# Bulletin No. 1997–33

> Briefs, arguments, decisions, and more.

URL: https://www.frixlaw.com/law-library/documents/agency%3Airs%3A5c5f5d84613f0dbf

## Record

- **Collection:** Agency decision
- **Document type:** Agency decision

## Text

Internal Revenue

bulletin

Bulletin No. 1997–33
August 18, 1997

HIGHLIGHTS
OF THIS ISSUE

These synopses are intended only as aids to the reader in
identifying the subject matter covered. They may not be
relied upon as authoritative interpretations.

INCOME TAX
Rev. Rul. 97–32, page 4.
LIFO; price indexes; department stores. The June
1997 Bureau of Labor Statistics price indexes are accepted for use by department stores employing the retail inventory and last-in, first-out inventory methods for valuing
inventories for tax years ended on, or with reference to,
June 30, 1997.

EMPLOYEE PLANS
Rev. Proc. 97–41, page 51.
Plan amendments; discretionary extension of the
remedial amendment period. This procedure provides an
extended remedial amendment period for certain qualified
plans described in sections 401(a) and 403(a) of the Code
and describes the time for making amendments to certain
tax-sheltered annuities described in section 403(b).

Notice 97–45, page 7.
Highly compensated employee; definition. This notice
sets forth the changes in determining who is a highly compensated employee within the meaning of section 414(q) of
the Code as a result of section 1431 of the Small Business
Job Protection Act of 1996.

ADMINISTRATIVE
Rev. Proc. 97–35, page 11.

engaged in the trade or business of retail sales of new automobiles or new light-duty trucks.

Rev. Proc. 97–37, page 18.
Methods of accounting; automatic consent. Procedures
are provided under which a taxpayer may obtain automatic
consent of the Commissioner to change certain methods of
accounting.

Rev. Proc. 97–38, page 43.
Warranty contracts; methods of accounting. Procedures
are provided under which accrual method manufacturers,
wholesalers, and retailers of motor vehicles or other durable
consumer goods may, in certain specified and limited circumstances, include a portion of an advance payment related to
the sale of a multi-year service warranty contract in gross income generally over the life of the service warranty obligation.

Rev. Proc. 97–39, page 48.
Original issue discount; methods of accounting.
Taxpayers are allowed to use an aggregate method of
accounting, termed the “principal-reduction” method, for de
minimis original issue discount on certain loans originated by
the taxpayer.

Rev. Proc. 97–40, page 50.
Late S corporation elections. If an S corporation election is
filed late for a current taxable year, Rev. Proc. 97–40 provides a special procedure to permit taxpayers to request relief instead of applying for a private letter ruling.

Package design costs; methods of accounting. Three
alternative methods of accounting for package design costs
are provided: (1) the capitalization method; (2) the design-bydesign and 60-month amortization method; and (3) the poolof-cost and 48-month amortization method.

Rev. Proc. 97–42, page 57.

Rev. Proc. 97–36, page 14.

Announcement 97–77, page 58.

Last-in, first-out inventory method; methods of
accounting. An alternative last-in, first-out (LIFO) inventory
computation method of accounting is provided for taxpayers

This announces that the Internal Revenue Service will eliminate Form 4782, Employee Moving Expense Information,
effective for tax year 1998.

Finding Lists begin on page 60.

Department of the Treasury
Internal Revenue Service

Low-income housing tax credit. This procedure publishes
the amounts of unused housing credit carryovers allocated
to qualified states under section 42(h)(3)(D) of the Code for
calendar year 1997.

Mission of the Service
ucts and services; and perform in a manner warranting
the highest degree of public confidence in our integrity, efficiency, and fairness.

The purpose of the Internal Revenue Service is to collect
the proper amount of tax revenue at the least cost; serve
the public by continually improving the quality of our prod-

Statement of Principles
of Internal Revenue
Tax Administration
The Service also has the responsibility of applying and
administering the law in a reasonable, practical manner.
Issues should only be raised by examining officers when
they have merit, never arbitrarily or for trading purposes.
At the same time, the examining officer should never hesitate to raise a meritorious issue. It is also important that
care be exercised not to raise an issue or to ask a court to
adopt a position inconsistent with an established Service
position.

The function of the Internal Revenue Service is to administer the Internal Revenue Code. Tax policy for raising revenue
is determined by Congress.
With this in mind, it is the duty of the Service to carry out that
policy by correctly applying the laws enacted by Congress;
to determine the reasonable meaning of various Code provisions in light of the Congressional purpose in enacting them;
and to perform this work in a fair and impartial manner, with
neither a government nor a taxpayer point of view.

Administration should be both reasonable and vigorous. It
should be conducted with as little delay as possible and
with great courtesy and considerateness. It should never
try to overreach, and should be reasonable within the
bounds of law and sound administration. It should, however, be vigorous in requiring compliance with law and it
should be relentless in its attack on unreal tax devices and
fraud.

At the heart of administration is interpretation of the Code. It
is the responsibility of each person in the Service, charged
with the duty of interpreting the law, to try to find the true
meaning of the statutory provision and not to adopt a
strained construction in the belief that he or she is “protecting the revenue.” The revenue is properly protected only
when we ascertain and apply the true meaning of the statute.

2

Introduction
The Internal Revenue Bulletin is the authoritative instrument
of the Commissioner of Internal Revenue for announcing official rulings and procedures of the Internal Revenue Service
and for publishing Treasury Decisions, Executive Orders, Tax
Conventions, legislation, court decisions, and other items of
general interest. It is published weekly and may be obtained
from the Superintendent of Documents on a subscription
basis. Bulletin contents of a permanent nature are consolidated semiannually into Cumulative Bulletins, which are sold
on a single-copy basis.

dures must be considered, and Service personnel and others concerned are cautioned against reaching the same conclusions in other cases unless the facts and circumstances
are substantially the same.
The Bulletin is divided into four parts as follows:
Part I.—1986 Code.
This part includes rulings and decisions based on provisions
of the Internal Revenue Code of 1986.

It is the policy of the Service to publish in the Bulletin all substantive rulings necessary to promote a uniform application
of the tax laws, including all rulings that supersede, revoke,
modify, or amend any of those previously published in the
Bulletin. All published rulings apply retroactively unless otherwise indicated. Procedures relating solely to matters of internal management are not published; however, statements
of internal practices and procedures that affect the rights
and duties of taxpayers are published.

Part II.—Treaties and Tax Legislation.
This part is divided into two subparts as follows: Subpart A,
Tax Conventions, and Subpart B, Legislation and Related
Committee Reports.
Part III.—Administrative, Procedural, and Miscellaneous.
To the extent practicable, pertinent cross references to
these subjects are contained in the other Parts and Subparts. Also included in this part are Bank Secrecy Act Administrative Rulings. Bank Secrecy Act Administrative Rulings
are issued by the Department of the Treasury’s Office of the
Assistant Secretary (Enforcement).

Revenue rulings represent the conclusions of the Service on
the application of the law to the pivotal facts stated in the
revenue ruling. In those based on positions taken in rulings
to taxpayers or technical advice to Service field offices,
identifying details and information of a confidential nature
are deleted to prevent unwarranted invasions of privacy and
to comply with statutory requirements.

Part IV.—Items of General Interest.
With the exception of the Notice of Proposed Rulemaking
and the disbarment and suspension list included in this part,
none of these announcements are consolidated in the Cumulative Bulletins.

Rulings and procedures reported in the Bulletin do not have
the force and effect of Treasury Department Regulations,
but they may be used as precedents. Unpublished rulings
will not be relied on, used, or cited as precedents by Service
personnel in the disposition of other cases. In applying published rulings and procedures, the effect of subsequent legislation, regulations, court decisions, rulings, and proce-

The first Bulletin for each month includes a cumulative index
for the matters published during the preceding months.
These monthly indexes are cumulated on a quarterly and
semiannual basis, and are published in the first Bulletin of the
succeeding quarterly and semiannual period, respectively.

The contents of this publication are not copyrighted and may be reprinted freely. A citation of the Internal Revenue Bulletin as the source would be appropriate.
For sale by the Superintendent of Documents, U.S. Government Printing Office, Washington, DC 20402.

3

Part I. Rulings and Decisions Under the Internal Revenue Code of 1986
Section 162.—Trade or
Business Expenses
What procedures must a lawyer, handling cases
on a contingent fee basis, use to obtain automatic
consent of the Commissioner to change its method
of accounting for advances paid to clients. See Rev.
Proc. 97–37, page 18.

Section 165.—Losses
26 CFR 1.165–2: Obsolescence of nondepreciable
property.
When may a taxpayer deduct a loss arising from
the obsolescence of a package design. See Rev.
Proc. 97–35, page 11.
What procedures must a taxpayer use to obtain
automatic consent of the Commissioner to change
its method of accounting for package design costs.
See Rev. Proc. 97–37, page 18.

Section 166.—Bad Debts
What procedures must a taxpayer use to obtain
automatic consent of the Commissioner to change
from the § 585 reserve method of accounting to the
§ 166 specific charge-off method. See Rev. Proc.
97–37, page 18.

What procedures must a taxpayer use to obtain
automatic consent of the Commissioner to change
its method of accounting for package design costs.
See Rev. Proc. 97–37, page 18.

Section 263A.—Capitalization
and Inclusion in Inventory Costs
of Certain Expenses
26 CFR §1.263A–1: Uniform capitalization of costs.
What procedures must a taxpayer use to obtain
automatic consent of the Commissioner to change
its method of accounting. See Rev. Proc. 97–37,
page 18.

26 CFR 1.263A–2: Rules relating to property produced by the taxpayer.
Are the costs incurred in connection with the development and design of product packages subject
to the rules under section 263A. See Rev. Proc.
97–35, page 11.

Section 401.—Qualified
Pension, Profit-sharing, and
Stock Bonus Plans.
26 CFR 1.401(b)–1: Certain retroactive changes in
plan.

Section 167.—Depreciation
26 CFR 1.167(a)–3: Intangibles.
How may a taxpayer recover the costs of creating
a package design. See Rev. Proc. 97–35, page 11.

A procedure describes when plans that are qualified under § 401(a) or § 403(a) must be amended for
the Small Business Job Protection Act of 1996, Pub.
L. 104–188, the Uruguay Round Agreements Act,
Pub. L. 103–465, and the Uniformed Services Employment and Reemployment Rights Act of 1994,
Pub. L. 103–353. See Rev. Proc. 97–41, page 51.

26 CFR 1.167(e)–1: Change in method.
What procedures must a taxpayer use to obtain
automatic consent of the Commissioner to change
its method of accounting for depreciation. See Rev.
Proc. 97–37, page 18.

method of accounting for the income from an advance
payment related to the sale of a multi-year service
warranty contract. See Rev. Proc. 97–37, page 18.

Section 454.—Obligations
Issued at a Discount
26 CFR § 1.454–1: Obligations issued at a discount.
What procedures must a taxpayer use to obtain
automatic consent of the Commissioner to change
its method of accounting for the interest income on
Series E or EE U.S. savings bonds. See Rev. Proc.
97–37, page 18.

Section 455.—Prepaid
Subscription Income
26 CFR § 1.455–6: Time and manner of making
election.
What procedures must a taxpayer use to obtain
automatic consent of the Commissioner to change
its method of accounting for prepaid subscription income. See Rev. Proc. 97–37, page 18.

Section 461.—General Rule for
Taxable Year of Deduction
26 CFR § 1.461–4: Economic performance.
What procedures must a taxpayer use to obtain
automatic consent of the Commissioner to change
its method of accounting. See Rev. Proc. 97–37,
page 18.

Section 471.—General Rule for
Inventories

Section 403.—Taxation of
Employee Annuities

26 CFR § 1.471–1: Need for inventories;
26 CFR § 1.471–3: Inventories at cost.

Section 168.—Accelerated Cost
Recovery System

A procedure describes when tax-sheltered annuity plans within the meaning of § 403(b) must be
amended for the Small Business Job Protection Act
of 1996, Pub. L. 104–188. See Rev. Proc. 97–41,
page 51.

What procedures must a taxpayer use to obtain
automatic consent of the Commissioner to change
its method of accounting for depreciation. See Rev.
Proc. 97–37, page 18.

Section 446.—General Rule for
Methods of Accounting

Section 197.—Amortization of
Goodwill and Other Intangibles
What procedures must a taxpayer use to obtain
automatic consent of the Commissioner to change
its method of accounting for amortization. See Rev.
Proc. 97–37, page 18.

Section 263.—Capital
Expenditures
26 CFR 1.263(a)–2: Examples of capital expenditures.
Must the costs of creating a package design be
capitalized. See Rev. Proc. 97–35, page 11.

