer’s former

method of accounting, and any advance

payments received in the year of change

and in subsequent taxable years are accounted for under the taxpayer’s new

method of accounting. A taxpayer that

changes its method of allocating payments

for purposes of § 1.451-8(c)(8)(i) must allocate any payments received prior to the

year of change using the taxpayer’s former method of accounting. Accordingly,

a § 481(a) adjustment is neither permitted

nor required.

(B) Section 481(a) adjustment for

certain changes. If a taxpayer makes a

change under section 16.10(1)(a)(i), (ii),

or (vi) of this revenue procedure, and the

AFS treatment of prior advance payments

in the year of change or a subsequent tax-

Bulletin No. 2021–35

able year is relevant for purposes of determining the amount of such payments that

is required to be included in gross income

in the year of change or a subsequent taxable year, the taxpayer must implement

the change with a § 481(a) adjustment as

provided in sections 7.02 and 7.03 of Rev.

Proc. 2015-13.

(ii) Cut-off basis or § 481(a) adjustment for certain changes. A taxpayer that

makes a change under section 16.10(1)(a)

(iii) or (iv) of this revenue procedure as a

result of adopting the New Standards, as

defined in section 16.11(1) of this revenue

procedure, in the year of change may implement the change with either a § 481(a)

adjustment as provided in sections 7.02

and 7.03 of Rev. Proc. 2015-13, or on a

cut-off basis. If the taxpayer implements

the change on a cut-off basis,

(A) the change applies to contracts entered into on or after the beginning of the

year of change;

(B) all changes made under section

16.10(1)(a)(iii) or (iv) of this revenue procedures for the same year of change must

be implemented using a cut-off basis; and

(C) a § 481(a) adjustment is neither

permitted nor required.

(iii) Computing § 481(a) adjustments

when the year of change is a year in which

the taxpayer implements a change in accounting principle with a retained earnings adjustment. If the year of change is

a year in which the taxpayer implements

a change in accounting principle for AFS

purposes, including a change in the method of applying an accounting principle

for AFS purposes, and the change in accounting principle is implemented with a

retained earnings adjustment that is taken

into account during the year of change, the

taxpayer is required to treat such adjustment as being taken into account in the

taxable year prior to the year of change

for purposes of computing the § 481(a)

adjustment. An AFS change to adopt the

New Standards, as defined in section

16.11(1) of this revenue procedure, is an

example of a change in accounting principle.

(iv) Example. Computing a § 481(a)

adjustment when the taxpayer presently

uses the AFS cost offset method - related accounts. B is in the trade or business

of selling computers. B uses an accrual

method of accounting and computes Fed-

343

eral income tax on a calendar-year basis

and has an AFS, as defined in § 1.451-3(a)

(5). B is not under examination within

the meaning of section 3.18 of Rev. Proc.

2015-13. B does not receive advance payments. For 2021, B makes two changes

in method of accounting to comply with

§ 1.451-3. Specifically, pursuant to section

16.12(2)(a)(iii)(A) of this revenue procedure, B changes its method of accounting

for gross income from the sale of computers to apply the AFS income inclusion

rule and, pursuant to section 16.12(2)(a)

(iii)(C) of this revenue procedure, changes

its method of accounting to apply the AFS

cost offset method. For 2022, B changes the manner in which income from the

sale of computers is taken into account as

AFS revenue, as defined in § 1.451-3(a)

(4), and changes its method of accounting

under section 16.10(1)(a)(v) of this section to use the new AFS method. However, B continues to use the AFS cost offset

method. In computing the § 481(a) adjustment resulting from the change to the

new method of computing AFS revenue

for 2022 under section 16.10(1)(a)(v) of

this revenue procedure, B must take into

account its continued use of the AFS cost

offset method. See section 3.15 of Rev.

Proc. 2015-13.

(b) In accordance with § 1.446-1(e)

(3)(ii), the requirement of § 1.446-1(e)

(3)(i) to file a Form 3115 is waived and a

statement in lieu of a Form 3115 is authorized for a change made under this section

16.10. Notwithstanding the definition of

Form 3115 in section 3.07 of Rev. Proc.

2015-13, 2015-5 I.R.B. 419, the statement

in lieu of a Form 3115 that is permitted

under this section 16.10 is considered a

Form 3115 for purposes of the automatic

consent procedures of Rev. Proc. 2015-13.

However, the requirement to file the duplicate copy, under section 6.03(1)(a) of Rev.

Proc. 2015-13, is waived. The statement

attached to the taxpayer’s return for the

year of change must include the following

information for each applicant:

(i) the designated automatic accounting

change number for this change, which is

“153;”

(ii) the applicant’s name, employer

identification number (or social security

number in the case of an individual), and

type of applicant, as would be provided

had a Form 3115 been required;

August 30, 2021

(iii) the year of change (both the beginning and ending dates);

(iv) the type of AFS used by the applicant, as defined in applicable guidance,

and which change the applicant is making under section 16.10(1)(a) of this revenue procedure. See section 4.06 of Rev.

Proc. 2004-34, § 451(b)(3), proposed

§ 1.451-8(b)(2), proposed § 1.451-3(c)(1),

§ 1.451-3(a)(5); and/or § 1.451-8(a)(5), as

applicable;

(v) a detailed and complete description of each item affected by the change

in AFS revenue recognition and the line

number (or schedule) where the affected

item is reflected on the Federal income tax

return for the year of change, and if applicable, the § 481(a) adjustment for each

change; and

(vi) a detailed description of the basis

used for AFS revenue recognition (that is,

the method the applicant uses in its AFS)

both before and after the AFS change.

(c) Concurrent automatic change. A

taxpayer may make more than one change

under this section 16.10 on the same statement in lieu of a Form 3115 for the same

year of change. The taxpayer must separately provide all of the information required for each change on that statement.

(3) Certain eligibility rule inapplicable. The eligibility rule in section 5.01(1)

(f) Rev. Proc. 2015-13 does not apply to

this change.

(4) No audit protection. A taxpayer

does not receive audit protection under

section 8.01 of Rev. Proc. 2015-13 for this

change. See section 8.02(2) of Rev. Proc.

2015-13.

(5) Designated automatic accounting

method change number. The designated automatic accounting method change

number for a change under this section

16.10 is “153.”

(6) Contact information. For further

information regarding a change under this

section, contact Maria Castillo-Valle at

(202) 317-7003 (not a toll-free number).

.08 Modification to section 16.11 of

Rev. Proc. 2019-43, relating to changes in

the timing of recognition of income due to

the New Standards.

(1) Section 16.11(2) of Rev. Proc.

2019-43 is modified by deleting the last

two sentences.

(2) Section 16.11(3) of Rev. Proc.

2019-43 is modified by removing the “or”

August 30, 2021

at the end of section 16.11(3)(d), inserting

at the end of section 16.11(3)(e) an “; or”

and adding a new subparagraph (f) at the

end thereof to read as follows:

(f) an item of gross income that is

required to be accounted for under

§ 451(b) or § 451(c). Accordingly, a

taxpayer that wants to make a change

in method of accounting for an item of

gross income to comply with § 451(b),

the proposed section 451(b) regulations

(REG-104870-18; 84 FR 47205) (proposed § 1.451-3), the proposed section

451(c) regulations (REG-104554-18;

84 FR 47191) (proposed § 1.451-8),

§ 1.451-3 and/or § 1.451-8, as applicable, in the year in which it adopts the

New Standards is not permitted to do so

under section 16.11 of this revenue procedure. See, however, sections 16.07,

16.10, or 16.12, as applicable, of this

revenue procedure.

(3) Section 16.11(4) of Rev. Proc.

2019-43 is modified by replacing the date

“May 10, 2021” with the date “May 10,

2022.”

(4) Section 16.11(5)(a) of Rev. Proc.

2019-43 is modified to read as follows:

(a) Cut-off basis or § 481(a) adjustment. A taxpayer making a change under

this section 16.11 may implement the

change with either a § 481(a) adjustment

as provided in sections 7.02 and 7.03 of

Rev. Proc. 2015-13, or on a cut-off basis.

If the taxpayer implements the change on

a cut-off basis, (i) the taxpayer must allocate any payments received prior to the

year of change using the taxpayer’s former method of accounting, (ii) all changes

made under this section 16.11 must be implemented using a cut-off basis, and (iii)

a § 481(a) adjustment is neither permitted

nor required. Changes under this section

16.11 with regard to taxpayers who are

members of consolidated groups generally are governed by this section 16.11

rather than by § 1.1502-17(b)(2) (applicable to changes in the application of the

timing rules of § 1.1502-13 in accounting

for intercompany transactions (within the

meaning of § 1.1502-13(b)(1)(i)). See

§ 1.1502-17(a) and (b)(1).

(5) Section 16.11(6) of Rev. Proc. 201943 is removed and paragraphs (7)–(11) are

renumbered (6)-(10), respectively.

(6) Newly renumbered section 16.11(6)

of Rev. Proc. 2019-43 is modified by re-

344

placing the date “May 10, 2021” with the

date “May 10, 2022.”

(7) Newly renumbered section

16.11(10) of Rev. Proc. 2019-43 is modified to read as follows:

(10) Contact information. For further

information regarding a change under this

section, contact Sharon Horn at (202) 3177003 (not a toll-free number).

.09 Modifications to section 16.12 of

Rev. Proc. 2019-43, relating to changes

in the timing of income recognition under

§ 451(b) and (c).

(1) Section 16.12 of Rev. Proc. 201943 is modified to read as follows:

.12 Changes in the timing of income

recognition under § 451(b) and (c).

(1) Description of change.

(a) In general. This change applies to

an accrual method taxpayer with an applicable financial statement (AFS) that wants

to make certain changes in method of accounting described in section 16.12(2)(a)

of this revenue procedure. This change

also applies to a taxpayer without an AFS

that wants to make certain changes in

method of accounting described in section

16.12(2)(b) of this revenue procedure.

(b) Applicable terms. For this section

16.12, the term “AFS” is defined under

proposed § 1.451-3(c)(1) (REG-10487018; 84 FR 47205) for a taxpayer making

a change to apply proposed § 1.451-3 and/

or proposed § 1.451-8 (REG-104554-18;

84 FR 47191), as applicable, or under

§ 1.451-3(b)(5) for a taxpayer making a

change to apply § 1.451-3 and/or § 1.4518, as applicable. Additionally, because a

change to comply with §§ 1.451-3, 1.4518, and/or 1.1275-2(l), as applicable, is a

change in method of accounting to which

the provisions of § 446 and the accompanying regulations apply, the item being changed to comply with §§ 1.451-3,

1.451-8, and/or 1.1275-2(l), as applicable,

is determined by applying § 446 and the

accompanying regulations. See §§ 1.4513(l)(1) and 1.451-8(g)(2). In that regard,

while §§ 451(b) and (c) and the final regulations use the term “item of gross income” to generally refer to income that

arises under a specific contract, the term

“item of gross income” is not synonymous

with the terms “item” or “material item”

as used throughout the regulations under

§ 446.