August 18, 1997

26 CFR 1.446–1: General rule for methods of accounting.
What procedures must a taxpayer use to obtain
automatic consent of the Commissioner to change
its method of accounting for package design costs.
See Rev. Proc. 97–35, page 11.

How may an automobile dealer change its
method of accounting to use the Alternative LIFO
Method. See Rev. Proc. 97–36, page 14.

Section 451.—General Rule for
Taxable Year of Inclusion
What procedures must a taxpayer use to obtain automatic consent of the Commissioner to change its

4

26 CFR § 1.471–2: Valuation of inventories;
What procedures must a taxpayer use to obtain
automatic consent of the Commissioner to change
its method of accounting for certain cash discounts.
See Rev. Proc. 97–37, page 18.

Section 472.—Last-in, First-out
Inventories
26 CFR 1.472-1: Last-in, first-out inventories.

LIFO; price indexes; department
stores. The June 1997 Bureau of Labor
Statistics price indexes are accepted for
use by department stores employing the
retail inventory and last-in, first-out inventory methods for valuing inventories
for tax years ended on, or with reference
to, June 30, 1997.

Rev. Rul. 97-32
The following Department Store Inven-

1997–33 I.R.B.

tory Price Indexes for June 1997 were issued by the Bureau of Labor Statistics on
July 16, 1997. The indexes are accepted
by the Internal Revenue Service, under
§1.472–1(k) of the Income Tax Regulations and Rev. Proc. 86–46, 1986–2 C.B.
739, for appropriate application to inventories of department stores employing the
retail inventory and last-in, first-out inventory methods for tax years ended on,
or with reference to, June 30, 1997.
The Department Store Inventory Price
Indexes are prepared on a national basis
and include (a) 23 major groups of departments, (b) three special combinations
of the major groups — soft goods,

durable goods, and miscellaneous goods,
and (c) a store total, which covers all departments, including some not listed separately, except for the following: candy,
foods, liquor, tobacco, and contract departments.
DRAFTING INFORMATION
The principal author of this revenue
ruling is Stan Michaels of the Office of
Assistant Chief Counsel (Income Tax and
Accounting). For further information regarding this revenue ruling, contact Mr.
Michaels on (202) 622-4970 (not a tollfree call).

1. Piece Goods . . . . . . . . . . . . . . . . . . . . . . 551.1
2. Domestics and Draperies . . . . . . . . . . . . 641.0
3. Women’s and Children’s Shoes . . . . . . . 649.3
4. Men’s Shoes . . . . . . . . . . . . . . . . . . . . . . 895.4
5. Infants’ Wear. . . . . . . . . . . . . . . . . . . . . . 627.1
6. Women’s Underwear. . . . . . . . . . . . . . . . 535.4
7. Women’s Hosiery . . . . . . . . . . . . . . . . . . 288.0
8. Women’s and Girls’ Accessories. . . . . . . 545.5
9. Women’s Outerwear and Girls’ Wear . . . 401.1
10. Men’s Clothing . . . . . . . . . . . . . . . . . . . . 612.2
11. Men’s Furnishings . . . . . . . . . . . . . . . . . 584.5
12. Boys’ Clothing and Furnishings . . . . . . . 485.7
13. Jewelry . . . . . . . . . . . . . . . . . . . . . . . . . 1011.5
14. Notions . . . . . . . . . . . . . . . . . . . . . . . . . . 774.1
15. Toilet Articles and Drugs . . . . . . . . . . . . 877.8
16. Furniture and Bedding . . . . . . . . . . . . . . 673.6
17. Floor Coverings . . . . . . . . . . . . . . . . . . . 576.4
18. Housewares. . . . . . . . . . . . . . . . . . . . . . . 808.7
19. Major Appliances . . . . . . . . . . . . . . . . . . 245.5
20. Radio and Television . . . . . . . . . . . . . . . . 79.3
21. Recreation and Education2 . . . . . . . . . . . 112.8
22. Home Improvements2 . . . . . . . . . . . . . 127.4
23. Auto Accessories2 . . . . . . . . . . . . . . . . . . 107.5

541.0
644.1
651.0
904.0
642.5
539.3
295.7
569.4
415.3
625.0
589.8
494.5
1002.1
752.1
913.5
673.2
592.4
808.1
243.5
76.2
109.5
132.8
108.0

-1.8
0.5
0.3
1.0
2.5
0.7
2.7
4.4
3.5
2.1
0.9
1.8
-0.9
-2.8
4.1
-0.1
2.8
-0.1
-0.8
-3.9
-2.9
4.2
0.5

Groups 1 – 15: Soft Goods . . . . . . . . . . . . . 592.4

602.5

1.7

Groups 16 – 20: Durable Goods. . . . . . . . . . 469.7

465.9

-0.8

Groups 21 – 23: Misc. Goods2 . . . . . . . . . . . 113.7

112.2

-1.3

554.8

0.8

Store Total . . . . . . . . . . . . . . . . . . . . . . . . . 550.3
1

Absence of a minus sign before percentage change in this column signifies price increase.
Indexes on a January 1986 = 100 base.
3
The store total index covers all departments, including some not listed separately, except for the following: candy, foods, liquor, tobacco, and contract departments.
2

1997–33 I.R.B.

26 CFR §1.472–6: Change from LIFO inventory
method;
26 CFR §1.472–8: Dollar value method of pricing
LIFO inventories.
What procedures must a taxpayer use to obtain
automatic consent of the Commissioner to change
from the LIFO method of accounting for all its LIFO
inventory, or to change to an alternate LIFO inventory method. See Rev. Proc. 97–37, page 18.

Section 481.—Adjustments
Required by Changes in
Mehtods of Accounting
26 CFR 1.481–4: Adjustments taken into account
with consent.

BUREAU OF LABOR STATISTICS, DEPARTMENT STORE
INVENTORY PRICE INDEXES BY DEPARTMENT GROUPS
(January 1941 = 100, unless otherwise noted)
Percent Change
Groups
June
June
from June 1996
1996
1997
to June 19971

3

What is the “Alternative LIFO Method.” See
Rev. Proc. 97–36, page 14.

5

How is the section 481(a) adjustment taken into
account when a taxpayer changes its method of accounting for package design costs. See Rev. Proc.
97–35, page 11.

26 CFR §1.481–1: Adjustments in general;
26 CFR §1.481–4: Adjustments taken into account
with consent.
What procedures must a taxpayer use to obtain automatic consent of the Commissioner to change a
method of accounting. See Rev. Proc. 97–37, page 18.

Section 585.—Reserves for
Losses on Loans of Banks
What procedures must a taxpayer use to obtain
automatic consent of the Commissioner to change
from the § 585 reserve method of accounting to the
§ 166 specific charge-off method. See Rev. Proc.
97–37, page 18.

Section 1273.—Determination
of Amount of Original Issue
Discount
26 CFR §1.1273–1: Definition of OID;
26 CFR §1.1273–2: Determination of issue price
and issue date.
What procedures must a taxpayer use to obtain
automatic consent of the Commissioner to change its
method of accounting for certain de minimis original
issue discount. See Rev. Proc. 97–37, page 18.

Section 1281.—Current
Inclusion in Income of Discount
on Certain Short-term
Obligations
What procedures must a taxpayer use to obtain
automatic consent of the Commissioner to change
its method of accounting for interest income on
short-term obligations, or for stated interest on
short-term loans of cash method banks in the
Eighth Circuit. See Rev. Proc. 97–37, page 18.

August 18, 1997

Section 1362.—Election;
Revocation; Termination
26 CFR 1.1362–6: Elections and consents.

tory due date, may the taxpayer obtain relief under
§ 1362(b)(5) of the Internal Revenue Code without
applying for a private letter ruling? See Rev. Proc.
97–40, page 50.

If a taxpayer files an S corporation election after
the statutory date, but within 6 months of that statu-

August 18, 1997

6

Section 1363.—Effect of
Election on Corporation
What procedures must a taxpayer use to obtain automatic consent of the Commissioner to change its
method of accounting. See Rev. Proc. 97–37, page 18.

1997–33 I.R.B.

Part III. Administrative, Procedural, and Miscellaneous
Highly Compensated Employee
Definition
Notice 97–45
I. PURPOSE
This notice provides guidance relating
to the definition of highly compensated
employee (“HCE”) under §414(q) of the
Internal Revenue Code (“Code”), as
amended by §1431 of the Small Business
Job Protection Act of 1996, Pub. L. 104188 (“SBJPA”). The §414(q) definition of
HCE is incorporated by certain provisions
of the Code that apply nondiscrimination
requirements to various employee benefit
plans, entities, or arrangements (“plans”).
Specifically, this notice provides:
• Guidance on making the top-paid
group election permitted by
§414(q)(1)(B)(ii), under which an
employee (other than a 5-percent
owner) with compensation in excess
of the dollar threshold is an HCE
only if the employee is among the
highest paid 20 percent of an employer’s workforce.
• A new calendar year data election
under which an employer that maintains one or more plans on a fiscal
year basis has the option to use calendar year data to simplify the determination of whether an employee is an
HCE on account of compensation
under §414(q)(1)(B).
• Transition relief from certain requirements of the top-paid group election
and the calendar year data election.
• Guidance on plan amendments to reflect the revised definition of HCE, including the application of the remedial
amendment period under § 401(b),
and certain other matters relating to
the determination of HCE status.

II. BACKGROUND
(1) Section 414(q) prior to SBJPA.
Prior to amendment by SBJPA,
§ 414(q)(1) generally provided that an
employee was an HCE if, at any time during the year or the preceding year, the employee:
(A) was a 5-percent owner,
(B) received more than $100,000 (for
1996) in annual compensation from the
employer,

1997–33 I.R.B.

(C) received more than $66,000 (for
1996) in annual compensation from the
employer and was in the top-paid group
of employees during the same year, or
(D) was an officer of the employer who
received compensation in excess of
$60,000 (for 1996).
(2) Guidance under § 414(q) prior to
SBJPA. Under §1.414(q)–1T, A–14(b) of
the temporary Income Tax Regulations,
employers were allowed to make a calendar year calculation election, under which
the preceding year’s calculations relating
to HCE determinations were made on the
basis of the calendar year ending with or
within the current year. Under section 4 of
Rev. Proc. 93–42, 1993–2 C.B. 540, as
modified by Rev. Proc. 95–34, 1995–2
C.B. 385, an employer was permitted to
use a simplified method for determining
HCEs. Rev. Proc. 95–34 also provided
model plan language for employers to use
the simplified method.
(3) SBJPA amendments to § 414(q).
Section 414(q)(1), as amended by SBJPA,
provides that the term “highly compensated employee” means any employee
who:
(A) was a 5-percent owner at any time
during the year or the preceding year, or
(B) for the preceding year had compensation from the employer in excess of
$80,000 and, if the employer so elects,
was in the top-paid group for the preceding year.
The $80,000 amount is adjusted at the
same time and in the same manner as
under § 415(d), except that the base period is the calendar quarter ending September 30, 1996.
Pursuant to § 414(q)(3), an employee is
in the top-paid group for any year if the
employee is in the group consisting of the
top 20 percent of the employees of the
employer when ranked on the basis of
compensation paid to employees during
such year. An election pursuant to §
414(q)(1)(B)(ii), under which an employee (who is not a 5-percent owner)
who has compensation in excess of
$80,000 is not an HCE if the employee is
not a member of the top-paid group, is referred to in this notice as a “top-paid
group election.”
The amendments made by § 1431 of
SBJPA generally apply to years beginning

7

after December 31, 1996.

III. EFFECT OF STATUTORY
CHANGES ON PRIOR GUIDANCE
(1) Prior guidance. Because of the
amendments made to § 414(q) by SBJPA,
certain portions of § 1.414(q)–1T do not
reflect current law. Except as provided in
section III(2), the calendar year calculation election under A–14(b) of §
1.414(q)–1T does not apply for years beginning after December 31, 1996. In addition, the guidance provided under section
4 of Rev. Proc. 93–42 and under Rev.
Proc. 95–34 does not apply for years beginning after December 31, 1996. The
Service intends to publish guidance in the
future that will make appropriate modifications to these items of guidance.
(2) Transition relief for 1997. For any
year beginning on or after January 1,
1997 and before January 1, 1998, employers may continue to utilize the calendar
year calculation election, taking into account the statutory amendments to §
414(q)(1)(B), and the elimination of §
414(q)(1)(C) and (D), by SBJPA.