(2) Applicability.

Bulletin No. 2021–35

(a) Taxpayer with an AFS. This change

applies to an accrual method taxpayer

with an AFS that:

(i) for a taxable year beginning before January 1, 2021, wants to change

to a method of accounting under proposed § 1.451-3 (including a change for

a specified credit card fee under proposed

§ 1.451-3(i) and proposed § 1.1275-2(l));

(ii) for a taxable year beginning before January 1, 2021, wants to change to

a method of accounting for advance payments under proposed § 1.451-8(a) or (c);

(iii) wants to make one of the following

changes under § 1.451-3:

(A) a change to comply with the AFS

income inclusion rule in § 1.451-3(b)

under which the taxpayer determines the

amount of an item of gross income that

is treated as “taken into account as AFS

revenue” by making the AFS revenue

adjustments provided in § 1.451-3(b)(2)

(i) (including a change for specified credit card fees under §§ 1.451-3(j)(2) and

1.1275-2(l));

(B) a change to comply with the AFS

income inclusion rule in § 1.451-3(b)

under which the taxpayer determines the

amount of the item of gross income that

is “taken into account as AFS revenue” by

making the AFS revenue adjustments provided in § 1.451-3(b)(2)(ii) (including a

change for specified credit card fees under

§§ 1.451-3(j)(2) and 1.1275-2(l)) (Alternative AFS Revenue Method);

(C) except as provided in section

16.12(2)(a)(iii)(E) of this section, a change

to apply the AFS cost offset method in

§ 1.451-3(c) to determine the amount of

an item of gross income from the sale of

inventory that is required to be included

in gross income under the AFS income inclusion rule in § 1.451-3(b);

(D) a change from applying a cost offset method, including the AFS cost offset

method in § 1.451-3(c), to not applying

a cost offset method to determine the

amount of an item of gross income from

the sale of inventory that is required to be

included in gross income under the AFS

income inclusion rule in § 1.451-3(b);

(E) a change to comply with § 1.4513(c)(5)(ii) as a result of a concurrent

cost-offset related inventory method

change, as defined in section 5.06 of Rev.

Proc. 2015-13 (or successor), or because

the taxpayer determines its cost of goods

Bulletin No. 2021–35

in progress offset by reference to costs

that the taxpayer has impermissibly capitalized and/or allocated under its present

method of accounting for inventory;

(F) a change to comply with the transaction price allocation rules in § 1.4513(d); or

(G) a change to a method of accounting

described in § 1.451-3(h)(4) when a taxpayer’s AFS covers mismatched reportable periods; or

(iv) wants to make one of the following

changes in method of accounting for advance payments under § 1.451-8:

(A) a change to the full inclusion method provided in § 1.451-8(b);

(B) a change to the deferral method

provided in § 1.451-8(c);

(C) a change to the specified goods

§ 451(c) method described in § 1.451-8(f)

to treat payments that otherwise qualify

for the specified good exception, as defined in § 1.451-8(a)(1)(ii)(H), as advance

payments and account for such payments

either under the full inclusion method provided in § 1.451-8(b) or under the deferral

method provided in § 1.451-8(c);

(D) except as provided in section

16.12(2)(a)(iv)(F) of this revenue procedure, a change to apply the advance payment cost offset method in § 1.451-8(e)

to determine the amount of an advance

payment from the sale of inventory that

is required to be included in gross income

under either the full inclusion method in

§ 1.451-8(b) or the deferral method in

§ 1.451-8(c), as applicable;

(E) a change from applying a cost offset

method, including the advance payment

cost offset method in § 1.451-8(e), to not

applying a cost offset method to determine

the amount of an advance payment from

the sale of inventory that is required to be

included in gross income under either the

full inclusion method in § 1.451-8(b) or

the deferral method in § 1.451-8(c), as applicable;

(F) a change to comply with § 1.4518(e)(8)(ii) as a result of a concurrent

cost-offset related inventory method

change, as defined in section 5.06 of Rev.

Proc. 2015-13 (or successor), or because

the taxpayer presently determines its cost

of goods in progress offset by reference to

costs that the taxpayer has impermissibly

capitalized and/or allocated under its present method of accounting for inventory;

345

(G) a change to a method of accounting

described in § 1.451-8(c)(7), which refers

to the methods described in § 1.451-3(h)

(4), when a taxpayer’s AFS covers mismatched reporting periods; or

(H) a change to comply with the payment allocation rules in § 1.451-8(c)(8).

(b) Taxpayer without an AFS. This

change applies to a taxpayer that does not

have an AFS that:

(i) for a taxable year beginning after

December 31, 2017, and before January 1,

2021, wants to change to a method of accounting for advance payments under proposed § 1.451-8(a) or (d); or

(ii) wants to make one of the following

changes in method of accounting for advance payments under § 1.451-8:

(A) a change to the full inclusion method provided in § 1.451-8(b);

(B) a change to the deferral method

provided in § 1.451-8(d)(3);

(C) except as provided in section

16.12(2)(b)(ii)(E) of this revenue procedure, a change to apply the advance payment cost offset method in § 1.451-8(e)

to determine the amount of an advance

payment from the sale of inventory that

is required to be included in gross income

under either the full inclusion method in

§ 1.451-8(b) or the deferral method in

§ 1.451-8(d)(3), as applicable;

(D) a change from applying a cost offset

method, including the advance payment

cost offset method in § 1.451-8(e), to not

applying a cost offset method to determine

the amount of an advance payment from

the sale of inventory that is required to be

included in gross income under either the

full inclusion method in § 1.451-8(b) or

the deferral method in § 1.451-8(d)(3), as

applicable;

(E) a change to comply with § 1.4518(e)(8)(ii) as a result of a concurrent

cost-offset related inventory method

change, as defined in section 5.06 of

Rev. Proc. 2015-13 (or successor), or because the taxpayer determines its cost of

goods in progress offset by reference to

costs that the taxpayer has impermissibly capitalized and/or allocated under its

present method of accounting for inventory; or

(F) a change to a payment allocation

method described in § 1.451-8(d)(4)(ii).

(3) Inapplicability. Section 16.12(2) of

this revenue procedure does not apply to:

August 30, 2021

(a) a change in method of accounting

to use a special method of accounting, as

defined in proposed § 1.451-3(c)(5) or

§ 1.451-3(a)(13), as applicable;

(b) a change in method of allocating

transaction price between item(s) of gross

income that are accounted for under proposed § 1.451-3 or § 1.451-3, as applicable, and items(s) of gross income that

are accounted for under a special method of accounting, as defined in proposed

§ 1.451-3(c)(5) or § 1.451-3(a)(14), as

applicable, including a change to comply

with § 1.451-3(d)(5);

(c) a change described in section

16.12(2)(a)(iii)(E), section 16.12(2)(a)

(iv)(F) or section 16.12(2)(b)(ii)(E) of

this revenue procedure, as applicable, if,

immediately after such change is made,

the taxpayer’s method of accounting for

cost offsets does not otherwise comply

with the AFS cost offset method under

§ 1.451-3(c) and/or the advance payment

cost offset method under § 1.451-8(e), as

applicable;

(d) a change described in section

16.12(2)(a)(iii)(E), section 16.12(2)(a)(iv)

(F) or section 16.12(2)(b)(ii)(E) of this

revenue procedure, including a change to

comply with § 1.451-3(c)(5)(ii) or § 1.4518(e)(8)(ii) because the taxpayer determines

its cost of goods in progress offset by reference to costs that the taxpayer has impermissibly capitalized and/or allocated under

its present method of accounting for inventory, unless the taxpayer makes, for the

same year of change, the cost-offset related

inventory method change(s), as defined in

section 5.06 of Rev. Proc. 2015-13;

(e) a change to use the AFS cost offset

method if the taxpayer receives advance

payments from the sale of inventory and

does not also make a change to apply the

advance payment cost offset method, or a

change to use the advance payment cost

offset method if the taxpayer is required

to include gross income from the sale of

inventory under § 1.451-3 and does not

also make a change to apply the AFS cost

offset method;

(f) a change to use the deferral method in § 1.451-8(c) for allocable payments

described in § 1.451-8(c)(8)(iii)(A) (other than allocable payments described in

§ 1.451-8(c)(8)(iii)(B));

(g) a taxpayer that presently uses the

deferral method in § 1.451-8(c) for alloca-

August 30, 2021

ble payments described in § 1.451-8(c)(8)

(iii)(A) that wants to change its payment

allocation method to an allocation method

that is not described in § 1.451-8(c)(8)(iii)

(B);

(h) a change to use the deferral method

in § 1.451-8(d)(3) for allocable payments

described in § 1.451-8(d)(4)(i) other than

either allocable payments described in

§ 1.451-8(d)(4)(ii) or allocable payments

that are wholly attributable to two or more

items described in § 1.451-8(a)(1)(i)(C);

(i) a taxpayer that presently uses the

deferral method in § 1.451-8(d)(3) for

allocable payments described in § 1.4518(d)(4)(i) that wants to change its payment

allocation method to an allocation method

that is not described in § 1.451-8(d)(4)(ii);

(j) a taxpayer without an AFS that

wants to change its method of accounting for advance payments to the deferral

method under proposed § 1.451-8(d)(3) or

§ 1.451-8(d)(3) under which the taxpayer

determines the extent to which an advance

payment is earned by using the following:

(i) a statistical basis if adequate data are

available to the taxpayer; or (ii) the use of

any other basis that in the opinion of the

Commissioner results in a clear reflection

of income;

(k) a change in method of accounting

for specified fees, as defined in proposed

§ 1.451-3(i)(2) or § 1.451-3(j)(2), as applicable, other than specified credit card

fees;

(l) a change in method of accounting

that qualifies under another automatic

change provided in this revenue procedure including, for example, a change

described in section 16.10 of this revenue

procedure;

(m) a change in method of accounting

for a liability, as defined in § 1.446-1(c)

(1)(ii)(B);

(n) a change in a taxpayer’s mismatched reporting periods method described in § 1.451-3(h)(4) if the taxpayer uses the deferral method for advance

payments under § 1.451-8(c) and does

not also change to the same mismatched

reporting periods method for purposes of

accounting for advance payments pursuant to § 1.451-8(c)(7) for the same year

of change; or, if applicable, a change in

a taxpayer’s mismatched reporting periods method pursuant to § 1.451-8(c)(7)

if the taxpayer uses the deferral method

346

for advance payments under § 1.451-8(c)

and does not also change to the same mismatched reporting periods method for

purposes of § 1.451-3(h)(4) for the same

year of change;

(o) a change in method of accounting for payments within the scope of the

specified good exception, as defined in

§ 1.451-8(a)(1)(ii), if the proposed method of accounting is to include such payments in gross income under § 1.451-3 in

one or more taxable years following the

taxable year of receipt; and

(p) a taxpayer that makes one or more

changes under section 16.12(2)(a)(iii) or

(iv) of this revenue procedure for a taxable year that begins before January 1,

2021, unless the taxpayer complies with

all the requirements in §§ 1.451-3(m)(3),

1.451-8(h)(2), and 1.1275-2(l)(2)(ii), as

applicable.

(4) Manner of making change.

(a) Short Form 3115. A taxpayer making a change under this section 16.12 for

its early application year, as defined in

section 16.12(4)(c)(i) of this revenue procedure, or in the case of a taxpayer that

does not apply § 1.451-3 and/or § 1.451-8,

as applicable, for a taxable year beginning

before January 1, 2021, for its first taxable year beginning on or after January 1,

2021, is required to complete the following information on Form 3115 (Rev. December 2018), and the requirement to file

the duplicate copy, under section 6.03(1)

(a) of Rev. Proc. 2015-13 is waived:

(i) The identification section of page 1

(above Part I);

(ii) The signature section at the bottom

of page 1;

(iii) Part I;

(iv) Part II, all lines except lines 13,

16c, and 19; and

(v) Part IV, all lines. For a taxpayer

making a change under this section 16.12,

the statement required for Line 26 of

Form 3115 should list the § 481(a) adjustment(s).

(vi) Schedule B, all lines except line 1e.

(b) Special rules relating to § 481(a)

adjustment or cut-off basis.

(i) Section 481(a) adjustment period

for changes relating to specified credit

card fees. In the case of income from a

specified credit card fee, the § 481(a) adjustment period for any qualified change

in method of accounting described in this

Bulletin No. 2021–35

section 16.12(4)(b)(i) is six taxable years,

including the year of change and next five

taxable years. For purposes of the preceding sentence, a qualified change in method of accounting is a change in method of

accounting for income from a specified

credit card fee to a method that is required

by § 451(b), as added by section 13221 of

Public Law 115-97, 131 Stat. 2054 (Dec.

22, 2017), commonly referred to as the

Tax Cuts and Jobs Act (TCJA), for such

income, but only for the taxpayer’s first

taxable year beginning after December

31, 2018. Section 16.12(4)(b)(ii) of this

revenue procedure may not be used for

a change relating to specified credit card

fees.

(ii) Cut-off basis or § 481(a) adjustment.

(A) In general. Changes under this section 16.12 with regard to taxpayers who

are members of consolidated groups generally are governed by this section 16.12,

rather than by § 1.1502-17(b)(2) (applicable to changes in the application of the

timing rules of § 1.1502-13 in accounting

for intercompany transactions (within the

meaning of § 1.1502-13(b)(1)(i))). See

§ 1.1502-17(a) and (b)(1).

(B) Cut-off basis or § 481(a) adjustment for changes made under section

16.12(2)(a)(i) of this revenue procedure

when taxpayer is also adopting the New

Standards. Except as otherwise provided

in this section 16.12(4)(b)(ii), a taxpayer making a change described in section

16.12(2)(a)(i) of this revenue procedure

may implement the change with either a

§ 481(a) adjustment as provided in sections 7.02 and 7.03 of Rev. Proc. 2015-13

or on a cut-off basis provided the year of

change is the same year that the taxpayer

adopts the New Standards, as defined in

section 16.11 of this revenue procedure.

A taxpayer described in section 16.12(4)

(c)(i)(B) or (C) of this revenue procedure

that uses the streamlined procedures provided in section 16.12(4)(c) of this revenue procedure may not make a change in

method of accounting on a cut-off basis.

If the taxpayer makes a change described

in section 16.12(2)(a)(i) of this revenue

procedure for the taxable year in which it

adopts the New Standards and chooses to

implement such change on a cut-off basis,

(1) the change applies to contracts entered

into on or after the beginning of the year

Bulletin No. 2021–35

of change, (2) all changes made under

section 16.12(2)(a)(i) of this revenue procedure must be implemented using a cutoff basis, and (3) a § 481(a) adjustment is

neither permitted nor required.

(C) Cut-off basis or § 481(a) adjustment for certain changes under proposed

§ 1.451-8(c). Except as otherwise provided in this section 16.12(4)(b)(ii), a taxpayer making a change described in section

16.12(2)(a)(ii) of this revenue procedure

may implement the change with either a

§ 481(a) adjustment as provided in sections 7.02 and 7.03 of Rev. Proc. 2015-13

or on a cut-off basis. A taxpayer described

in section 16.12(4)(c)(i)(B) of this revenue

procedure that uses the streamlined procedures provided in section 16.12(4)(c) of

this revenue procedure may not make a

change in method of accounting on a cutoff basis. If the taxpayer implements the

change on a cut-off basis, (1) the change

applies to contracts entered into on or after

the beginning of the year of change, (2)

all changes made under section 16.12(2)

(a)(ii) of this revenue procedure to comply with proposed § 1.451-8(c) must be

implemented using a cut-off basis, and (3)

a § 481(a) adjustment is neither permitted

nor required.

(D) Computing section 481(a) adjustments when the year of change is a year in

which the taxpayer implements a change

in accounting principle with a retained

earnings adjustment. If the year of change

is a year in which the taxpayer implements

a change in accounting principle for AFS

purposes, including a change in the method of applying an accounting principle

for AFS purposes, and the change in accounting principle is implemented with a

retained earnings adjustment that is taken

into account during the year of change, the

taxpayer is required to treat such adjustment as being taken into account in the

taxable year prior to the year of change for

purposes of computing the section 481(a)

adjustment. An AFS change to adopt the

New Standards, as defined in section

16.11(1) of this revenue procedure, is an

example of a change in accounting principle.

(iii) Netting of the section § 481(a) adjustment.

(A) Required netting for changes made

under § 1.451-3 related to inventory sales.

A taxpayer that makes a change described

347

in section 16.12(2)(a)(iii)(C) or (D) of

this revenue procedure and one or more

changes described in section 16.12(2)(a)

(iii)(A), (B), and/or (G) of this revenue

procedure for gross income from inventory sales for the same year of change must

provide a single net § 481(a) adjustment

for all such changes. The § 481(a) adjustment period described in section 7.03 of

Rev. Proc. 2015-13 is determined based

on the net § 481(a) adjustment.

(B) Required netting for changes made

under §1.451-8 related to inventory sales

for taxpayers with an AFS. A taxpayer

that makes a change described in section

16.12(2)(a)(iv)(D) or (E) of this revenue

procedure and one or more changes described in section 16.12(2)(a)(iv)(A), (B),

(C), and/or (G) of this revenue procedure

for advance payments from the sale of inventory for the same year of change must

provide a single net § 481(a) adjustment

for all such changes. The § 481(a) adjustment period described in section 7.03 of

Rev. Proc. 2015-13 is determined based

on the net § 481(a) adjustment.

(C) Required netting for changes made

under § 1.451-8 related to inventory sales

for taxpayers without an AFS. A taxpayer

that makes a change described in section

16.12(2)(b)(ii)(C) or (D) of this revenue

procedure and one or more changes in

method of accounting described in section 16.12(2)(b)(ii)(A) or (B) of this revenue procedure for advance payments

from the sale of inventory for the same

year of change must provide a single net

§ 481(a) adjustment for all such changes.

The § 481(a) adjustment period described

in section 7.03 of Rev. Proc. 2015-13 is

determined based on the net § 481(a) adjustment.

(D) Required netting for non-automatic method changes under § 1.451-3 and/

or § 1.451-8 related to inventory sales.

The rules in section 16.12(4)(b)(iii) of this

revenue procedure generally will apply to

a non-automatic change under § 1.4513 and/or § 1.451-8 for which the netting

rules of section 16.12(4)(b)(iii) of this

revenue procedure would otherwise apply

if the taxpayer were eligible to make the

change under section 16.12 of this revenue procedure.

(iv) Special § 481(a) adjustment rules

for cost offset method change(s) under

§ 1.451-3 and/or § 1.451-8 made with

August 30, 2021

corresponding cost-offset related inventory method change(s).

(A) Required netting rule for changes

described in section 16.12(2)(a)(iii)(E). A

taxpayer that makes more than one method change under section 16.12(2)(a)(iii)

(E) of this revenue procedure for the same

year of change must provide a single net

§ 481(a) adjustment for all such changes.

The § 481(a) adjustment period for this

net § 481(a) adjustment is determined by

applying the rules in section 16.12(4)(b)

(iv)(D) of this revenue procedure.

(B) Required netting rule for changes

described in section 16.12(2)(a)(iv)(F). A

taxpayer that makes more than one method change under section 16.12(2)(a)(iv)

(F) of this revenue procedure for the same

year of change must provide a single net

§ 481(a) adjustment for all such changes.

The § 481(a) adjustment period for this

net § 481(a) adjustment is determined by

applying the rules in section 16.12(4)(b)

(iv)(D) of this revenue procedure.

(C) Required netting rule for changes

described in section 16.12(2)(b)(ii)(E). A

taxpayer that makes more than one method change under section 16.12(2)(b)(ii)

(E) of this revenue procedure for the same

year of change must provide a single net

§ 481(a) adjustment for all such changes.

The § 481(a) adjustment period for this

net § 481(a) adjustment is determined by

applying the rules in section 16.12(4)(b)

(iv)(D) of this revenue procedure.