IV. PERIODS FOR DETERMINING
HCE STATUS
(1) Determination years and look-back
years. HCE status is determined on the
basis of the applicable year (as defined
below) of the plan or other entity for
which a determination is being made
(“determination year”) and the preceding
twelve-month period (“look-back year”)
in accordance with § 414(q). Thus, under
§ 414(q), as amended by SBJPA, an employee is an HCE for a determination year
if, (a) at any time during the determination year or the look-back year, the employee was a 5-percent owner or (b) for
the look-back year, the employee had
compensation from the employer in excess of $80,000 (as adjusted) and, if the
employer so elects, was in the top-paid
group.
(2) Applicable year.
(a) Retirement plans. The applicable
year for a retirement plan is the plan year.
For purposes of this notice, a retirement
plan is a plan that is qualified under §
401(a) or 403(a) or described in § 403(b)
or 408(k).
(b) Nonretirement plans. The applica-

August 18, 1997

ble year for a nonretirement plan is the
plan year, as defined in the written plan
document or otherwise identified in the
Code and regulations. If a nonretirement
plan does not have an identified plan year,
then the employer may treat either the calendar year or the employer’s fiscal year as
the applicable year. For purposes of this
notice, a nonretirement plan is any employee benefit arrangement to which the
definition of HCE is applicable under a
provision of the Code, other than a retirement plan.

V. IMPLEMENTATION OF
ELECTIONS
(1) Top-paid group election. An employer may make a top-paid group election for a determination year. The effect
of the top-paid group election is that an
employee (who is not a 5-percent owner
at any time during the determination year
or the look-back year) with compensation
in excess of $80,000 (as adjusted) for the
look-back year is an HCE only if the employee was in the top-paid group for the
look-back year. A top-paid group election,
once made, applies for all subsequent determination years unless changed by the
employer.
(2) Calendar year data election.
(a) This notice provides a new calendar
year data election which an employer may
make for a determination year. The effect
of the calendar year data election is that
the calendar year beginning with or
within the look-back year is treated as the
employer’s look-back year for purposes
of determining whether an employee is an
HCE on account of the employee’s compensation for a look-back year under §
414(q)(1)(B). A calendar year data election, once made, applies for all subsequent determination years unless changed
by the employer.
(b) A calendar year data election made
by an employer does not apply in determining whether the employer’s employees are HCEs under § 414(q)(1)(A) on account of being 5-percent owners.
Accordingly, if an employee is a 5-percent owner in either the look-back year or
the determination year, then the employee
is an HCE, without regard to whether the
employee’s employer makes a calendar
year data election.
(c) If a plan has a calendar year as its
determination year, then the immediately

August 18, 1997

preceding calendar year is the look-back
year for the plan. This is the case whether
or not a calendar year data election is
made. Thus, a calendar year data election
would have no effect on the HCE determination for a calendar year plan.
(3) No separate notification requirement. Notification or filing with the Internal Revenue Service of a top-paid group
election or a calendar year data election is
not required in order for the election to be
valid. However, under certain circumstances, plan amendments may be required to reflect the election. See
section VII of this notice.
(4) Cross-references. Section VI of this
notice provides a consistency requirement
that applies if an employer maintains
more than one plan. Section VII of this
notice describes circumstances under
which a top-paid group election or calendar year data election, or changes to such
elections, may have to be reflected in plan
documents.

VI. CONSISTENCY REQUIREMENT
FOR ELECTIONS
(1) Consistency requirement — in general. Except as provided in section VI(3)
and (4), in order to be effective, a top-paid
group election made by an employer must
apply consistently to the determination
years of all plans of the employer that
begin with or within the same calendar
year. Similarly, except as provided in section VI(3) and (4), in order to be effective,
a calendar year data election made by an
employer must apply consistently to the
determination years of all plans of the employer, other than a plan with a calendar
year determination year, that begin within
the same calendar year.
(2) Interaction of top-paid group election and calendar year data election. The
top-paid group election and the calendar
year data election are independent of each
other. Thus, an employer making one of
the elections is not required also to make
the other election. However, if both elections are made, the look-back year in determining the top-paid group must be the
calendar year beginning with or within
the look-back year, in accordance with
section V of this notice.
(3) Multiemployer plans. Satisfaction of
the consistency requirement is determined
without regard to any multiemployer plans
in which the employer participates.

8

(4) Transition relief for years prior to
2000.
(a) Transition relief for 1997. The consistency requirement will not apply to determination years beginning with or
within the 1997 calendar year. Thus, an
employer may make a top-paid group
election or a calendar year data election
for a plan for a determination year beginning with or within 1997, without regard
to whether the employer makes that election for any other plan.
(b) Transition relief for 1998 and 1999.
For determination years beginning on or
after January 1, 1998, and before January
1, 2000, (i) nonretirement plans are not
subject to the consistency requirement,
and (ii) satisfaction of the consistency requirement with respect to retirement plans
is determined without regard to any plans
of the employer that are nonretirement
plans.

VII. QUALIFIED RETIREMENT
PLAN AMENDMENTS FOR HCE
DEFINITION
(1) Qualified plans that must be
amended. If a retirement plan qualified
under § 401(a) or 403(a) contains the definition of HCE under § 414(q), as in effect before SBJPA, the plan must be
amended to reflect the definition of HCE
under § 414(q), as amended by SBJPA. If
an employer makes either a top-paid
group or calendar year data election for a
determination year, a plan that contains
the definition of HCE must reflect the
election. If the employer changes either a
top-paid group or calendar year data election, the plan must be amended to reflect
the change. However, a plan is not required to add a definition of HCE merely
to reflect a top-paid group or calendar
year data election.
(2) Amendment date. Rev. Proc. 97–41,
1997–33 IRB, provides that qualified retirement plans have a remedial amendment period under § 401(b) so that certain
plan amendments for SBJPA are not required to be adopted before the last day of
the first plan year beginning on or after
January 1, 1999 (with a later date for governmental plans). Pursuant to Rev. Proc.
97–41, a plan provision reflecting the definition of HCE is a disqualifying provision and thus any plan amendments to reflect the definition of HCE in § 414(q), as
amended by SBJPA, and to reflect any

1997–33 I.R.B.

choices regarding the top-paid group or
calendar year data elections, are not required to be made until the end of this remedial amendment period. However,
plans must be operated in accordance
with the SBJPA changes to the HCE definition in § 414(q) as of the statutory effective date, and plans required to be
amended to reflect those changes must be
so amended retroactively effective as of
that date. In addition, under Rev. Proc.
97–41, any retroactive amendments must
reflect the choices made in the operation
of the plan for each determination year,
including choices made with respect to
the top-paid group election and the calendar year data election (and any changes to
those elections), and the first date that the
plan operated in accordance with those
choices (and any such changes).

VIII. OTHER ISSUES RELATING
TO DETERMINATION OF HCE
STATUS
(1) Determining HCE status for 1997.
As noted earlier, the amendments made
by § 1431 of the SBJPA generally apply
to years beginning after December 31,
1996. However, § 1431(d)(1) provides
that, in determining whether an employee
is an HCE for years beginning in 1997,
the amendments to § 414(q) are treated as
having been in effect for years beginning
in 1996. Accordingly, in determining
whether an employee is an HCE for the
determination year beginning with or
within the 1997 calendar year, an employer must consider whether the employee was a 5-percent owner or had
compensation in excess of $80,000 for the
look-back year that began with or within
the 1996 calendar year. An employer also
may make the calendar year data election
and/or the top-paid group election with
respect to determination years beginning
with or within the 1997 calendar year, in
accordance with the guidance in this notice. The SBJPA amendments to § 414(q)
are not applicable in determining the employer’s HCEs for determination years
beginning prior to January 1, 1997.
(2) Highly compensated former employees. For purposes of determining status as a highly compensated former employee under § 1.414(q)–1T, A–4,
whether an employee was a highly compensated active employee for a determination year that ended on or after the em-

1997–33 I.R.B.

ployee’s 55th birthday, or that was a separation year, is based on the rules applicable to determining HCE status as in effect
for that determination year.
(3) Determining 5-percent ownership
by attribution of ownership interest to
family members. The definition of 5-percent owner in § 414(q)(2) refers to §
416(i)(1), which in turn refers to the attribution rules of § 318. Under the rules of
§318, an individual is considered to own
any stock owned directly or indirectly by
the individual’s spouse, children, grandchildren or parents. Consequently, an employee who is the spouse, child, parent or
grandparent (“family member”) of an individual who has a 5-percent interest in
the employer at any time during the lookback year or the determination year is
treated as an HCE under § 414(q)(1)(A),
regardless of the family member’s compensation level. These statutory provisions relating to the definition of 5-percent owner under § 414(q)(2) are different
from the family aggregation rules under
former § 414(q)(6) and are unaffected by
the repeal of those rules under §
1431(b)(1) of SBJPA.

IX. EXAMPLES
The following examples illustrate the
rules in this notice:
Example 1: (a) Employer A has maintained a defined benefit plan qualified
under § 401(a) (Plan M) since 1996 with a
plan year beginning April 1 and ending
March 31. Employer A has never had a 5percent owner. For Plan M’s determination year beginning April 1, 2000 and
ending March 31, 2001, Employer A does
not make a calendar year data election or
a top-paid group election.
(b) Under § 414(q)(1)(B), Employer A
determines HCEs for Plan M’s determination year beginning April 1, 2000, based
upon the compensation of Employer A’s
employees in Plan M’s look-back year.
Thus, the HCEs are those employees who
had compensation over $80,000 (as adjusted) during the period beginning April
1, 1999 and ending March 31, 2000.
Example 2: (a) Assume the same facts
as in Example 1, except that Employer A
hires a new employee, Employee X, on
March 1, 2000 at an annual salary of
$240,000. Employee X is not a 5-percent
owner during the determination year beginning April 1, 2000 or the look-back

9

year beginning April 1, 1999. During the
month of March, 2000, Employee X’s
compensation was $20,000.
(b) Because Employee X’s compensation during Plan M’s look-back year beginning April 1, 1999 was less than
$80,000 (as adjusted), Employee X is not
an HCE for Plan M’s determination year
beginning April 1, 2000.
Example 3: (a) Employer B has maintained a qualified defined benefit plan
(Plan N) since 1996 that has a calendar
plan year. Employer B makes a top-paid
group election for Plan N’s 1998 determination year, which is the 1998 calendar
year. Employer B had 15 employees in
the 1997 calendar year and has never had
a 5-percent owner. These employees,
along with their compensation for the
1997 calendar year, are listed below.
Employees
1
2
3
4
5-15

1997 Compensation
$200,000
110,000
101,000
90,000
50,000 or less

(b) In determining Employer B’s HCEs
for the calendar year 1998 under the toppaid group election, Plan N’s relevant
look-back year is the 1997 calendar year.
Employer B must determine whether any
employee had compensation above
$80,000, and was in the group consisting
of the top 20 percent of the employees of
Employer B in the 1997 calendar year,
when ranked on the basis of compensation from Employer B during the 1997
calendar year.
(c) Employees 1, 2 and 3 comprise the
top 20 percent of Employer B’s 15 employees for the 1997 calendar year based
on compensation from Employer B during the 1997 calendar year. Although Employee 4 had compensation over $80,000
in the 1997 calendar year, Employee 4
was not in the top-paid group for the 1997
calendar year and is therefore not an HCE
for Plan N’s 1998 determination year.
This will be the case regardless of
whether Employees 1, 2 and 3 continue to
be employed in the 1998 calendar year.
Example 4: (a) Employer C has a qualified profit sharing plan (Plan O) with a
calendar plan year. Employer C also has a
qualified defined benefit plan (Plan P)
with a plan year beginning April 1 and
ending March 31. Employer C makes the

August 18, 1997

top-paid group election for Plan O for the
calendar year 2000.
(b) Pursuant to the consistency rule requiring that the employer make the same
election for all determination years of all
plans of the employer that begin with or
within the same calendar year, Employer
C must also make the top-paid group election for Plan P’s determination year beginning April 1, 2000 and ending March
31, 2001.
(c) The look-back year for purposes of
determining whether any of Employer C’s
employees is an HCE under Employer C’s
top-paid group election for Plan O is the
1999 calendar year and for Plan P is the
April 1, 1999 to March 31, 2000 year. The
group of Employer C’s employees that are
HCEs for Plan O’s 2000 determination
year are those employees who had compensation above $80,000 (as adjusted)
and who were in the top 20 percent of employees based on compensation for the
1999 calendar year, while the group of
Employer C’s employees that are HCEs
for Plan P’s determination year beginning
April 1, 2000 are those employees who
had compensation above $80,000 (as adjusted) and who were in the top 20 percent of employees based upon compensation for Plan P’s look-back year beginning
April 1, 1999.
Example 5: (a) Since 1998, Employer
D has maintained a qualified cash or deferred arrangement under § 401(k) (Plan
Q). Plan Q has a calendar plan year. Employer D has never made a calendar year
data election or a top-paid group election
for Plan Q and has never had a 5-percent
owner. Under § 401(k)(3)(A)(ii), as
amended by the SBJPA, unless an employer elects to use current year data for
all eligible employees, the actual deferral
percentage (ADP) test for the plan year is
applied by comparing the ADP for all eligible HCEs for the plan year to the ADP
for all other eligible employees (nonHCEs) for the preceding plan year. Employer D has not elected to use current
year data for the nonHCEs for the 2000
calendar year.
(b) In conducting the ADP test for the
2000 calendar year, Employer D compares the ADP for the 2000 calendar year
for the group of employees who had compensation above $80,000 (as adjusted) for
the 1999 calendar year, and who are eligible under the plan for the 2000 calendar

August 18, 1997

year, with the ADP for the 1999 calendar
year for the group of employees who were
nonHCEs for the 1999 calendar year and
who were eligible under the plan for the
1999 calendar year. Employer D would
have previously determined who the
HCEs were for the 1999 calendar year,
that is, the employees of Employer D who
had compensation above $80,000 (as adjusted) for the 1998 calendar year. The
nonHCEs for the 1999 calendar year are
those employees who were employees in
the 1999 calendar year and who were not
determined to be HCEs for the 1999 calendar year.
Example 6: (a) Employer E has maintained a qualified profit sharing plan (Plan
R) since 1996 with an April 1 to March 31
plan year. Employer E has also maintained a defined benefit plan (Plan S)
since 1996 with an October 1 to September 30 plan year. Employer E decides to
make the calendar year data election for
determination years of Plan R and Plan S
beginning in the 2000 calendar year.
Thus, Employer E makes the election for
Plan R’s determination year beginning
April 1, 2000 and ending March 31, 2001,
and Plan S’s determination year beginning October 1, 2000 and ending September 30, 2001.
(b) The 2000 calendar year begins
within Plan R’s look-back year beginning
April 1, 1999 and ending March 31, 2000,
and Plan S’s look-back year beginning
October 1, 1999 and ending September
30, 2000 and is treated as Employer E’s
look-back year for both Plans R and S for
purposes of determining Employer E’s
HCEs on the basis of compensation.
Thus, in determining HCE status under §
414(q)(1)(B) Employer E determines
whether an employee has compensation
for the look-back year in excess of
$80,000 (as adjusted), and if applicable,
the composition of the top-paid group, on
the basis of compensation for the 2000
calendar year.
Example 7: (a) Assume the same facts
as in Example 6, except that Employer E
also maintains Plan T, a qualified defined
benefit plan with a calendar plan year.
Employer E fails to make the calendar
year data election for Plan T.
(b) Because the consistency requirement for the calendar year data election is
applied without regard to calendar year
plans, the consistency requirement is sat-

10

isfied regardless of whether Employer E
makes a calendar year data election for
Plan T.
Example 8: Assume the same facts as
in Example 6. For Plan R, in determining
whether any of Employer E’s employees
is an HCE on account of being a 5-percent
owner, the employee’s ownership in Employer E is examined for Plan R’s 2000
and 2001 plan years (April 1, 1999 to
March 31, 2000, and April 1, 2000 to
March 31, 2001). For Plan S, in determining whether any of Employer E’s employees is an HCE on account of being a 5percent owner, the employee’s ownership
in Employer E is examined for Plan S’s
2000 and 2001 plan years (October 1,
1999 to September 30, 2000, and October
1, 2000 to September 30, 2001). This is
because the calendar year data election
does not apply in determining whether an
employee is a 5-percent owner.
Example 9: (a) Employer F maintains
Plan U, a defined benefit plan with a calendar year plan year. Employee Y was
employed by Employer F since 1990.
Employee Y retired at age 65 from employment with Employer F in 1998. Employee Y was an HCE in 1992 under the
rules applicable in 1992 to determine
HCE status, but was not an HCE in any
other year, including 1998.
(b) Because Employee Y was an HCE
for a determination year (1992) ending on
or after Employee Y’s 55th birthday, Employee Y is a highly compensated former
employee for determination years beginning after Employee Y’s retirement.

X. PAPERWORK REDUCTION
ACT
The collection of information contained in this notice has been reviewed
and approved by the Office of Management and Budget in accordance with the
Paperwork Reduction Act (44 U.S.C.
3507) under control number 1545–1550.
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
control number.
The collection of information in this
notice is in Section VII. This requirement
to amend plan documents is necessary to
update plan documents to reflect the
amended definition of HCE under §
414(q). This information will be used to

1997–33 I.R.B.

determine which employees are HCEs for
purposes of determining contributions,
benefits, or the availability of other rights
or features under the plan. The collection
of information is required to obtain a benefit. The likely respondents are businesses
or other for-profit institutions, nonprofit
institutions, and small businesses or organizations.
The estimated total annual recordkeeping burden is 65,605 hours.
The estimated annual burden per
recordkeeper varies from 10 minutes to
30 minutes, depending on individual circumstances, with an estimated average of
18 minutes. The estimated number of
recordkeepers is 218,683.
Books or records relating to a collection of information must be retained as
long as their contents may become material in the administration of any internal
revenue law. Generally tax returns and tax
return information are confidential, as required by 26 U.S.C. 6103.

XI. COMMENTS
This notice does not address all of the
procedural requirements that may be necessary to implement the top-paid group
election or the calendar year data election
for future years. However, any additional
requirements would be applied prospectively only. The Treasury and the Service
invite comments and suggestions regarding procedural issues and the other matters discussed in this notice.
Comments can be addressed to
CC:DOM:CORP:R (Notice 97–45), room
5228, Internal Revenue Service, POB
7604, Ben Franklin Station, Washington,
DC 20044. In the alternative, comments
may be hand delivered between the hours
of 8 a.m. and 5 p.m. to CC:DOM:CORP:R
(Notice 97–45), Courier’s Desk, Internal
Revenue Service, 1111 Constitution Avenue, NW, Washington, DC. Alternatively,
taxpayers may transmit comments electronically via the IRS Internet site at
http://www.irs.ustreas.gov/prod/tax_regs/
comments.html.

phone service at (202) 622-6074 or (202)
622-6075, between the hours of 1:30 p.m.
and 3:30 p.m. Eastern Time, Monday
through Thursday, or Ms. Grinde at (202)
622-6214, or Patricia McDermott of the
Office of the Associate Chief Counsel
(Employee Benefits and Exempt Organizations) at (202) 622-6030. These are not
toll-free numbers.

26 CFR 601.204: Changes in accounting periods
and in methods of accounting.
(Also Part I, §§ 165, 167, 263, 263A, 446, 481;
1.165-2, 1.167(a)-3, 1.263(a)-2, 1.263A-2, 1.446-1,
1.481-4.)

Rev. Proc. 97-35
SECTION 1. PURPOSE
.01 This revenue procedure describes
three alternative methods of accounting
for package design costs: (1) the capitalization method (see section 5.01 of this
revenue procedure), (2) the design-by-design capitalization and 60-month amortization method (see section 5.02 of this
revenue procedure), and (3) the pool-ofcost capitalization and 48-month amortization method (see section 5.03 of this
revenue procedure). A taxpayer may
change to or adopt any one of these three
methods. The procedures for a taxpayer
to change to one of these three methods
are provided in Rev. Proc. 97–37, page
18, which provides simplified and uniform procedures to obtain automatic consent to make this and other changes in
methods of accounting. This revenue procedure modifies and supersedes Rev.
Proc. 90–63, 1990–2 C.B. 664.
.02 The three methods of accounting
for package design costs described in this
revenue procedure are the same methods
of accounting that were described in Rev.
Proc. 90–63. Accordingly, a taxpayer that
properly changed to or adopted one of
these methods pursuant to Rev. Proc.
90–63 is not required to change its
method of accounting to comply with this
revenue procedure.
SECTION 2. DEFINITIONS

DRAFTING INFORMATION
The principal author of this notice is Ingrid Grinde of the Employee Plans Division. For further information regarding
this notice, please contact the Employee
Plans Division’s taxpayer assistance tele-

1997–33 I.R.B.

For purposes of this revenue procedure,
the terms “package design” and “package
design cost” have the meanings provided
in Rev. Rul. 89–23, 1989–1 C.B. 85. If
the taxpayer develops the package design,
the term includes the cost of materials,

11

labor, and overhead associated with the
design, including all design exploration
and study (for example, the development
of any related design which, although
abandoned, advances the development of
the design selected), refinement of the
basic design selected, testing, and preparation of the final master comprehensive
design. If an independent contractor performs the work, the term includes all
billings related to the development of the
particular package, including all design
exploration and study (for example, the
development of any related design which,
although abandoned, advances the development of the design selected), refinement of the basic design selected, testing,
and preparation of the final master comprehensive design. If the taxpayer purchases the package, the term includes the
purchase price. The costs associated with
coupon inserts, refund offers, and other
short-lived promotion-related changes are
specifically excepted from the definition
of “package design cost.”
SECTION 3. BACKGROUND
.01 Section 263(a) of the Internal Revenue Code provides that no deduction is
allowed for any amount paid for new
buildings or for permanent improvements
or betterments made to increase the value
of any property or estate. Section
1.263(a)–2 of the Income Tax Regulations
includes in its examples of capital expenditures the costs of acquiring property
having a useful life substantially beyond
the tax year.
.02 An expenditure generally must be
capitalized under § 263 if the expenditure
creates, enhances, or is part of the cost of
acquiring a tangible or intangible asset
having a useful life that extends substantially beyond the end of the tax year in
which the expenditure is incurred. See
INDOPCO, Inc. v. Commissioner, 503
U.S. 79 (1992); Commissioner v. Lincoln
Savings and Loan Association, 403 U.S.
345 (1971), 1971-2 C.B. 116; Central
Texas Savings and Loan Association v.
United States, 731 F.2d 1181 (5th Cir.
1984); Ellis Banking Corp. v. Commissioner, 688 F.2d 1376 (11th Cir. 1982),
cert. denied, 463 U.S. 1207 (1983); and
Cleveland Electric Illuminating Company
v. United States, 7 Cl. Ct. 220 (1985).
Generally, taxpayers must capitalize
package design costs incurred prior to

August 18, 1997

January 1, 1987 under § 263 because
those costs create intangible assets having
useful lives that extend substantially beyond the end of the tax year in which the
costs are incurred. See Rev. Rul. 89-23.
.03 Section 263A, enacted by the Tax
Reform Act of 1986, provides, in part, for
the capitalization of certain direct and indirect costs with respect to real or tangible
personal property produced by the taxpayer. All costs that are incurred with respect to real or tangible personal property
that the taxpayer produces are to be capitalized with respect to the property. The
term “produce” includes construct, build,
install, manufacture, develop, improve,
create, raise, or grow. For purposes of
§263A, “tangible personal property” includes a film, sound recording, video
tape, book, or similar property embodying
words, ideas, concepts, images, or sounds
(see 2 H.R. Conf. Rep. No. 841, 99th
Cong., 2d Sess. II–308 (1986), 1986–3
(Vol. 4) C.B. 308) without regard to
whether the property is treated as tangible
or intangible under other provisions of the
Code. See § 1.263A-2(a)(2)(ii). Section
263A and the regulations thereunder require that costs incurred after December
31, 1986 in connection with the development and design of product packages
must be capitalized. See Rev. Rul. 89–23.
.04 As stated in Rev. Rul. 89–23, package designs generally do not have an ascertainable useful life, and thus no depreciation or amortization is allowed under §
167 and the regulations thereunder. See §
1.167(a)–3. Only when such a package
design is abandoned may the capitalized
costs be deducted. See § 165 and
§1.165–2(a).
.05 Thus, taxpayers are generally required under the Code and regulations to
use the capitalization method of accounting for package design costs described in
section 5.01 of this revenue procedure.
However, to minimize disputes regarding the accounting for package design
costs, the Internal Revenue Service, as a
matter of administrative convenience,
will allow a taxpayer that complies with
the requirements of this revenue procedure to choose one of two alternative
methods of accounting for package design costs:
(1) the capitalization and 60-month
amortization method described in section
5.02 of this revenue procedure, deter-