(D) Special § 481(a) adjustment

spread period. For purposes of sections

7.02 and 7.03 of Rev. Proc. 2015-13, the

§ 481(a) adjustment spread period for a

cost offset change described in section

16.12(2)(a)(iii)(E), section 16.12(2)(a)(iv)

(F), or section 16.12(2)(b)(ii)(E) of this

revenue procedure, whether the § 481(a)

adjustment is positive or negative, is the

same as the § 481(a) spread period for the

corresponding cost-offset related inventory method change, as defined in section

5.06 of Rev. Proc. 2015-13. The rules of

section 7.02 and 7.03 of Rev. Proc. 201513, including the short period rule and

the accelerated adjustment period rules,

apply to determine the spread period for

the § 481(a) adjustment for the cost-offset

related inventory method change, which is

used to determine the § 481(a) adjustment

spread period for a positive or negative

§ 481(a) adjustment for the correspond-

August 30, 2021

ing cost offset change described in section

16.12(2)(a)(iii)(E), section 16.12(2)(a)(iv)

(F), or section 16.12(2)(b)(ii)(E) of this

revenue procedure. If the taxpayer must

net the § 481(a) adjustments for cost offset changes under section 16.12(4)(b)(iv)

(A), (B) or (C) of this revenue procedure,

as applicable, the spread period for any

such net § 481(a) adjustment is the same

as the § 481(a) spread period for the corresponding cost-offset related inventory

method changes, determined by netting

the § 481(a) adjustments from such corresponding cost-offset related inventory

method changes. The requirement that the

taxpayer net the § 481(a) adjustments for

such corresponding cost-offset related inventory method changes is solely for purposes of determining the spread period for

the net § 481(a) adjustment determined

under section 16.12(4)(b)(iv)(A), (B), or

(C), as applicable. This section 16.12(4)

(b)(iv)(D) does not apply if, after applying the netting rules in section 16.12(4)

(b)(iv)(A), (B), or (C), as applicable, the

§ 481(a) adjustment for the corresponding

cost offset change(s) is zero. For example,

if the taxpayer makes a cost-offset related

inventory method change that is implemented on a cut-off basis and the § 481(a)

adjustment for the taxpayer’s corresponding change described in section 16.12(2)

(a)(iii)(E), section 16.12(2)(a)(iv)(F), or

section 16.12(2)(b)(ii)(E) of this revenue

procedure is zero as a result, this section

16.12(4)(b)(iv)(D) does not apply.

(v) Examples. For each of the following examples, the taxpayer uses an accrual method of accounting, is on a calendar year, and has an AFS, as defined in

§ 1.451-3(a)(5). The taxpayer implements

§ 1.451-3 and, if applicable, § 1.451-8, beginning with its 2021 taxable year.

(A) Example 1. Netting rules. A is engaged in a

single trade or business of selling and servicing computers. A is not under examination within the meaning of section 3.18 of Rev. Proc. 2015-13. A does

not receive advance payments. For 2021, A makes

multiple changes in method of accounting to apply

§ 1.451-3. Specifically, A changes its method of accounting for gross income from the sale of computers

to apply the AFS income inclusion rule pursuant to

section 16.12(2)(a)(iii)(A) of this revenue procedure

and to apply the AFS cost offset method pursuant to

section 16.12(2)(a)(iii)(C) of this revenue procedure.

A also changes its method of accounting for gross

income from computer services to apply the AFS

income inclusion rule pursuant to section 16.12(2)

(a)(iii)(A) of this revenue procedure. Since A made

a change described in section 16.12(2)(a)(iii)(C) of

348

this revenue procedure and a change described in

section 16.12(2)(a)(iii)(A) of this revenue procedure

for gross income from computer sales for the same

year of change, A must net the § 481(a) adjustments

resulting from these changes in the manner required

by section 16.12(4)(b)(iii)(A) of this revenue procedure. The § 481(a) adjustment resulting from A’s

change in method of accounting for income from

computer services under section 16.12(2)(a)(iii)

(A) of this revenue procedure is not netted with the

§ 481(a) adjustments resulting from the computer

sales method changes.

(B) Example 2. Special section 481(a) adjustment period under section 16.12(4)(b)(iv) of this

revenue procedure. The facts are the same as in Example 1. For 2022, A changes its inventory method

under section 12.01 of this revenue procedure and,

as a result, also changes its cost offset method to

comply with § 1.451-3(c)(5)(ii) pursuant to section

16.12(2)(a)(iii)(E) of this revenue procedure. The

cost-offset related inventory method change under

section 12.01 of this revenue procedure results in a

positive § 481(a) adjustment that is spread over four

taxable years under section 7.01 and 7.03 of Rev.

Proc. 2015-13. The cost offset method change under

section 16.12(2)(a)(iii)(E) of this revenue procedure

results in a negative § 481(a) adjustment. Section

16.12(4)(b)(iv)(D) of this revenue procedure requires A to spread the negative § 481(a) adjustment

over four taxable years consistent with the § 481(a)

adjustment period for the concurrent cost-offset related inventory method change under section 12.01

of this revenue procedure.

(c) Streamlined method change procedures for certain taxpayers.

(i) Applicability. The procedures described in this section 16.12(4)(c) may be

used by a taxpayer to make a change in

method of accounting described in section

16.12(2)(a)(iii)(A), (B), (F), and/or (G),

section 16.12(2)(a)(iv)(A), (B), (C), (G),

and/or (H), or section 16.12(2)(b)(ii)(A),

(B), and/or (F) of this revenue procedure

for the taxpayer’s early application year,

provided the taxpayer meets the requirements in this section 16.12(4)(c). For

purposes of section 16.12, a taxpayer’s

“early application year” means the taxable

year beginning before January 1, 2021, in

which a taxpayer first applies § 1.451-3

and/or § 1.451-8, as applicable. In addition, in the case of a taxpayer that does

not apply § 1.451-3 and/or § 1.451-8 for

a taxable year beginning before January

1, 2021, the procedures described in this

section 16.12(4)(c) may be used to make

a change in method of accounting described in section 16.12(2)(a)(iii)(A), (B),

(F), and/or (G), section 16.12(2)(a)(iv)

(A), (B), (C), (G), and/or (H), or section

16.12(2)(b)(ii)(A), (B), and/or (F) of this

revenue procedure, for the taxpayer’s first

Bulletin No. 2021–35

taxable year beginning on or after January

1, 2021, provided the taxpayer meets the

requirements in this section 16.12(4)(c).

A taxpayer may not use the streamlined

procedures for any change in method of

accounting described in section 16.12(2)

of this revenue procedure if the taxpayer

is also making a change in method of accounting described in sections 16.12(2)(a)

(iii)(C), (D), and/or (E), sections 16.12(2)

(a)(iv)(D), (E), and/or (F), or sections

16.12(2)(b)(ii)(C), (D), and/or (E) of this

revenue procedure for the same year of

change. In addition, a taxpayer may not

use the streamlined procedures if one or

more of the inapplicability rules provided

in section 16.12(3) of this revenue procedure applies to the change. A taxpayer that

is otherwise permitted to use the streamlined method change procedures in this

section 16.12(4)(c) may use these streamlined procedures if the taxpayer meets one

of the following requirements:

(A) the taxpayer, other than a tax shelter, as defined in § 448(d)(3), meets the

§ 448(c) gross receipts test (a “small business taxpayer”) for the year of change. The

taxpayer meets the § 448(c) gross receipts

test if the taxpayer has average annual

gross receipts for the three prior taxable

years of $25,000,000 or less (adjusted for

inflation). See § 448(c)(4). For a taxable

year beginning in 2019, 2020, or 2021, the

inflation-adjusted amount is $26,000,000.

See Rev. Proc. 2018-57, 2018-49 I.R.B.

827, Rev. Proc. 2019-44, 2019-47 I.R.B.

1093, or Rev. Proc. 2020-45, 2020-46

I.R.B. 1016 as applicable;

(B) the taxpayer is making one or more

changes described in section 16.12(2)(a)

(iii)(A), (B), (F), and/or (G) of this revenue procedure, and the § 481(a) adjustment required by each of the changes is

zero. A taxpayer that meets this requirement is permitted to make the changes described in section 16.12(2)(a)(iii)(A), (B),

(F), and/or (G) of this revenue procedure

under the streamlined method change procedures. Notwithstanding any provisions

of this section 16.12, a taxpayer making

more than one change in method of accounting under section 16.12(2)(a)(iii)

(A), (B), (F), and/or (G) of this revenue

procedure for the same year of change is

not permitted to net the § 481(a) adjustments to determine if the taxpayer meets

the requirements to use the streamlined

Bulletin No. 2021–35

method change procedures. See section

16.12(7)(a) of this revenue procedure for

more information on making concurrent

changes; or

(C) the taxpayer is making one or more

changes described in section 16.12(2)(a)

(iv)(A), (B), (C), (G), and/or (H), or section 16.12(2)(b)(ii)(A), (B), and/or (F) of

this revenue procedure, and the § 481(a)

adjustment required by each of the changes is zero. A taxpayer that meets this requirement is permitted to make the changes described in section 16.12(2)(a)(iv)

(A), (B), (C), (G), and/or (H), or section

16.12(2)(b)(ii)(A), (B), and/or (F) of this

revenue procedure under the streamlined

method change procedures. Notwithstanding any provisions of this section 16.12,

a taxpayer making more than one change

in method of accounting under section

16.12(2) for the same year of change is not

permitted to net the § 481(a) adjustments

to determine if the taxpayer meets the requirements to use the streamlined method

change procedures. See section 16.12(7)

(a) of this revenue procedure for more information on making concurrent changes.

(ii) No Form 3115 required. In accordance with § 1.446-1(e)(3)(ii), the

requirement of § 1.446-1(e)(3)(i) to file

a Form 3115 is waived for a taxpayer

making a change in method of accounting

under this section 16.12 using the streamlined method change procedures. Thus,

a taxpayer using the streamlined method

change procedures is not required to file a

Form 3115 and is not required to attach a

separate statement when making a change

under this section 16.12.

(d) Certain cost offset changes made

on an amended return.

(i) In general. Notwithstanding section

6.03(1)(a) of Rev. Proc. 2015-13, a taxpayer making a change described in section 16.12(2)(a)(iii)(E), section 16.12(2)

(a)(iv)(F), or section 16.12(2)(b)(ii)(E)

of this revenue procedure, as applicable,

which corresponds to a cost-offset related

inventory method change filed under the

non-automatic method change procedures

of Rev. Proc. 2015-13 for the same year

of change may make the corresponding

cost offset change described in section

16.12(2)(a)(iii)(E), section 16.12(2)(a)

(iv)(F), or section 16.12(2)(b)(ii)(E) on

an amended Federal income tax return for

the cost offset year of change (as defined

349

in section 16.12(4)(d)(ii) of this revenue

procedure) provided:

(A) the taxpayer received consent for

the cost-offset related inventory method change filed under the non-automatic

method change procedures for the year

of change after the time the taxpayer was

required to file the original Form 3115

for the corresponding cost offset change

under section 16.12(2)(a)(iii)(E), section

16.12(2)(a)(iv)(F), or section 16.12(2)(b)

(ii)(E) of this revenue procedure, as applicable, in accordance with section 6.03(1)

(a)(i)(A) of Rev. Proc. 2015-13 for the

cost offset year of change;

(B) the taxpayer timely signs and returns the Consent Agreement for the

non-automatic corresponding cost-offset

related inventory method change in accordance with section 11.03(2)(c)(i) of Rev.