August 18, 1997

mined on a design-by-design basis for all
package designs or;
(2) the capitalization and 48-month
amortization method described in section
5.03 of this revenue procedure, determined on a pool-of-cost basis for all package design costs.
SECTION 4. SCOPE
This revenue procedure applies to a
taxpayer that wants to change to or adopt
a method of accounting for package design costs. A change in method of accounting for package design costs made
pursuant to this revenue procedure does
not affect the taxpayer’s method of accounting for intangible property other
than package designs described in section
2 of this revenue procedure.
SECTION 5. ALTERNATIVE
METHODS OF ACCOUNTING
.01 The capitalization method.
(1) Description of method. The treatment of the costs of developing new package designs or modifying existing designs
in accordance with the capitalization
method constitutes a permissible method
of accounting. Under the capitalization
method, the taxpayer must capitalize the
costs of developing (or modifying) any
package design if the asset created by
those costs has no ascertainable useful life
or an ascertainable useful life that extends
substantially beyond the end of the tax
year in which the costs are incurred. If
the asset created by the costs has an ascertainable useful life, the taxpayer may
amortize the costs ratably over the useful
life, beginning with the month the package design (or modification to the design)
is placed in service. If the asset created
by the costs has no ascertainable useful
life, the taxpayer may deduct the costs
only upon the disposition or abandonment
of the package design (or modification to
the design). See Rev. Rul. 89-23.
(2) Computation of basis. The basis of
each package design (or modification to
the design) subject to capitalization is determined by applying the provisions of
§ 263 and the regulations thereunder to
costs incurred prior to January 1, 1987,
and § 263A and the regulations thereunder to costs incurred after December 31,
1986 (regardless of the tax year the design
(or modification to the design) is placed
in service). The costs required to be capi-

12

talized are described in section 2 of this
revenue procedure.
.02 The design-by-design capitalization
and 60-month amortization method.
(1) Description of method. The treatment of the costs of developing new
package designs or modifying existing
designs in accordance with the designby-design capitalization and 60-month
amortization method constitutes a permissible method of accounting. Under
the design-by-design capitalization and
60-month amortization method, the taxpayer must capitalize the costs of developing (or modifying) any package design
if the asset created by those costs has no
ascertainable useful life or an ascertainable useful life that extends substantially
beyond the end of the tax year in which
the costs are incurred. The taxpayer
must amortize the basis of any package
design (or modification to the design)
subject to capitalization over a period of
60 months. Thus, in computing taxable
income, the basis of each package design
(or modification to the design) subject to
capitalization is allowed as a deduction
ratably over a 60-month period, beginning with the month the design (or modification to the design) is treated as
placed in service. See section 5.02(3) of
this revenue procedure. If the package
design (or modification to the design) is
disposed of or abandoned within the 60month period, the taxpayer is permitted
to deduct the unamortized portion of the
basis of the design (or modification to
the design) in the tax year of disposition
or abandonment.
(2) Computation of basis. Under the
design-by-design capitalization and 60month amortization method, the basis of
each package design (or modification of
the design) subject to capitalization must
be determined by applying the provisions
of § 263 and the regulations thereunder to
costs incurred prior to January 1, 1987,
and § 263A and the regulations thereunder to costs incurred after December 31,
1986 (regardless of the tax year the design
(or modification to the design) is placed
in service). The costs required to be capitalized are described in section 2 of this
revenue procedure.
(3) Half-year convention. Under the
design-by-design capitalization and 60month amortization method, the amortization allowance for each package design

1997–33 I.R.B.

(or modification to the design) subject to
capitalization must be determined by
treating a design (or modification to the
design) placed in service during the tax
year as placed in service on the mid-point
of the tax year. If the tax year in which
the package design (or modification to
the design) is placed in service is 12 full
months, the design (or modification to
the design) is treated as placed in service
on the first day of the seventh month of
the tax year. For guidance in computing
the amortization allowance under the design-by- design capitalization and 60month amortization method when a package design (or modification to the design)
is placed in service in a taxable year of
less than 12 months (a short taxable
year), see Rev. Proc. 89-15, 1989-1 C.B.
816.
.03 The pool-of-cost capitalization and
48-month amortization method.
(1) Description of method. The treatment of the costs of developing new package designs or modifying existing designs
in accordance with the pool-of-cost capitalization and 48-month amortization
method constitutes a permissible method
of accounting. Under the pool-of-cost
capitalization and 48-month amortization
method, the taxpayer must capitalize all
its package design costs and amortize the
costs over a period of 48 months. Thus,
in computing taxable income, package
design costs incurred during the tax year
are allowed as a deduction ratably over a
48-month period, beginning with the
month the costs are treated as incurred.
See section 5.03(3) of this revenue procedure. The taxpayer may not deduct the
unamortized portion of the cost of a package design (or modification to the design)
if the design (or modification to the design) is never placed in service or is disposed of or abandoned within the 48month period.
(2) Costs subject to capitalization. All
package design costs are subject to capitalization without regard to whether the
costs create a package design (or modification to the design) having an ascertainable useful life that extends substantially
beyond the end of the tax year in which
the costs are incurred. Thus, all package
design costs incurred prior to January 1,
1987 that would be capitalized under
§ 263 and the regulations thereunder but
for the fact that the costs create a package

1997–33 I.R.B.

design (or modification to the design)
having an ascertainable useful life that
does not extend substantially beyond the
end of the tax year in which the costs are
incurred must be capitalized. All package design costs incurred after December
31, 1986 that would be capitalized
under § 263A and the regulations thereunder but for the fact that the costs create
a package design (or modification to the
design) having an ascertainable useful
life that does not extend substantially beyond the end of the tax year in which the
costs are incurred must be capitalized.
The costs required to be capitalized are
described in section 2 of this revenue
procedure.
(3) Half-year convention. Under the
pool-of-cost capitalization and 48-month
amortization method, the amortization allowance for package design costs must be
determined by treating all package design
costs incurred during the tax year as incurred on the mid-point of the tax year. If
the tax year in which the package design
costs are incurred is 12 full months, the
costs are treated as incurred on the first
day of the seventh month of the tax year.
For guidance in computing the amortization allowance under the pool-of-cost
capitalization and 48-month amortization
method when package design costs are incurred in a taxable year of less than 12
months (a short taxable year), see Rev.
Proc. 89–15.
SECTION 5. CHANGING PACKAGE
DESIGN COSTS METHOD
.01 Automatic change. A taxpayer
wanting to change its method of accounting for package design costs must follow
the provisions in Rev. Proc. 97-37.
.02 Section 481(a) adjustment.
(1) Change to the capitalization
method. If the taxpayer is changing its
method of accounting for package design
costs to the capitalization method, the §
481(a) adjustment (which will be positive) will restore to income the total
amounts deducted or amortized in tax
years prior to the year of change with respect to all package designs (or modifications to designs) subject to capitalization
and not abandoned as of the first day of
the tax year of change, less the amounts
that would have been amortized during
the tax years prior to the year of change
with respect to designs (or modifications

13

to designs) which had an ascertainable
useful life on the date the designs (or
modifications to the designs) were placed
in service. The § 481(a) adjustment is the
difference at the beginning of the tax year
of change between the basis of all such
package designs (or modifications to designs) determined under the taxpayer’s
present method of accounting and the
basis redetermined under the capitalization method.
(2) Change to the design-by-design
capitalization and 60-month amortization method. If the taxpayer is changing
its method of accounting for package design costs to the design-by-design capitalization and 60-month amortization
method, the § 481(a) adjustment is equal
to the total amounts deducted or amortized in tax years prior to the year of
change with respect to all package designs (or modifications to designs) subject to capitalization and not abandoned
as of the first day of the tax year of
change, less the amounts that would have
been amortized during the tax years prior
to the year of change with respect to such
designs (or modifications to designs) had
the design-by-design capitalization and
60-month amortization method been
used.
(3) Change to the pool-of-cost capitalization and 48-month amortization
method. If the taxpayer is changing its
method of accounting for package design
costs to the pool-of-cost capitalization
and 48-month amortization method, the
§ 481(a) adjustment is equal to the total
amounts deducted or amortized in tax
years prior to the year of change with respect to all package design costs treated
as incurred during the tax years prior to
the year of change, less the amounts that
would have been amortized during the tax
years prior to the year of change with respect to such costs had the pool-of-cost
capitalization and 48-month amortization
method been used.
SECTION 6. INQUIRIES
Inquiries regarding this revenue procedure may be addressed to the Commissioner of Internal Revenue, Attention: Office of Assistant Chief Counsel (Income
Tax and Accounting) CC:DOM:IT&A,
1111 Constitution Avenue, NW, Washington, DC 20224.

August 18, 1997

SECTION 7. EFFECT ON OTHER
DOCUMENTS
Rev. Proc. 90-63, 1990-2 C.B. 664, is
modified, and as modified, is superseded.
However, see the transition rules in section 13.02 of Rev. Proc. 97-37.
SECTION 8. EFFECTIVE DATE
This revenue procedure is effective on
August 18, 1997.
DRAFTING INFORMATION
This revenue procedure was drafted in
the Office of Assistant Chief Counsel (Income Tax & Accounting). For further information regarding this revenue procedure, contact Robert A. Testoff on (202)
622-4800 (not a toll free call).

26 CFR 601.204: Changes in accounting periods
and in methods of accounting.
(Also Part I, §§ 446, 472; 1.446–1, 1.472–1.)

Rev. Proc. 97–36
SECTION 1. PURPOSE
This revenue procedure provides an alternative last-in, first-out (LIFO) inventory
computation method (the “Alternative
LIFO Method”) for a taxpayer engaged in
the trade or business of retail sales of new
automobiles or new light-duty trucks (“automobile dealer”). A taxpayer may change
to or adopt the Alternative LIFO Method.
The procedures for a taxpayer to change to
the Alternative LIFO Method are provided
in Rev. Proc. 97–37, page 18, which provides simplified and uniform procedures to
obtain automatic consent to make this and
other changes in methods of accounting.
This revenue procedure modifies and supersedes Rev. Proc. 92–79, 1992–2 C.B.
457.
.02 The Alternative LIFO Method described in this revenue procedure is the
same method of accounting that was described in Rev. Proc. 92–79. Accordingly,
a taxpayer that properly changed to or
adopted this method pursuant to Rev.
Proc. 92-79 is not required to change its
method of accounting to comply with this
revenue procedure.
SECTION 2. BACKGROUND
.01 In general. Section 472(a) of the
Internal Revenue Code provides that a

August 18, 1997

taxpayer may use the LIFO inventory
method of inventorying goods if, among
other requirements, the change to, and
use of, the method is in accordance with
such regulations as the Secretary may
prescribe as necessary in order that the
use of the method may clearly reflect income.
.02 Dollar-value LIFO method. Section 1.472–8(a) of the Income Tax Regulations provides that any taxpayer may
elect to determine the cost of its LIFO inventories under the dollar-value LIFO
method of accounting, provided such
method is used consistently and clearly
reflects income in accordance with the
rules of that section.
.03 Link-chain method. Section
1.472–8(e)(1) permits the use of a “linkchain” method of computing the LIFO
value of a dollar-value pool if the “double-extension” method and an “index”
method would be impractical or unsuitable in view of the nature of the inventory
in the dollar-value pool. Further, in applying a link-chain method, an index may
be computed by “double extending” a
representative portion of the inventory in
a dollar-value, link-chain pool at both the
current-year cost and the prior-year cost.
Additionally, an index may be computed
under a link-chain method using other
sound and consistent statistical methods.
.04 Acceptable methods. Under existing LIFO inventory provisions, there are
three general dollar-value LIFO methods:
(1) Simplified dollar-value LIFO
method.
(a) Section 474 provides an elective simplified dollar-value LIFO method
for eligible small businesses. In general,
a taxpayer is an eligible small business for
any taxable year if its average annual
gross receipts for the three preceding
years do not exceed $5,000,000.
(b) The simplified dollar-value
LIFO method under § 474 is based on a
so-called link-chain method of computing
the LIFO value of an inventory pool.
Under § 474, inventory pools are established by the major categories in the applicable Government price index, and an
annual index for each pool is obtained
from that Government price index.
Therefore, under § 474, an eligible automobile dealer uses a single inventory pool
for new automobiles and new trucks
under the major category, transportation

14

equipment, in the Producer Price Index
(“PPI”) published by the Bureau of Labor
Statistics (“BLS”).
(c) Under this link-chain method,
two price indexes are computed for each
pool, an annual index and a cumulative
index. The annual index represents the
change in price level of goods in the ending inventory of the pool for the current
year from the price level of comparable
goods for the prior year. Under § 474, the
annual index for computing the LIFO
value of an automobile dealer’s single inventory pool is obtained using the price
change from the preceding taxable year
for the major index category, transportation equipment, from the PPI.
(d) The cumulative index represents the price level change from the beginning of the base year to the end of the
current year and is the product of each of
the annual indexes. The cumulative index
is used to convert the total current-year
cost in an inventory pool at the close of
the taxable year to base-year dollars by
dividing the total current-year cost by the
cumulative index, and also to determine
the value of any incremental increase in
the pool to be added to the ending inventory of the preceding year by multiplying
that increment by the cumulative index.
(2) Inventory price index computation method.
(a) Section 1.472-8(e)(3) provides
another simplified dollar-value LIFO
method, the inventory price index computation (IPIC) method, which is available
to all taxpayers. An automobile dealer
using the IPIC method must use that
method in determining the value of all
goods for which the automobile dealer
has elected to use the LIFO method.
Under the IPIC method, special inventory
pooling rules permit an automobile dealer
to establish a single inventory pool for
new automobiles and new trucks under
the major category of the applicable Government price index published by the
BLS. See § 1.472–8(e)(3)(iv) and Rev.
Proc. 84–57, 1984–2 C.B. 496.
(b) The IPIC method under §
1.472–8(e)(3) is also based on a linkchain method of computing the LIFO
value of an inventory pool. The annual
index for the pool is generally computed
using a stated percentage of the percent
change in the applicable detailed
index(es) for the major category of the ap-

1997–33 I.R.B.

plicable Government price index. The
stated percentage is 80 percent unless a
taxpayer qualifies as an eligible small
business under § 474, in which case the
stated percent is 100 percent.
(3) General dollar-value LIFO
method.
(a) If an automobile dealer does
not want to use either the simplified dollar-value LIFO method for certain small
businesses provided in § 474 of the Code
(if the taxpayer is eligible) or the IPIC
method provided in § 1.472–8(e)(3), the
automobile dealer may use the general
dollar-value LIFO inventory rules contained in § 1.472–8. Under these general
rules, an automobile dealer establishes
inventory pools for each separate trade or
business under § 1.472–8(c) by major
lines, types, or classes of goods (for example, one separate pool for all new automobiles and another separate pool for
all new trucks). See Fox Chevrolet, Inc.
Maryland v. Commissioner, 76 T.C. 708
(1981), acq., 1984–2 C.B. 1, and
Richardson Investments, Inc., and Subsidiaries v. Commissioner, 76 T.C. 736
(1981).
(b) An automobile dealer may use
the double-extension method, an index
method, or a link-chain method, to compute the LIFO value of its inventory
pools. Under all three of these methods,
automobile dealers use their own cost
data to compute the index for each pool.
Because of the nature of the items in their
pools, automobile dealers generally use a
link-chain method. The annual index for
each pool under the link-chain method is
computed by “double extending” (that is,
pricing) the vehicles (or “items”) in each
inventory pool as of the close of the taxable year at the automobile dealer’s own
current year cost and at the automobile
dealer’s own prior-year cost. For each
pool, the total current-year cost of the vehicles in ending inventory is divided by
the total prior-year cost of the vehicles in
ending inventory to compute the annual
index for the current year. The vehicles
used to determine the dealer’s own prioryear cost of vehicles in the current year’s
ending inventory must be comparable to
the vehicles used to compute the currentyear cost of vehicles in the current year’s
ending inventory. For purposes of this
revenue procedure, this is referred to as
the § 1.472-8 “comparability requirement.”

1997–33 I.R.B.

.05 New alternative method. In addition to the three general dollar-value
LIFO methods briefly described in section 2.04 of this revenue procedure, this
revenue procedure provides an additional
dollar-value LIFO method for automobile
dealers, the Alternative LIFO Method.
This method is described in section 4 of
this revenue procedure.
SECTION 3. SCOPE
The Alternative LIFO Method is available to any automobile dealer engaged in
the business of retail sales of new automobiles or new light-duty trucks for its
LIFO inventories of new automobiles and
new light-duty trucks. Light-duty trucks
are trucks with a gross vehicle weight of
14,000 pounds or less, which are also referred to as class 1, 2, or 3 trucks.
SECTION 4. ALTERNATIVE LIFO
METHOD
.01 In general.
(1) The Alternative LIFO Method is
a comprehensive dollar-value, link-chain
LIFO method of accounting that encompasses several LIFO sub-methods and
may only be used by an automobile dealer
engaged in the trade or business of retail
sales of new automobiles or new lightduty trucks to value its inventory of new
automobiles and new light-duty trucks.
(2) The Alternative LIFO Method is
designed to simplify the dollar-value
computations of automobile dealers.
Under the authority of § 1.446–1(c)(2)(ii),
the Commissioner will waive strict adherence of the § 1.472–8 comparability requirement in applying the Alternative
LIFO Method, provided a taxpayer uses
the compensating sub-methods described
in section 4.02 of this revenue procedure,
which, in the opinion of the Commissioner, are necessary to ensure that the Alternative LIFO Method clearly reflects income. These sub-methods include
requirements that (1) the current-year cost
of a new item be used as the prior year
cost for the new item, and (2) the automobile dealer use the manufacturer’s base
model codes to define items for purposes
of § 1.472–8. Generally, the manufacturer’s base model codes used in defining
items and identifying new items under the
Alternative LIFO Method have an average life of approximately five to seven
years.

15

(3) The Alternative LIFO Method includes, by definition, all its sub-methods.
Individual sub-methods used alone, or in
combination with some but not all of the
sub-methods of the Alternative LIFO
Method, may not clearly reflect income.
Therefore, use of the Alternative LIFO
Method is conditioned upon an automobile dealer computing its LIFO inventory
using all the sub-methods, definitions,
and special rules provided in section 4.02
of this revenue procedure, and the computational methodology provided in section
4.03 of this revenue procedure.
(4) The Alternative LIFO Method
will be accepted by the Commissioner as
an appropriate method of computing an
inventory index, and the use of the Alternative LIFO Method to compute the value
of the inventory pool or pools will be accepted as accurate, reliable, and suitable.
The automobile dealer’s computations
under the Alternative LIFO Method are,
however, subject to verification by the
district director upon examination of the
automobile dealer’s return.
.02 Sub-methods, definitions, and special rules.
(1) LIFO pools. For each separate
trade or business, (a) all new automobiles
(regardless of manufacturer), including
those used as demonstrators, must be included in one dollar-value LIFO pool, and
(b) all new light-duty trucks (regardless of
manufacturer), including those used as
demonstrators, must be included in another separate dollar-value LIFO pool.
(2) Specific identification increment
method. The current-year cost of the
items making up a pool must be determined by reference to the actual cost of
the specific new automobiles or new
light-duty trucks in ending inventory.
Therefore, the actual cost of the specific
vehicles on hand at year end will be the
current-year cost of such vehicles.
(3) Item of inventory. An item of inventory (“item category”) must be determined using the entire manufacturer’s
base model code number that represents
the most detailed description of the base
vehicle’s characteristics, such as model
line, body style, trim level, etc. The manufacturer’s base model code numbers are
almost always used as part of the vehicle
identification on each dealer invoice (for
example, a domestic model, trim level, 4door sedan has a specific model code; a
foreign model, 4-door sedan, trim level,

August 18, 1997

5-speed has a specific model code). In
the case of conversion vans, an item of inventory must be determined using both
(a) the entire manufacturer’s base model
code, as described in the preceding sentence, and (b) the most detailed conversion package designation.
(4) Cost of the vehicle used for purposes of computing the pool index. The
actual base vehicle cost of each of the
specific vehicles in ending inventory is
used to compute the index under the Alternative LIFO Method. The base vehicle
cost of each vehicle is not adjusted for
any options, accessories, or other costs.
The pool index computed from only the
base vehicle cost of vehicles is applied to
the total vehicle cost, including options,
accessories, and other costs, of all vehicles in the pool at the end of the taxable
year.
(5) Definition of a new item. A new
item category, which is an item category
not considered in existence in the prior
taxable year, is one of the following: (a)
any new or reassigned manufacturer’s
model code, as described in section
4.02(3) of this revenue procedure, that is
caused by a change in an existing vehicle,
or (b) a manufacturer’s model code, as described in section 4.02(3) of this revenue
procedure, created or reassigned because
the classified vehicle did not previously
exist. Additionally, if there is no change in
a manufacturer’s model code, but there
has been a change to the platform (i.e., the
piece of metal at the bottom of the chassis
that determines the length and width of
the vehicle and the structural set-up of the
vehicle) that results in a change in track
width or wheel-base, whether or not the
same model name was previously used by
the manufacturer, a new item category is
created.
(6) Treatment of a new item not in
existence in the prior year. The automobile dealer must use the current-year base
vehicle cost of the new item category as
the prior-year base vehicle cost of that
item category.
(7) Item in existence in the prior
year, but not stocked. If an item in ending
inventory was not stocked by the automobile dealer at the end of the prior year, but
was in existence in the prior year, the automobile dealer must determine the prioryear base vehicle cost for that item by reconstructing what the base vehicle cost

August 18, 1997

for the item category would have been
using a manufacturer’s price list that provides dealer purchase prices. For each
such item category, the manufacturer’s
price list that must be used by the automobile dealer is the list in effect as of the beginning of the last month of the prior taxable year.
.03 Computational methodology.
The following rules are applied to compute the LIFO value for each pool of an
automobile dealer’s ending inventory
under the Alternative LIFO Method:
STEP 1. Obtain the actual invoice for
each vehicle in the automobile dealer’s
ending inventory.
STEP 2. For each pool, group all the
invoices from Step l by item category, as
defined in section 4.02(3) of this revenue
procedure.
STEP 3. For each item category, add
together the dealer’s base vehicle costs of
all vehicles within each item category,
from Step 2.
STEP 4. Within each pool, compute an
average base vehicle cost for each item
category by dividing the result from Step
3 for each item category by the number of
vehicles in the item category. This average base vehicle cost for each item will be
used in Step 6 of the succeeding year’s
computations using the Alternative LIFO
Method.
STEP 5. For each pool, compute the
total current-year base vehicle cost of the
pool by adding together the separate item
category totals from Step 3.
STEP 6. For each pool, compute the
total base vehicle cost of the ending inventory at prior-year’s base vehicle cost.
First, multiply the number of vehicles in
the current year’s ending inventory for
each item category by the average base
vehicle cost of the same item category
from Step 4 of the preceding year’s inventory calculation. If the same item was not
in the prior year’s ending inventory, see
sections 4.02(6) and 4.02(7) of this revenue procedure. Then, add together the
total prior-year base vehicle cost of all of
the item categories.
STEP 7. For each pool, compute the
current-year (annual) index by dividing
the amount from Step 5 by the amount
from Step 6.
STEP 8. For each pool, compute the
cumulative index by multiplying the current-year index from Step 7 by the cumu-

16

lative index at the end of the preceding
year (from Step 8 of the preceding year’s
computation).
STEP 9. For each pool, compute the
total current-year total- vehicle cost by
adding together the total invoice cost, including installed options, accessories, and
other inventoriable cost(s), of all the vehicles in inventory at the end of the current
year.
STEP 10. For each pool, compute the
total cost of the current-year’s ending inventory at base-year cost by dividing the
total current-year total-vehicle cost of all
the vehicles in ending inventory, from
Step 9, by the cumulative index from Step
8.
STEP 11. For each pool, determine if
there is an increment for the current year
by comparing the total cost of the pool’s
current-year ending inventory at baseyear cost, from Step 10, with the total cost
of the pool’s preceding year’s ending inventory at base-year cost, using the
amount from Step 10 of the preceding
year’s calculation. If the amount from
Step 10 of the current year’s calculation is
greater, there is an increment.
STEP 12. For each pool, value the current year’s increment at current-year cost
by multiplying the increment amount
from Step 11 by the cumulative index
from Step 8.
STEP 13. If there is no increment for a
pool, but, rather, a liquidation (also referred to as a decrement), reduce the LIFO
layers in reverse chronological order until
the liquidation is fully absorbed.
STEP 14. For each pool, add together
the current year’s increment, if any, at
current-year cost and the prior years’ increments at each prior year’s current-year
cost to compute the total LIFO value for
the pool.
SECTION 5. CHANGING TO
ALTERNATIVE LIFO METHOD
.01 Automatic change. Except as provided in section 5.02 of this revenue procedure, an automobile dealer wanting to
change to the Alternative LIFO Method
must follow the provisions in Rev. Proc.
97–37.
.02 Nonautomatic change. An automobile dealer that uses the IPIC method for
goods other than new automobiles, new
light-duty trucks, parts and accessories,
used automobiles, and used trucks, must

1997–33 I.R.B.