Proc. 2015-13, and timely implements

such non-automatic change in accordance

with section 11.03(2)(c)(ii)(A) or (B) of

Rev. Proc. 2015-13;

(C) the taxpayer implements the corresponding cost offset method change

described in section 16.12(2)(a)(iii)(E),

section 16.12(2)(a)(iv)(F), or section

16.12(2)(b)(ii)(E) of this revenue procedure, as applicable, on the same amended

Federal income tax return that the taxpayer implements the cost-offset related

inventory method change described in

section 16.12(4)(d)(i)(A) of this revenue

procedure; and

(D) the taxpayer’s amended Federal income tax return for the year of change includes any adjustments to taxable income

or tax liability resulting from the change(s)

in method of accounting for the cost-offset

related inventory method change(s) specified in the letter ruling and the corresponding cost offset method change(s).

(ii) Cost offset year of change. For purposes of this section 16.12(4)(d), a taxpayer’s cost offset year of change is the same

year of change that the taxpayer received

consent under the non-automatic change

procedures for the cost-offset inventory

related change.

(iii) Filing requirements. Notwithstanding section 6.03(1)(a) of Rev. Proc.

2015-13, a taxpayer making a change

under section 16.12(2)(a)(iii)(E), section

16.12(2)(a)(iv)(F), or section 16.12(2)(b)

(ii)(E) of this revenue procedure in accordance with section 16.12(4)(d) of this rev-

August 30, 2021

enue procedure must attach the original

Form 3115 to the taxpayer’s timely filed

amended Federal income tax return for the

cost offset year of change and must file the

required copy (with signature) of the Form

3115 with the IRS in Ogden, UT, no later

than the date the taxpayer timely files the

amended Federal income tax return that

implements the cost-offset related inventory method described in section 16.12(4)

(d)(i)(A) of this revenue procedure, as

provided in section 11.03(2)(c)(ii)(A) or

(B) of Rev. Proc. 2015-13.

(5) Eligibility rule inapplicable.

(a) Eligibility rule temporarily inapplicable for changes under sections 16.12(2)

(a)(i), (2)(a)(ii), or (2)(b)(i) of this revenue

procedure. Except as otherwise provided in section 16.12(5)(c) of this revenue

procedure, the eligibility rule in section

5.01(1)(f) of Rev. Proc. 2015-13 does not

apply to a change under section 16.12(2)

(a)(i), (a)(ii) or (2)(b)(i) of this revenue

procedure for a taxpayer’s first, second or

third taxable year beginning after December 31, 2017, provided the taxable year

begins before January 1, 2021.

(b) Eligibility rule temporarily inapplicable for changes under sections 16.12(2)

(a)(iii), (2)(a)(iv), or (2)(b)(ii) of this revenue procedure. Except as otherwise provided in section 16.12(5)(c) of this revenue procedure, for a taxpayer that applies

§ 1.451-3 and/or § 1.451-8, as applicable,

for a taxable year beginning before January 1, 2021, the eligibility rule in section

5.01(1)(f) of Rev. Proc. 2015-13 does not

apply to a change under section 16.12(2)

(a)(iii), (2)(a)(iv), or (2)(b)(ii) of this

revenue procedure for a taxpayer’s early application year, as defined in section

16.12(4)(c)(i) of this revenue procedure.

Except as otherwise provided in this section 16.12(5), for a taxpayer that does not

apply § 1.451-3 and/or § 1.451-8 for a

taxable year beginning before January 1,

2021, the eligibility rule in section 5.01(1)

(f) of Rev. Proc. 2015-13 does not apply

to a change under section 16.12(2)(a)(iii),

(2)(a)(iv), or (2)(b)(ii) of this revenue procedure for a taxpayer’s first taxable year

beginning on or after January 1, 2021.

(c) Changes related to specified credit card fees. The eligibility rule in section

5.01(1)(f) of Rev. Proc. 2015-13 does not

apply to a specified credit card fee change

made under section 16.12(2)(a)(i) of this

revenue procedure for a taxpayer’s first

August 30, 2021

or second taxable year beginning after

December 31, 2018, provided the taxable

year begins before January 1, 2021. In addition, for a taxpayer that applies § 1.4513 and § 1.1275-2(l) for specified credit

card fees for a taxable year beginning before January 1, 2021, the eligibility rule

in section 5.01(1)(f) of Rev. Proc. 201513 does not apply to a specified credit

card fee change under section 16.12(2)

(a)(iii) of this revenue procedure for the

taxpayer’s early application year, as defined in section 16.12(4)(c)(i) of this revenue procedure. For a taxpayer that does

not apply § 1.451-3 and § 1.1275-2(l) for

specified credit card fees for a taxable year

beginning before January 1, 2021, the eligibility rule in section 5.01(1)(f) of Rev.

Proc. 2015-13 does not apply to a specified credit card fee change under section

16.12(2)(a)(iii) of this revenue procedure

for the taxpayer’s first taxable year beginning on or after January 1, 2021.

(d) Certain cost offset method changes. The eligibility rule in section 5.01(1)

(f) of Rev. Proc. 2015-13 does not apply

to a change under section 16.12(2)(a)(iii)

(E), section 16.12(2)(a)(iv)(F) or section

16.12(2)(b)(ii)(E) of this revenue procedure.

(6) Audit protection.

(a) Streamlined procedures. A taxpayer

making a change in method of accounting

under this section 16.12 using the streamlined method change procedures provided

in section 16.12(4)(c) of this revenue procedure does not receive audit protection

under section 8.01 of Rev. Proc. 2015-13.

(b) Taxpayers under examination.

(i) In general – certain audit protection

exception temporarily inapplicable. Except

as otherwise provided in section 16.12(6)

(b)(ii) and (iii) of this revenue procedure,

for a taxpayer’s first, second or third taxable year beginning after December 31,

2017, and before January 1, 2021, section

8.02(1) of Rev. Proc. 2015-13 does not apply to a change in method of accounting

made under section 16.12(2)(a)(i), (2)(a)

(ii) or (2)(b)(i) of this revenue procedure.

In addition, except as otherwise provided in

section 16.12(6)(b)(ii) and (iii) of this revenue procedure, for a taxpayer that applies

§ 1.451-3 and/or § 1.451-8, as applicable,

for a taxable year beginning before January

1, 2021, section 8.02(1) of Rev. Proc. 201513, does not apply to a change in method of

accounting made under section 16.12(2)(a)

(iii), (2)(a)(iv) or (2)(b)(ii) of this revenue

350

procedure for a taxpayer’s early application

year, as defined in section 16.12(4)(c)(i) of

this revenue procedure. Except as otherwise

provided in section 16.12(6)(b)(ii) and (iii)

of this revenue procedure, for a taxpayer

that does not apply § 1.451-3 or § 1.451-8

for a taxable year beginning before January

1, 2021, section 8.02(1) of Rev. Proc. 201513 does not apply to a change in method of

accounting made under section 16.12(2)(a)

(iii), (2)(a)(iv), or (2)(b)(ii) of this revenue

procedure for a taxpayer’s first taxable year

beginning on or after January 1, 2021. In

addition, except as otherwise provided in

section 16.12(4) of this revenue procedure,

section 8.02(1) of Rev. Proc. 2015-13 continues to apply for purposes of determining

the § 481(a) adjustment period provided in

section 7.03(3)(b) of Rev. Proc. 2015-13.

(ii) Changes related to specified credit

card fees. Except as otherwise provided

in section 16.12(6)(b)(iii) of this revenue

procedure, for a taxpayer’s first or second

taxable year beginning after December 31,

2018, and before January 1, 2021, section

8.02(1) of Rev. Proc. 2015-13 does not apply to a change under section 16.12(2)(a)

(i) of this revenue procedure for specified

credit card fees. In addition, except as otherwise provided in section 16.12(6)(b)(iii)

of this revenue procedure, for a taxpayer

that applies § 1.451-3 and § 1.1275-2(l) to

specified credit card fees for a taxable year

beginning before January 1, 2021, section

8.02(1) of Rev. Proc. 2015-13 does not apply to a change for specified credit card

fees under section 16.12(2)(a)(iii) of this

revenue procedure for the taxpayer’s early application year, as defined in section

16.12(4)(c)(i) of this revenue procedure.

Except as otherwise provided in section

16.12(6)(b)(iii) of this revenue procedure,

for a taxpayer that does not apply § 1.4513 and § 1.1275-2(l) to specified credit card

fees for a taxable year beginning before

January 1, 2021, section 8.02(1) of Rev.

Proc. 2015-13 does not apply to a change

for specified credit card fees under section

16.12(2)(a)(iii) of this revenue procedure

for the taxpayer’s first taxable year beginning on or after January 1, 2021. In

addition, except as otherwise provided

in section 16.12(4)(b)(i) of this revenue

procedure, section 8.02(1) of Rev. Proc.

2015-13 continues to apply for purposes

of determining the § 481(a) adjustment

period provided in section 7.03(3)(b) of

Rev. Proc. 2015-13.

Bulletin No. 2021–35

(iii) Exception. Sections 16.12(6)(b)(i)

and (ii) of this revenue procedure do not

apply to a taxpayer that uses the streamlined method change procedures under section 16.12(4)(c) of this revenue procedure.

(iv) No audit protection for certain

cost offset changes. For a taxpayer under

examination that makes a change in method of accounting under section 16.12(2)

(a)(iii)(E), section 16.12(a)(iv)(F), or

section 16.12(2)(b)(ii)(E) of this revenue

procedure, the taxpayer does not receive

audit protection under section 8.01 of

Rev. Proc. 2015-13 for such change if, at

the time of filing, the taxpayer’s method

of accounting for the item being changed

by the corresponding cost-offset related

inventory method change, as defined in

section 5.06 of Rev. Proc. 2015-13 (or

successor), is an issue under consideration for the taxable year under examination. However, if the taxpayer ultimately

receives audit protection for the corresponding cost-offset related inventory

method change under section 8.02(1)(f)

of Rev. Proc. 2015-13, then the preceding

sentence does not apply and the normal

audit protection rules in section 8 of Rev.

Proc. 2015-13 apply.

(7) Concurrent automatic changes.

(a) Changes under this section 16.12.

A taxpayer that wants to make one or

more concurrent changes in method of

accounting under this section 16.12 may

file a single Form 3115 that includes all

of the changes. Except as otherwise required by section 16.12(4)(b)(iii) of this

revenue procedure, the taxpayer may not

net the § 481(a) adjustment from one

change with the § 481(a) adjustment from

another change, and must separately state

the § 481(a) adjustment for each change.

If a taxpayer makes a concurrent change

in method of accounting to allocate transaction price and/or payments under section 16.12(2)(a)(i), (iii), or (iv) or section

16.12(2)(b)(ii) of this revenue procedure,

the taxpayer is required to make the allocation change before any other change

described in section 16.12(2)(a)(i), (iii), or

(iv) or section 16.12(2)(b)(ii) of this revenue procedure, as applicable.

(b) Concurrent cost offset change

and cost-offset related inventory method

change. See section 6.03(1)(b) of Rev.

Proc. 2015-13 for a taxpayer that makes

one or more change(s) under section

16.12(2)(a)(iii)(E), (a)(iv)(F), or (b)(ii)

(E) of this revenue procedure and one or

more cost-offset related inventory method change(s), as defined in section 5.06

of Rev. Proc. 2015-13, under this revenue

procedure in the same year of change.

Additionally, such taxpayer is required

to implement the cost-offset related inventory method change(s) under this revenue procedure before it implements the

corresponding change(s) under section

16.12(2)(a)(iii)(E), (a)(iv)(F), or (b)(ii)(E)

of this revenue procedure, as applicable.

(8) Limited applicability. Notwithstanding the inapplicability rules in section 16.12(3) of this revenue procedure,

the changes described in section 16.12(2)

(a)(iii)(A) and (B) of this revenue procedure are applicable only for taxable years

beginning before January 1, 2021, and for

a taxpayer’s first, second or third taxable

year beginning after December 31, 2020.

(9) Designated automatic accounting

method change number. See the following tables for the designated automatic

method change number (DCN) for the

changes in method of accounting under

this section 16.12.

(a) Changes under proposed §§ 1.4513 and 1.451-8.

SECTION # in

REV. PROC. 2019-43

DESIGNATED CHANGE

NUMBER (DCN)

16.12(2)(a)(i)

242

16.12(2)(a)(ii)

242

16.12(2)(b)(i)

242

SECTION # in

REV. PROC. 2019-43

16.12(2)(a)(iii)(A), (B), (F), (G)

DESIGNATED CHANGE

NUMBER (DCN)

250

Description of change

Timing of Income Recognition - Taxpayer with an AFS

Changes to proposed § 1.451-3

Changes to account for advance payments under proposed

§ 1.451-8(a) or (c)

Timing of Income Recognition - Taxpayer without an AFS

Changes to account for advance payments under proposed

§ 1.451-8(a) or (d)

(b) Changes under the final regulations of §§ 1.451-3 and 1.451-8.

Description of change

Changes related to § 1.451-3 other than cost offset

Changes related to cost offset under § 1.451-3, except

16.12(2)(a)(iii)(C), (D)

concurrent cost-offset related inventory method changes

Changes related to the deferral method for advance

16.12(2)(a)(iv)(A)-(C), (G) and (H),

payments - § 1.451-8 other than cost offset

(2)(b)(ii)(A), (B) or (F)

Changes related to cost offset under § 1.451-8, except

16.12(2)(a)(iv)(D), (E),

concurrent cost-offset related inventory method changes

16.12(2)(b)(ii)(C) or (D)

Changes related to full-inclusion method under § 1.451-8(b)

16.12(2)(a)(iv)(A), (b)(ii)(A)

Changes related to cost offsets resulting from concurrent

16.12(2)(a)(iii)(E), 16.12(a)(iv)(F),

cost-offset related inventory changes

and 16.12(b)(ii)(E)

Bulletin No. 2021–35

351

251

252

253

254

255

August 30, 2021

(10) Contact information. For further

information regarding a change under this

section, contact Sharon Horn at (202) 3177003 (not a toll-free number). For further

information regarding a change under this

section for OID and specified fees (including specified credit card fees), contact

Deepan Patel at (202) 317-3423 (not a

toll-free number).

.10 Section 20 of Rev. Proc. 2019-43 is

modified to add new section 20.13 to read

as follows:

.13 Timing of incurring inventory costs.

(1) Applicability. This change applies

to an accrual method taxpayer that wants

to change its method of accounting for one

or more inventory costs to treat such costs

as incurred in accordance with § 1.4611(a)(2) and § 1.461-4(d)(4) if:

(a) under the taxpayer’s present method of accounting, the taxpayer takes one

or more inventory costs into account in a

taxable year prior to the taxable year in

which such costs are incurred under § 461

and the regulations thereunder, and recovers such costs in a taxable year prior to the

taxable year in which ownership of inventory is transferred to the customer to offset

income inclusions under § 451(b) and/or

§ 451(c);

(b) in the case of a taxpayer with an

applicable financial statement (AFS), as

defined in section 16.12(1)(b) of this revenue procedure, the taxpayer makes, for the

same year of change, a change in method

of accounting for income from the sale of

inventory under section 16.12(2)(a)(iii) of

this revenue procedure and, to the extent

the taxpayer receives advance payments

for the sale of inventory, section 16.12(2)

(a)(iv) of this revenue procedure, or in the

case of a taxpayer that does not have an

AFS, the taxpayer makes, for the same

year of change, a change in method of accounting for advance payments from the

sale of inventory under section 16.12(2)

(b)(ii) of this revenue procedure;

(c) the taxpayer makes, for the same

year of change, a change in method of accounting for such inventory costs under

section 12.01, 12.02, 22.05, 22.11, 22.18,

or 22.19 of this revenue procedure, as applicable; and

(d) the taxpayer makes the change for

its inventory costs under this section 20.13

for its early application year, as defined

in section 16.12(4)(c)(i) of this revenue

August 30, 2021

procedure, or if a taxpayer does not apply

§ 1.451-3 and/or § 1.451-8, as applicable,

for a taxable year beginning before January 1, 2021, for the taxpayer’s first taxable year beginning on or after January 1,

2021.

(2) Inapplicability. Section 20.13 of

this revenue procedure does not apply

to a taxpayer that is not on a permissible

method of accounting for its inventory as

required under § 471 and § 263A, as applicable, unless the taxpayer changes to a

permissible method of accounting under

§ 471 or § 263A, as applicable, for the

same year of change.

(3) Eligibility rule inapplicable. The

eligibility rule in section 5.01(1)(f) of Rev.

Proc. 2015-13 does not apply to a change

described in section 20.13(1) of this revenue procedure.

(4) No ruling on method used. The

consent granted under section 9 of Rev.

Proc. 2015-13 for a change made under

this section 20.13 is not a determination

by the Commissioner that the proposed

method of accounting is a permissible

method of accounting under § 1.461-1(a)

(2) and § 1.461-4(d)(4), and does not create a presumption that the proposed method of accounting is a permissible method

of accounting under a provision of the

Code. The director will ascertain whether

the proposed method is permissible and

in accordance with § 1.461-1(a)(2) and

§ 1.461-4(d)(4).

(5) Concurrent automatic change.

A taxpayer that is making a change described in section 20.13(1) of this revenue procedure and one or more changes

described in sections 12.01, 12.02, 22.05,

22.11, 22.18, or 22.19 of this revenue procedure for the same year of change must

timely file a single Form 3115 for all such

changes and must enter the designated automatic accounting change numbers for

all such changes on the appropriate line

of Form 3115. If the taxpayer is making

a change described in section 20.13(1) of

this revenue procedure for one or more inventory costs, and a change described in

section 12.01, 12.02, 22.05, 22.11, 22.18,

or 22.19 of this revenue procedure for the

same year of change, the taxpayer may

provide a single net § 481(a) adjustment

for all such changes. See section 6.03(1)

(b) of Rev. Proc. 2015-13 for information

on making concurrent changes.

352

(6) Designated automatic accounting

method change number. The designated

automatic method change number (DCN)

for a change to the method of accounting

under this section 20.13 is “256.”

(7) Contact information. For further

information regarding a change under this

section, contact Douglas Kim at (202)

317-7003 (not a toll-free number).

.11 Modification to section 22.05 of

Rev. Proc. 2019-43, relating to Impermissible methods of identification and valuation of inventories. Section 22.05(1) of

Rev. Proc. 2019-43 is modified to add a

new subparagraph (d) to read as follows:

(d) Eligibility rule temporarily inapplicable for certain changes related to cost

offset method. The eligibility rule in section 5.01(1)(f) of Rev. Proc. 2015-13 does

not apply to a method change under this

section 22.05 if:

(i) the taxpayer made or requested to

make a change during any of the five taxable years ending with the year of change

to recover inventory costs in a taxable

year prior to the taxable year in which

ownership of the inventory is transferred

to the customer to offset inclusions under

§ 451(b) and/or 451(c), as applicable;

(ii) in the case of a taxpayer with an

applicable financial statement (AFS), as

defined in section 16.12(1)(b) of this revenue procedure, the taxpayer makes, for the

same year of change, a change in method

of accounting for income from the sale of

inventory under section 16.12(2)(a)(iii) of

this revenue procedure and, to the extent

the taxpayer receives advance payments

for the sale of inventory, section 16.12(2)

(a)(iv) of this revenue procedure, or in the

case of a taxpayer that does not have an

AFS, the taxpayer concurrently changes its method of accounting for advance

payments from the sale of inventory under

section 16.12(2)(b)(ii) of this revenue procedure; and

(iii) the taxpayer makes the change under this section 22.05 for its early application year, as defined in section 16.12(4)

(c)(i) of this revenue procedure, or if a

taxpayer does not apply § 1.451-3 and/or

§ 1.451-8, as applicable, for a taxable year

beginning before January 1, 2021, for the

taxpayer’s first taxable year beginning on

or after January 1, 2021.

.12 Modification to section 22.11 of

Rev. Proc. 2019-43, relating to Permis-

Bulletin No. 2021–35

sible methods of identification and valuation of inventories. Section 22.11(1) of

Rev. Proc. 2019-43 is modified to add

new subparagraphs (d) and (e) to read as

follows:

(d) Eligibility rule temporarily inapplicable. The eligibility rule in section

5.01(1)(f) of Rev. Proc. 2015-13 does not

apply to a method change under this section 22.11 if:

(i) the taxpayer made or requested to

make a change during any of the five taxable years ending with the year of change

to recover inventory costs in a taxable

year prior to the taxable year in which

ownership of the inventory is transferred

to the customer to offset inclusions under

§ 451(b) and/or 451(c), as applicable;

(ii) in the case of a taxpayer with an

applicable financial statement (AFS), as

defined in section 16.12(1)(b) of this revenue procedure, the taxpayer makes, for the

same year of change, a change in method

of accounting for income from the sale of

inventory under section 16.12(2)(a)(iii) of

this revenue procedure and, to the extent

the taxpayer receives advance payments

for the sale of inventory, section 16.12(2)

(a)(iv) of this revenue procedure, or in the

case of a taxpayer that does not have an

AFS, the taxpayer concurrently changes its method of accounting for advance

payments from the sale of inventory under

section 16.12(2)(b)(ii) of this revenue procedure; and

(iii) the taxpayer makes the change under this section 22.11 for its early application year, as defined in section 16.12(4)

(c)(i) of this revenue procedure, or if a

taxpayer does not apply § 1.451-3 and/or

§ 1.451-8, as applicable, for a taxable year

beginning before January 1, 2021, for the

taxpayer’s first taxable year beginning on

or after January 1, 2021.