change to the Alternative LIFO Method
under Rev. Proc. 97–27, 1997–21 I.R.B.
10.
.03 Conditions. An automobile dealer
changing to the Alternative LIFO Method
must comply with the following conditions:
(1) the automobile dealer must keep
its books and records for the year of
change and for later taxable years on the
LIFO inventory method and use the
LIFO inventory method for all reports,
including consolidated financial statements, if any, and statements for credit
purposes, in conformity with the provisions of § 1.472–2(e) of the regulations;
(2) the automobile dealer must value
its inventory of new automobiles and
new light-duty trucks as of the end of the
year of change and for later taxable years
under the Alternative LIFO Method, as
provided in section 4 of this revenue procedure, unless it obtains permission to
change to another recognized method;
(3) the automobile dealer changing
from the IPIC method for its inventory of
parts and accessories, used automobiles,
and used trucks must value its inventory
of parts and accessories, used automobiles and used trucks as of the end of the
year of change and for later taxable years
under the methods provided in section
10.03(2)(b) of the APPENDIX of Rev.
Proc. 97–37, unless it obtains permission
to change to another recognized method;
(4) the conversion from the specific
goods method, if applicable, to the dollar-value method must be made in accordance with § 1.472–8(f)(2);
(5) the automobile dealer must file
Form 970, Application to Use LIFO Inventory Method, with its federal income
tax return for the year of change and otherwise comply with the provisions of §
472(d) and § 1.472–3 (see also Rev. Rul.
76–282, 1976–2 C.B. 137) to extend the
LIFO election (i) to include any new automobiles and new light-duty trucks (for
example, demonstrators) to which the
LIFO election did not previously apply
but that are required to be included in
LIFO pools under the Alternative LIFO
Method, and (ii) for an automobile
dealer changing from the IPIC method,
to include any parts and accessories,
used automobiles, and used trucks, to
which the LIFO election did not previously apply but that are required to be in-

1997–33 I.R.B.

cluded in LIFO pools under section
10.03 of the APPENDIX to Rev. Proc.
97–37, as of the beginning of the year of
change;
(6) the automobile dealer must effect the change to the Alternative LIFO
Method, and in the case of an automobile
dealer changing from the IPIC method to
the methods provided in section
10.03(2)(b) of the APPENDIX of Rev.
Proc. 97–37, using the cut-off method.
Under the cut-off method, the value of
the automobile dealer’s new automobile
and new light-duty truck inventory, and
in the case of an automobile dealer
changing from the IPIC method, the parts
and accessories, used automobile, and
used truck inventory, at the beginning of
the year of change must be the same as
the value of such inventory at the end of
the preceding taxable year plus market
value restorations, if any, required pursuant to section 5.03(5) of this revenue
procedure;
(7) the automobile dealer must combine and/or separate the dollar-value inventory pool or pools, including any pool
resulting from section 5.03(4) of this revenue procedure, if applicable, to conform
to the inventory pooling rules provided in
section 4 of this revenue procedure, and
in the case of an automobile dealer
changing from the IPIC method, to the
inventory pooling rules provided in section 10.03(2)(b) of the APPENDIX of
Rev. Proc. 97–37, in accordance with the
provisions of § 1.472–8(g)(2);
(8) in effecting the changes, any layers of inventory increments previously
determined and the LIFO value of such
increments must be retained. Instead of
using the earliest taxable year for which
the automobile dealer adopted the LIFO
method for any items in the inventory
pool or pools, the year of change must be
used as the base year in determining the
LIFO value of the inventory pool or
pools for the year of change and later taxable years (the cumulative index at the
beginning of the year of change will be
1.00). The base-year costs of layers of
increments in the pool or pools at the beginning of the year of change must be restated in terms of the new base-year
costs, using the year of change as the new
base year; and
(9) the automobile dealer must
maintain and retain complete records of

17

the computations of the LIFO inventory
under the Alternative LIFO Method, as
well as copies of the actual purchase invoice for each vehicle used in the computation.
SECTION 6. INQUIRIES
Inquiries regarding this revenue procedure may be addressed to the Commissioner of Internal Revenue, Attention:
CC:DOM:IT&A, 1111 Constitution Avenue, NW, Washington, DC 20224.
SECTION 7. EFFECT ON OTHER
DOCUMENTS
Rev. Proc. 92–79, 1992–2 C.B. 457, is
modified, and as modified, is superseded.
However, see the transition rules in section 13.02 of Rev. Proc. 97–37.
SECTION 8. EFFECTIVE DATE
This revenue procedure is effective on
August 18, 1997.
SECTION 9. ELECTING LIFO AND
ADOPTING THE ALTERNATIVE LIFO
METHOD
.01 In general. An automobile dealer
that adopts the Alternative LIFO Method
provided in this revenue procedure at the
time the automobile dealer makes an
election to use (or extend) the dollarvalue LIFO inventory method must complete and file a statement of election
made on a current Form 970, pursuant to
the instructions for Form 970, or in such
other manner as may be acceptable to the
Commissioner. The use of the Alternative LIFO Method should be clearly indicated on the Form 970, or an attachment
to the Form 970, and reference should be
made to this revenue procedure. Appropriate LIFO sub-method elections that
are an integral part of the Alternative
LIFO Method, which are contained on
the Form 970, must be selected on the
Form 970 upon adoption of the Alternative LIFO Method.
.02 Conditions. A taxpayer adopting
the Alternative LIFO Method must comply with the conditions stated in section
5.03(1), (2), and (9) of this revenue procedure.
SECTION 10. PAPERWORK
REDUCTION ACT
The collections of information con-

August 18, 1997

tained in this revenue procedure have
been reviewed and approved by the Office of Management and Budget in accordance with the Paperwork Reduction Act
(44 U.S.C. 3507) under control number
1545–1551.
An agency may not conduct or sponsor,
and a person is not required to respond to,
a collection of information unless the collection of information displays a valid
OMB control number.
The collections of information in this
revenue procedure are in section 5. This
information is necessary and will be used
to determine whether the taxpayer is
properly using the Alternative LIFO
Method. The collections of information
are required for the taxpayer to use the Alternative LIFO Method. The likely
recordkeepers are individuals, business or
other for-profit institutions, and small
businesses or organizations.
The estimated total annual recordkeeping burden is 200,000 hours.
The estimated annual burden per
recordkeeper is 25 hours. The estimated
number of recordkeepers is 8,000.
Books or records relating to a collection of information must be retained as
long as their contents may become material in the administration of any internal
revenue law. Generally tax returns and
tax return information are confidential, as
required by 26 U.S.C. 6103.
DRAFTING INFORMATION
This revenue procedure was drafted in
the Office of Assistant Chief Counsel (Income Tax and Accounting). For further
information regarding this revenue procedure, contact Richard H. Berken on 202622-4970 (not a toll-free call).

26 CFR 601.204: Changes in accounting periods
and in methods of accounting.
(Also Part I, §§ 162, 165, 166, 167, 168, 197, 263,
263A, 446, 451, 454, 455, 461, 471, 472, 481, 585,
1273, 1281, 1363; 1.165–2, 1.167(e)–1, 1.263(a)–2,
1.263A–1, 1.263A–3, 1.446–1, 1.454–1, 1.455–6,
1.461–4, 1.461–5, 1.471–1, 1.471–2, 1.471–3,
1.472–6, 1.472–8, 1.481–1, 1.481–4, 1.1273–1,
1.1273–2.)

Rev. Proc. 97–37
TABLE OF CONTENTS
PAGE
SECTION 1. PURPOSE . . . . . . . . . . . 19
SECTION 2. BACKGROUND. . . . . . 19

August 18, 1997

.01 Change in method of accounting
defined. . . . . . . . . . . . . . . . . . . 19
.02 Securing permission to make a
method change . . . . . . . . . . . . 19
.03 Terms and conditions of a
method change . . . . . . . . . . . . 19
.04 No retroactive method
change . . . . . . . . . . . . . . . . . . . 19
.05 Method change with a § 481(a)
adjustment . . . . . . . . . . . . . . . . 19
(1) Need for adjustment . . . . . 19
(2) Adjustment period . . . . . . . 20
.06 Method change using a cut-off
method. . . . . . . . . . . . . . . . . . . 20
.07 Consistency and clear reflection
of income. . . . . . . . . . . . . . . . . 20
.08 Separate trades or businesses . 20
.09 Penalties. . . . . . . . . . . . . . . . . . 20
.10 Change made as part of an
examination . . . . . . . . . . . . . . . 20
SECTION 3. DEFINITIONS . . . . . . . 20
.01 Application . . . . . . . . . . . . . . . 20
.02 Taxpayer . . . . . . . . . . . . . . . . . 20
(1) In general . . . . . . . . . . . . . . 20
(2) Consolidated group . . . . . . 20
.03 Filed. . . . . . . . . . . . . . . . . . . . . 20
.04 Mailed . . . . . . . . . . . . . . . . . . . 20
.05 Timely performance of acts. . . 20
.06 Year of change . . . . . . . . . . . . . 21
.07 Section 481(a) adjustment
period. . . . . . . . . . . . . . . . . . . . 21
.08 Under examination . . . . . . . . . 21
(1) In general . . . . . . . . . . . . . . 21
(2) Partnerships and S corporations subject to TEFRA . . . . . . 21
.09 Issue under consideration . . . . 21
(1) Under examination . . . . . . 21
(2) Before an appeals office . . 21
(3) Before a federal court . . . . 21
.10 Change within the LIFO inventory method . . . . . . . . . . . . . . . 21
SECTION 4. SCOPE . . . . . . . . . . . . . 22
.01 Applicability . . . . . . . . . . . . . . 22
.02 Inapplicability . . . . . . . . . . . . . 22
(1) Under examination . . . . . . 22
(2) Before an appeals office . . 22
(3) Before a federal court . . . . 22
(4) Consolidated group
member . . . . . . . . . . . . . . . . . . 22
(5) Partnerships and S
corporations. . . . . . . . . . . . . . . 22
(6) Prior change. . . . . . . . . . . . 22
(7) Section 381(a) transaction . 22
.03 Nonautomatic changes . . . . . . 22
SECTION 5. TERMS AND CONDITIONS OF CHANGE . . . . . . . . . . . . . 22
.01 In general . . . . . . . . . . . . . . . . . 22

18

.02 Year of change . . . . . . . . . . . . . 22
.03 Section 481(a) adjustment . . . . 22
.04 Section 481(a) adjustment
period. . . . . . . . . . . . . . . . . . . . 22
(1) In general . . . . . . . . . . . . . . 22
(2) Short period as a separate
taxable year . . . . . . . . . . . . . . . 22
(3) Shortened or accelerated adjustment periods . . . . . . . . . . . 22
.05 NOL carryback limitation for
taxpayer subject to criminal
investigation . . . . . . . . . . . . . . 23
.06 Change treated as initiated by the
taxpayer . . . . . . . . . . . . . . . . . . 24
SECTION 6. GENERAL
APPLICATION PROCEDURES . . . . 24
.01 Consent . . . . . . . . . . . . . . . . . . 24
.02 Filing requirements . . . . . . . . . 24
(1) Waiver of taxable year
filing requirement . . . . . . . . . . 24
(2) Timely duplicate filing
requirement . . . . . . . . . . . . . . . 24
(3) Label . . . . . . . . . . . . . . . . . 24
(4) Signature requirements . . . 24
(5) Additional statement
required . . . . . . . . . . . . . . . . . . 24
(6) Where to file . . . . . . . . . . . 24
(7) No user fee. . . . . . . . . . . . . 24
(8) Single application for certain
consolidated groups. . . . . . . . . 24
.03 Taxpayer under examination . . 24
(1) In general . . . . . . . . . . . . . . 24
(2) 90-day window period. . . . 25
(3) 120-day window period. . . 25
(4) Consent of district director 25
.04 Taxpayer before an appeals
office . . . . . . . . . . . . . . . . . . . . 25
.05 Taxpayer before a federal
court. . . . . . . . . . . . . . . . . . . . . 25
.06 Compliance with provisions . . 25
SECTION 7. AUDIT PROTECTION
FOR TAXABLE YEARS PRIOR TO
YEAR OF CHANGE . . . . . . . . . . . . . 25
.01 In general. . . . . . . . . . . . . . . . . 25
.02 Exceptions . . . . . . . . . . . . . . . . 26
(1) Change not made or made
improperly . . . . . . . . . . . . . . . . 26
(2) Change in sub-method. . . . 26
(3) Prior year Service-initiated
change . . . . . . . . . . . . . . . . . . . 26
(4) Criminal investigation . . . . 26
SECTION 8. EFFECT OF
CONSENT . . . . . . . . . . . . . . . . . . . . . 26
.01 In general. . . . . . . . . . . . . . . . . 26
.02 Retroactive change or modification. . . . . . . . . . . . . . . . . . . . . . 26

1997–33 I.R.B.