(e) Permissible method determination. The eligibility waiver under section

22.11(1)(d) of this revenue procedure is

not a determination by the Commissioner

that the taxpayer’s present method of accounting described in section 22.11(1)(d)

(i) of this revenue procedure is a permissible method of accounting. The method of

accounting described in section 22.11(1)

(d)(i) of this revenue procedure is not a

permissible method of accounting for

any taxable year in which §§ 1.451-3 and

1.451-8 are applicable.

Bulletin No. 2021–35

.13 Modification to section 22.18 of

Rev. Proc. 2019-43, relating to Change

from currently deducting inventories to

permissible methods of identification and

valuation of inventories. Section 22.18(1)

of Rev. Proc. 2019-43 is modified to add a

new subparagraph (d) to read as follows:

(d) Eligibility rule temporarily inapplicable. The eligibility rule in section

5.01(1)(f) of Rev. Proc. 2015-13 does not

apply to a method change under this section 22.18 if:

(i) the taxpayer made or requested to

make a change during any of the five taxable years ending with the year of change

to recover inventory costs in a taxable

year prior to the taxable year in which

ownership of the inventory is transferred

to the customer to offset inclusions under

§ 451(b) and/or 451(c), as applicable;

(ii) in the case of a taxpayer with an

applicable financial statement (AFS), as

defined in section 16.12(1)(b) of this revenue procedure, the taxpayer makes, for the

same year of change, a change in method

of accounting for income from the sale of

inventory under section 16.12(2)(a)(iii) of

this revenue procedure and, to the extent

the taxpayer receives advance payments

for the sale of inventory, section 16.12(2)

(a)(iv) of this revenue procedure, or in the

case of a taxpayer that does not have an

AFS, the taxpayer concurrently changes its method of accounting for advance

payments from the sale of inventory under

section 16.12(2)(b)(ii) of this revenue procedure; and

(iii) the taxpayer makes the change under this section 22.18 for its early application year, as defined in section 16.12(4)

(c)(i) of this revenue procedure, or if a

taxpayer does not apply § 1.451-3 and/or

§ 1.451-8, as applicable, for a taxable year

beginning before January 1, 2021, for the

taxpayer’s first taxable year beginning on

or after January 1, 2021.

.14 Modification to section 30.02 of

Rev. Proc. 2019-43. Section 30.02 of Rev.

Proc. 2019-43 is modified to read as follows:

(1) Description of change. This change

applies to a taxpayer that wants to change

to the proportional method of accounting for OID on a pool of credit card receivables described in Rev. Proc. 201326, 2013-22 I.R.B. 1160, as modified by

Rev. Proc. 2021-35, 2021-35 I.R.B. 355,

353

to reflect changes made to the treatment

of certain credit card fees by § 451(b), as

amended by the TCJA, and §§ 1.451-3

and 1.1275-2(l). The proportional method

of accounting applies to OID and certain

amounts that would not otherwise be treated as OID (for example, market discount

or bond premium). Under § 1.1275-2(l),

OID does not include items that are subject to the timing rules in § 1.451-3, such

as credit card late fees, credit card cash advance fees, and interchange fees (specified

credit card fees). Therefore, items subject

to the timing rules in § 1.451-3, such as

specified credit card fees, are excluded

from the proportional method. See section

16.12 of this revenue procedure for the

procedures by which a taxpayer, including

a taxpayer using the proportional method

of accounting, can change its method of

accounting for specified credit card fees to

comply with § 451(b), as amended by the

TCJA, and §§1.451-3 and 1.1275-2(l).

(2) Manner of making change.

(a) This change is made on a cut-off basis. Accordingly, a § 481(a) adjustment is

neither required nor permitted.

(b) The unaccrued OID for the pool as

of the beginning of the first period in the

year of change is equal to the unaccrued

OID for the pool as of the end of the preceding taxable year under the taxpayer’s

previous method of accounting for OID

on the pool, reduced by any amounts representing charges or fees that are not properly treated as OID (for example, specified

credit card fees).

(3) Designated automatic accounting

method change number. The designated automatic accounting method change

number for a change under this section

30.02 is “183.”

(4) Contact information. For further

information regarding this section, please

contact Deepan Patel at (202) 317-3423

(not a toll-free number).

SECTION 4. MODIFICATIONS TO

REV. PROC. 2015-13

.01 Modifications to section 5.01(1)

of Rev. Proc. 2015-13, relating to the eligibility of automatic changes. Section

5.01(1)(e) of Rev. Proc. 2015-13 is modified by deleting the word “and” at the end

of the sentence, section 5.01(1)(f) of Rev.

Proc. 2015-13 is modified by deleting the

August 30, 2021

period at the end of the sentence and adding “; and”, and section 5.01 of Rev. Proc.

2015-13 is modified by adding a new subparagraph (g) to read as follows:

(g) in the case of a taxpayer that uses

the AFS cost offset method in § 1.4513(c) and/or the advance payment cost offset method in § 1.451-8(e) and wants to

make a cost-offset related inventory method change, as defined in SECTION 5.06,

that is described in the List of Automatic

Changes, the taxpayer makes a concurrent

change under section 16.12(2)(a)(iii)(E)

and/or section 16.12(2)(a)(iv)(F) or section 16.12(2)(b)(ii)(E) of Rev. Proc. 201943, 2019-48 I.R.B. 1107, (or successor),

as applicable.

.02 Modification to section 5 of Rev.

Proc. 2015-13, relating to the eligibility

rules. Section 5 of Rev. Proc. 2015-13 is

modified by adding a new paragraph .06

to read as follows:

.06 Definition of “Cost-offset related

inventory method change.” A “cost-offset

related inventory method change” is any

change in method of accounting for inventory or any change in method of accounting for a liability, as defined in § 1.4461(c)(1)(ii)(B), that affects or could affect

the taxpayer’s cost of goods in progress

offset under § 1.451-3(c) and/or § 1.4518(e). For example, a cost-offset related inventory method change includes:

(1) a change in method of accounting

for one or more costs that the taxpayer

currently references to determine its cost

of goods in progress offset under its present AFS cost offset method and/or its present advance payment cost offset method,

including costs the taxpayer has impermissibly capitalized and/or allocated under its present method of accounting for

inventory;

(2) a change in method of accounting

for one or more costs that the taxpayer

is required by § 1.451-3(c)(5)(ii) and/or

§ 1.451-8(e)(8)(ii) to reference to determine its cost of goods in progress offset

under § 1.451-3(c) and/or § 1.451-8(e),

regardless of whether the taxpayer currently references such cost under its present AFS cost offset method and/or its present advance payment cost offset method;

(3) a change in method of identifying

inventories; or

(4) a change in method of valuing inventories.

August 30, 2021

.03 Modification to section 6.03(1)(b)

of Rev. Proc. 2015-13, relating to certain

concurrent changes in method of accounting for an automatic change. Section

6.03(1)(b) of Rev. Proc. 2015-13 is modified by moving the existing text within

subparagraph (b) to a new division (i) with

the heading “In general.”, and adding a

new division (ii) to read as follows:

(ii) Concurrent cost offset change

and cost-offset related inventory method change. A taxpayer that makes one or

more changes under section 16.12(2)(a)

(iii)(E), (a)(iv)(F), or (b)(ii)(E) of Rev.

Proc. 2019-43, 2019-48 I.R.B. 1107, (or

successor) to comply with § 1.451-3(c)

(5)(ii) and/or § 1.451-8(e)(8)(ii) of TD

9941, 86 FR 810, corrected by 86 FR

126 and 86 FR 2974, as applicable, and

one or more cost-offset related inventory method changes, as defined in SECTION 5.06, that are described in the List

of Automatic Changes for the same year

of change should file a single Form 3115

for such changes and put the designated

automatic accounting change numbers

for such changes on the appropriate line

of that Form 3115. As provided in section 16.12(7)(b) of Rev. Proc. 2019-43,

a taxpayer is required to implement the

cost-offset related inventory method

change(s), as defined in SECTION 5.06,

before it implements the change(s) under

section 16.12(2)(a)(iii)(E), (a)(iv)(F), or

(b)(ii)(E) of Rev. Proc. 2019-43, as applicable.

SECTION 5. EFFECTIVE DATE

.01 In general. Except as provided in

section 5.02 of this revenue procedure,

this revenue procedure is effective for a

Form 3115 filed on or after August 12,

2021.

.02 Return of Form 3115 filed under the

non-automatic change procedures.

(1) The National Office will return any

Form 3115 requesting a change in method of accounting that was filed with the

National Office on or before August 12,

2021, under the non-automatic procedures

of Rev. Proc. 2015-13 for a taxable year

beginning after December 31, 2017, that

is pending with the National Office on August 12, 2021, and that is eligible for the

automatic change procedures as described

in section 3 of this revenue procedure. The

354

National Office will send a letter to notify the taxpayer of the return of the Form

3115 and will return the user fee submitted with the Form 3115.

(2) A taxpayer that resubmits the Form

3115 under the automatic change procedures for a change in method of accounting described in this revenue procedure

must resubmit the Form 3115 that conforms to the automatic change procedures

to the IRS in Ogden, UT, by the earlier of

(a) the 60th calendar day after the date of

the National Office’s letter acknowledging

the return of the Form 3115, or (b) the date

the taxpayer is required to file the duplicate copy of the Form 3115 under section

6.03(1)(a)(i)(B) of Rev. Proc. 2015-13.

See section 6.03(3) of Rev. Proc. 201513 regarding additional required copies of

Form 3115.

(3) For the rules of Rev. Proc. 2015-13,

the timely resubmitted Form 3115 will be

considered filed as of the date the taxpayer

originally filed the Form 3115 under the

non-automatic change procedures in Rev.

Proc. 2015-13. This section 5.02 does not

extend the date the taxpayer must file the

original (returned) Form 3115 under section 6.03(1)(a)(i)(A) of Rev. Proc. 201513.

.03 Forms 3115 for changes in methods of accounting that can no longer be

filed under the automatic change procedures of Rev. Proc. 2015-13, as a result

of modifications made by sections 3 and

4 of this revenue procedure. If before August 12, 2021, a taxpayer properly filed

the duplicate copy of a Form 3115 under

the automatic change procedures in Rev.

Proc. 2015-13 before modification by

this revenue procedure, for a change in

method of accounting that can no longer

be filed under the automatic change procedures of Rev. Proc. 2015-13 as a result

of modifications made by this revenue

procedure, the taxpayer may make that

change in method of accounting under

the automatic change procedures in Rev.

Proc. 2015-13 before modification by

this revenue procedure.

SECTION 6. EFFECT ON OTHER

DOCUMENTS

.01 This revenue procedure modifies

and amplifies Rev. Proc. 2019-43.

.02 Rev. Proc. 2015-13 is modified.

Bulletin No. 2021–35

SECTION 7. PAPERWORK

REDUCTION ACT

2(l) of the Income Tax Regulations (T.D.

9941, 86 FR 810 (January 6, 2021)).

The collection of information contained in this revenue procedure has been

submitted to the Office of Management

and Budget for review under OMB control

number 1545-0123 in accordance with

the Paperwork Reduction Act (44 U.S.C.

3507(d)). 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

collection of information in this revenue

procedure is in sections 3.03(1) and 3.07.

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.

SECTION 2. BACKGROUND

SECTION 8. DRAFTING

INFORMATION

The principal author of this revenue

procedure is Jo Lynn L. Ricks of the Office of the Associate Chief Counsel (Income Tax & Accounting). For further

information regarding this revenue procedure, contact Douglas Kim at (202) 3177003 (not a toll free number).

26 CFR 601.601: Rules and regulations.

(Also Part I, Section 1272(a)(6).)

Rev. Proc. 2021-35

SECTION 1. PURPOSE

Rev. Proc. 2013-26, 2013-22 I.R.B.

1160, allows a taxpayer to use a safe harbor method of accounting for original issue discount (OID) on a pool of credit card

receivables for purposes of § 1272(a)(6)

of the Internal Revenue Code (Code)—

the “proportional method.” This revenue

procedure modifies Rev. Proc. 2013-26

to reflect changes made to the treatment

of certain credit card fees by § 451(b) of

the Code, as amended by section 13221 of

Public Law 115–97 (131 Stat. 2054), commonly referred to as the Tax Cuts and Jobs

Act (TCJA), and §§ 1.451-3 and 1.1275-

Bulletin No. 2021–35

.01 The Department of Treasury (Treasury Department) and the Internal Revenue Service (IRS) allowed the use of the

proportional method in Rev. Proc. 201326 to reduce administrative burdens and

controversy for taxpayers and the IRS

in computing OID accruals on a pool of

credit card receivables under § 1272(a)

(6). The proportional method generally

produces the same results as the statutory

method of calculating OID accruals under

§ 1272(a)(6). The proportional method

generally allocates to an accrual period an

amount of unaccrued OID for the pool that

is proportional to the amount of the stated

redemption price at maturity (SRPM) of

the pool that is paid by cardholders during

the accrual period.

.02 Prior to the enactment of the TCJA,

the Treasury Department and the IRS accepted the treatment of certain credit card

fees associated with pools of credit card

receivables as creating or increasing OID

on those pools. See Rev. Proc. 2004-33,

2004-1 C.B. 989 (the IRS will not challenge the treatment of late fees as creating

or increasing OID); Rev. Proc. 2005-47,

2005-2 C.B. 269 (the IRS will not challenge the treatment of cash advance fees

as creating or increasing OID); and Chief

Counsel Notice CC-2010-018, Sept. 27,

2010 (as a result of the Tax Court’s decision in Capital One Financial Corp.

and Subsidiaries v. Commissioner, 133

T.C. 136 (2009), the IRS will no longer

challenge or litigate the issue of whether interchange fee income creates or increases OID). Accordingly, for purposes

of Rev. Proc. 2013-26, a taxpayer could

have treated as OID amounts attributable

to certain credit card fees associated with

pools of credit card receivables, including

credit card late fees, credit card cash advance fees, and interchange fees. In certain circumstances, for purposes of Rev.

Proc. 2013-26, a taxpayer may treat as

OID certain amounts that would not otherwise be treated as OID (for example,

market discount or bond premium). See

section 4.02 of Rev. Proc. 2013-26.

.03 On December 22, 2017, § 451(b)

was amended by the TCJA to provide that,

355

for an accrual method taxpayer, the all

events test for an item of gross income, or

portion thereof, is met no later than when

the item, or portion thereof, is included as revenue in an applicable financial

statement (AFS) (AFS Income Inclusion

Rule). With the amendment of § 451(b),

Congress overturned the historical Federal income tax treatment of credit card late

fees, credit card cash advance fees, and

interchange fees by subjecting these fees

to the AFS Income Inclusion Rule instead

of the timing rules for OID. In particular,

the legislative history for the amendment

describes credit card late fees, credit card

cash advance fees, and interchange fees as

examples of amounts to which § 451(b),

as amended by the TCJA, would apply.

H.R. Rep. No. 115-466, at 429 (2017)

(Conf. Rep.).

.04 Section 451(b), as amended by

the TCJA, generally applies to taxable

years beginning after December 31, 2017.

However, in the case of income from a

debt instrument having OID, § 451(b),

as amended by the TCJA, applies to taxable years beginning after December 31,

2018. In addition, if a taxpayer makes a

qualified change in method of accounting

as defined in section 13221(d)(2) of the

TCJA for income from a debt instrument

having OID to comply with § 451(b), as

amended by the TCJA, for the taxpayer’s

first taxable year beginning after December 31, 2018, the § 481(a) adjustment period for the change is six taxable years. See

section 13221(e) of the TCJA.

.05 On January 6, 2021, the Treasury

Department and the IRS published in the

Federal Register (86 FR 810) final regulations under §§ 451(b) and 1275(d).

See §§ 1.451-3 and 1.1275-2(l) (final

regulations). In general, under the AFS

Income Inclusion Rule in § 1.451-3,

an item of income, or portion thereof,

may not be included in income later

than when that item, or portion thereof,

is treated as taken into account as AFS

revenue, as determined under § 1.4513(b)(2). The AFS Income Inclusion

Rule, however, does not apply to any

item of gross income the recognition

of which is determined using a special

method of accounting as defined in §

1.451-3(b)(13), which includes, except

as otherwise provided in § 1.451-3(j),

the timing rules for OID. Section 1.451-

August 30, 2021

3(j) provides that if a fee is not spread

over a period of time as discount or as

an adjustment to the yield of a debt instrument (such as points) in the taxpayer’s AFS, and, but for §§ 1.451-3(j) and

1.1275-2(l), would be treated as creating or increasing OID for Federal income tax purposes (specified fee), then

the rules in § 1.451-3 apply before the

rules in §§ 1271 through 1275 and the

regulations thereunder (the OID rules).

Section 1.451-3(j)(2) provides three examples of specified fees: credit card late

fees, credit card cash advance fees, and

interchange fees (specified credit card

fees). To coordinate the OID rules with

§ 451(b), as amended by the TCJA, and

§ 1.451-3, § 1.1275-2(l) provides that if,

and to the extent, a taxpayer’s item of

income with respect to a debt instrument

is subject to the timing rules in § 1.4513 because the item of income is a specified fee (including specified credit card

fees), then the taxpayer does not take the

item into account in determining whether the debt instrument has any OID. As

a result, the taxpayer does not treat the

item as creating or increasing any OID

on the debt instrument. The final regulations do not affect the application of

the OID rules to any item that is not a

specified fee.

.06 Sections 1.451-3 and 1.1275-2(l)

generally apply to taxable years beginning

on or after January 1, 2021. However, in

the case of a specified fee other than a

specified credit card fee, those sections

apply to taxable years beginning on or

after January 6, 2022. For a taxable year

beginning after December 31, 2018, and

before January 1, 2021, a taxpayer and its

related parties, within the meaning of §§

267(b) and 707(b), may choose to apply

both §§ 1.451-3 and 1.1275-2(l), in their

entirety and in a consistent manner, to

all specified credit card fees subject to §

1.451-3, provided that, once applied to a

taxable year, the rules in § 1.1275-2(l) and

the rules in § 1.451-3 that apply to specified credit card fees, are applied in their

entirety and in a consistent manner for all

subsequent taxable years.

.07 Based on § 451(b) and the final

regulations, Rev. Proc. 2004-33, Rev.

Proc. 2005-47, and Chief Counsel Notice

CC-2010-018 no longer provide current

August 30, 2021

guidance on the treatment of the specified

credit card fees. Accordingly, the Treasury

Department and the IRS obsoleted these

items as of January 1, 2021. See 86 FR

810, 824 (January 6, 2021).

.08 Because, under § 1.1275-2(l), OID

no longer includes an item of income (or

portion thereof) that is subject to the timing rules of § 1.451-3 because the item (or

portion thereof) is a specified fee, such

as a specified credit card fee, Rev. Proc.

2013-26 is modified to avoid confusion as

to whether such items (or portions thereof) are fees that are properly treated as

OID. Under Rev. Proc. 2013-26, as modified by this revenue procedure, a taxpayer

that wants to use the proportional method

for calculating OID accruals on a pool of

credit card receivables under § 1272(a)

(6) may treat as OID only fees or charges

that are not subject to the timing rules of

§ 1.451-3 (for example, promotional discount) and certain amounts that would not

otherwise be treated as OID (for example,

market discount or bond premium). See

section 4.02 of Rev. Proc. 2013-26.

.09 On December 17, 2018, the Treasury Department and the IRS published

Rev. Proc. 2018-60, 2018-51 I.R.B. 1045,

which added section 16.12 to the List of

Automatic Changes in Rev. Proc. 2018–

31, 2018-22 I.R.B. 637, for a taxpayer to

change its method of accounting for the

timing of income recognition for Federal income tax purposes to comply with §

451(b), as amended by section 13221 of

the TCJA, for taxable years beginning

after December 31, 2017 (or, in the case

of income from a debt instrument having OID, beginning after December 31,

2018). On September 23, 2019, the Treasury Department and the IRS published

Rev. Proc. 2019-37, 2019-39 I.R.B. 731,

which modified section 16.12 in the List

of Automatic Changes in Rev. Proc. 201831 to provide procedures for a taxpayer to

obtain the automatic consent of the Commissioner of Internal Revenue or his delegate (Commissioner) to make a method

change to comply with § 451(b) and proposed § 1.451-3, including changes with

respect to specified credit card fees. Concurrent with the release of this revenue

procedure, the Treasury Department and

the IRS are issuing Rev. Proc. 2021-34,

2021-35 I.R.B. 337, which modifies Rev.

356

Proc. 2019-43, 2019-48 I.R.B. 1107, to

provide procedures for a taxpayer to obtain the automatic consent of the Commissioner to change methods of accounting to

comply with §§ 1.451-3 and 1.1275-2(l),

including a change to exclude items of income that are subje

This text is long and has been trimmed here. Open the source document for the complete record.