SECTION 9. REVIEW BY DISTRICT
DIRECTOR. . . . . . . . . . . . . . . . . . . . . 26
.01 In general. . . . . . . . . . . . . . . . . 26
.02 National office consideration . 26
SECTION 10. REVIEW BY NATIONAL
OFFICE . . . . . . . . . . . . . . . . . . . . . . . . 26
.01 In general. . . . . . . . . . . . . . . . . 26
.02 Incomplete application—21 day
rule. . . . . . . . . . . . . . . . . . . . . . 26
.03 Conference in the national
office . . . . . . . . . . . . . . . . . . . . 27
.04 National office determination . 27
SECTION 11. APPLICABILITY OF
REV. PROCS. 97–1 AND 97–4 . . . . . 27
SECTION 12. INQUIRIES. . . . . . . . . 27
SECTION 13. EFFECTIVE DATE. . . 27
.01 In general. . . . . . . . . . . . . . . . . 27
.02 Transition rules . . . . . . . . . . . . 27
(1) Previously filed
applications . . . . . . . . . . . . . . . 27
(2) New applications . . . . . . . . 27
.03 Timing of incurring liabilities for
payroll taxes . . . . . . . . . . . . . . 28
SECTION 14. EFFECT ON OTHER
DOCUMENTS . . . . . . . . . . . . . . . . . . 28
.01 Modified and superseded. . . . . 28
.02 Obsoleted. . . . . . . . . . . . . . . . . 28
SECTION 15. PAPERWORK
REDUCTION ACT. . . . . . . . . . . . . . . 28
DRAFTING INFORMATION . . . . . . 28
APPENDIX (TABLE OF
CONTENTS). . . . . . . . . . . . . . . . . . . . 28
SECTION 1. PURPOSE
This revenue procedure provides the
procedures by which a taxpayer may obtain automatic consent to change the
methods of accounting described in the
APPENDIX of this revenue procedure.
This revenue procedure consolidates and
supersedes most published automatic consent guidance for changes in methods of
accounting, and generally provides simplified, uniform procedures and terms and
conditions to obtain automatic consent to
make these changes. It also provides new
automatic consent procedures for changes
in several other methods of accounting. A
taxpayer complying with all the applicable provisions of this revenue procedure
has obtained the consent of the Commissioner of Internal Revenue to change its
method of accounting under § 446(e) of
the Internal Revenue Code and the Income Tax Regulations thereunder.

1997–33 I.R.B.

SECTION 2. BACKGROUND
.01 Change in method of accounting
defined.
(1) Section 1.446–1(e)(2)(ii)(a) of
the Income Tax Regulations provides that
a change in method of accounting includes a change in the overall plan of accounting for gross income or deductions,
or a change in the treatment of any material item. A material item is any item that
involves the proper time for the inclusion
of the item in income or the taking of the
item as a deduction. In determining
whether a taxpayer’s accounting practice
for an item involves timing, generally the
relevant question is whether the practice
permanently changes the amount of the
taxpayer’s lifetime income. If the practice does not permanently affect the taxpayer’s lifetime income, but does or could
change the taxable year in which income
is reported, it involves timing and is
therefore a method of accounting. See
Rev. Proc. 91–31, 1991–1 C.B. 566.
(2) Although a method of accounting
may exist under this definition without a
pattern of consistent treatment of an item,
a method of accounting is not adopted in
most instances without consistent treatment. The treatment of a material item in
the same way in determining the gross income or deductions in two or more consecutively filed tax returns (without regard to any change in status of the method
as permissible or impermissible) represents consistent treatment of that item for
purposes of § 1.446–1(e)(2)(ii)(a). If a
taxpayer treats an item properly in the
first return that reflects the item, however,
it is not necessary for the taxpayer to treat
the item consistently in two or more consecutive tax returns to have adopted a
method of accounting. If a taxpayer has
adopted a method of accounting under
these rules, the taxpayer may not change
the method by amending its prior income
tax return(s). See Rev. Rul. 90–38,
1990–1 C.B. 57.
(3) A change in the characterization
of an item may also constitute a change in
method of accounting if the change has
the effect of shifting income from one period to another. For example, a change
from treating an item as income to treating the item as a deposit is a change in
method of accounting. See Rev. Proc.
91–31.
(4) A change in method of account-

19

ing does not include correction of mathematical or posting errors, or errors in the
computation of tax liability (such as errors in computation of the foreign tax
credit, net operating loss, percentage depletion, or investment credit). See
§ 1.446–1(e)(2)(ii)(b).
.02 Securing permission to make a
method change. Section 446(e) and §
1.446–1(e) state that, except as otherwise
provided, a taxpayer must secure the consent of the Commissioner before changing
a method of accounting for federal income
tax purposes. Section 1.446–1T(e)(3)(i)(B) requires that, in order to obtain the
Commissioner’s consent to a method
change, a taxpayer must file a Form 3115,
Application for Change in Accounting
Method, during the taxable year in which
the taxpayer wants to make the proposed
change.
.03 Terms and conditions of a method
change. Section 1.446–1(e)(3)(ii) authorizes the Commissioner to prescribe administrative procedures setting forth the
limitations, terms, and conditions deemed
necessary to permit a taxpayer to obtain
consent to change a method of accounting
in accordance with § 446(e). The terms
and conditions the Commissioner may
prescribe include the year of change,
whether the change is to be made with a §
481(a) adjustment or on a cut-off basis,
and the § 481(a) adjustment period.
.04 No retroactive method change.
Unless specifically authorized by the
Commissioner, a taxpayer may not request, or otherwise make, a retroactive
change in method of accounting, regardless of whether the change is from a permissible or an impermissible method. See
generally Rev. Rul. 90–38.
.05 Method change with a § 481(a) adjustment.
(1) Need for adjustment. Section
481(a) requires those adjustments necessary to prevent amounts from being duplicated or omitted to be taken into account
when the taxpayer’s taxable income is
computed under a method of accounting
different from the method used to compute taxable income for the preceding taxable year. When there is a change in
method of accounting to which § 481(a) is
applied, income for the taxable year preceding the year of change must be determined under the method of accounting
that was then employed, and income for

August 18, 1997

the year of change and the following taxable years must be determined under the
new method of accounting as if the new
method had always been used.
Example. A taxpayer that is not required to use
inventories uses the overall cash receipts and disbursements method and changes to an overall accrual method. The taxpayer has $120,000 of income
earned but not yet received (accounts receivable)
and $100,000 of expenses incurred but not yet paid
(accounts payable) as of the end of the taxable year
preceding the year of change. A positive § 481(a)
adjustment of $20,000 ($120,000 accounts receivable less $100,000 accounts payable) is required as a
result of the change.

(2) Adjustment period. Section
481(c) and §§ 1.446–1T(e)(3)(i) and
1.481–4 provide that the adjustment required by § 481(a) may be taken into account in determining taxable income in
the manner and subject to the conditions
agreed to by the Commissioner and the
taxpayer. Generally, in the absence of
such an agreement, the § 481(a) adjustment is taken into account completely in
the year of change, subject to § 481(b)
which limits the amount of tax where the
§ 481(a) adjustment is substantial. However, under the Commissioner’s authority
in § 1.446–1(e)(3)(ii) to prescribe terms
and conditions for changes in methods of
accounting, this revenue procedure provides specific adjustment periods that are
intended to achieve an appropriate balance between the goals of mitigating distortions of income that result from accounting method changes and providing
appropriate incentives for voluntary compliance.
.06 Method change using a cut-off
method. The Commissioner may determine that certain changes in methods of
accounting will be made without a §
481(a) adjustment, using a “cut-off
method.” Under a cut-off method, only
the items arising on or after the beginning
of the year of change (or other operative
date) are accounted for under the new
method of accounting. Any items arising
before the year of change (or other operative date) continue to be accounted for
under the taxpayer’s former method of accounting. See, for example, § 263A
(which generally applies to costs incurred
after December 31, 1986, for noninventory property), § 461(h) (which generally
applies to amounts incurred on or after
July 18, 1984), and § 1.446–3 (which applies to notional principal contracts entered into on or after December 13, 1993).

August 18, 1997

Because no items are duplicated or omitted from income when a cut-off method is
used to effect a change in accounting
method, no § 481(a) adjustment is necessary.
.07 Consistency and clear reflection of
income. Methods of accounting should
clearly reflect income on a continuing
basis, and the Internal Revenue Service
exercises its discretion under §§ 446(e)
and 481(c) in a manner that generally
minimizes distortions of income across
taxable years and on an annual basis.
.08 Separate trades or businesses.
(1) Sections 1.446–1(d)(1) and (2)
provide that when a taxpayer has two or
more separate and distinct trades or businesses, a different method of accounting
may be used for each trade or business
provided the method of accounting used
for each trade or business clearly reflects
the overall income of the taxpayer as well
as that of each particular trade or business. No trade or business is separate and
distinct unless a complete and separable
set of books and records is kept for that
trade or business.
(2) Section 1.446–1(d)(3) provides
that if, by reason of maintaining different
methods of accounting, there is a creation
or shifting of profits or losses between the
trades or businesses of the taxpayer (for
example, through inventory adjustments,
sales, purchases, or expenses) so that income of the taxpayer is not clearly reflected, the trades or businesses of the
taxpayer are not separate and distinct.
.09 Penalties. Any otherwise applicable penalty for the failure of a taxpayer to
change its method of accounting (for example, the accuracy-related penalty under
§ 6662 or the fraud penalty under § 6663)
may be imposed if the taxpayer does not
timely file a request to change a method
of accounting. See § 446(f). Additionally, the taxpayer’s return preparer may
also be subject to the preparer penalty
under § 6694. However, penalties will
not be imposed when a taxpayer changes
from an impermissible method of accounting to a permissible one by complying with all applicable provisions of this
revenue procedure.
.10 Change made as part of an examination. Section 446(b) and § 1.446–1(b)(1) provide that if a taxpayer does not
regularly employ a method of accounting
that clearly reflects its income, the compu-

20

tation of taxable income must be made in a
manner that, in the opinion of the Commissioner, does clearly reflect income. If a
taxpayer under examination is not eligible
to change a method of accounting under
this revenue procedure, the change may be
made by the district director. A change resulting in a positive § 481(a) adjustment
will ordinarily be made in the earliest taxable year under examination with a oneyear § 481(a) adjustment period.
SECTION 3. DEFINITIONS
.01 Application. The term “application” includes a Form 3115, or any statement that is authorized under the APPENDIX of this revenue procedure to be filed
in lieu of a Form 3115, and any attachments.
.02 Taxpayer.
(1) In general. The term “taxpayer”
has the same meaning as the term “person” defined in § 7701(a)(1) (rather than
the meaning of the term “taxpayer” defined in § 7701(a)(14)).
(2) Consolidated group. For purposes of (a) sections 3.08(1), 3.09(1), and
4.02(1) of this revenue procedure (taxpayer under examination), (b) sections
3.09(2) and 4.02(2) of this revenue procedure (taxpayer before an appeals office),
or (c) sections 3.09(3) and 4.02(3) of this
revenue procedure (taxpayer before a federal court), the term “taxpayer” includes a
consolidated group.
.03 Filed. Any form (including an application), statement, or other document
required to be filed under this revenue
procedure is filed on the date it is mailed
to the proper address (or an address similar enough to complete delivery). If the
form, statement, or other document is not
mailed (or the date it is mailed cannot be
reasonably determined), it is filed on the
date it is delivered to the Service.
.04 Mailed. The date of mailing will
be determined under the rules of § 7502.
For example, the date of mailing is the
date of the U.S. postmark or the applicable date recorded or marked by a designated private delivery service. See Notice
97–26, 1997–17 I.R.B. 6.
.05 Timely performance of acts. The
rules of § 7503 apply when the last day
for the taxpayer’s timely performance of
any act (for example, filing an application
or submitting additional information) falls
on a Saturday, Sunday, or legal holiday.

1997–33 I.R.B.

The performance of any act is timely if
the act is performed on the next succeeding day that is not a Saturday, Sunday, or
legal holiday.
.06 Year of change. The year of
change is the taxable year for which a
change in method of accounting is effective, that is, the first taxable year the new
method is to be used, even if no affected
items are taken into account for that year.
.07 Section 481(a) adjustment period.
The § 481(a) adjustment period is the applicable number of taxable years for taking into account the § 481(a) adjustment
required as a result of the change in
method of accounting. The year of
change is the first taxable year in the adjustment period and the § 481(a) adjustment is taken into account ratably over
the number of taxable years in the adjustment period. The applicable adjustment
periods are set forth in section 5.04 of this
revenue procedure.
.08 Under examination.
(1) In general.
(a) Except as provided in section
3.08(2) of this revenue procedure, an examination of a taxpayer with respect to a
federal income tax return begins on the
date the taxpayer is contacted in any manner by a representative of the Service for
the purpose of scheduling any type of examination of the return. An examination
ends:
(i) in a case in which the Service accepts the return as filed, on the
date of the “no change” letter sent to the
taxpayer;
(ii) in a fully agreed case, on the
earliest of the date the taxpayer executes a
waiver of restrictions on assessment or
acceptance of overassessment (for example, Form 870, 4549, or 4605), the date
the taxpayer makes a payment of tax that
equals or exceeds the proposed deficiency, or the date of the “closing” letter
(for example, Letter 891 or 987) sent to
the taxpayer; or
(iii) in an unagreed or a partially agreed case, on the earliest of the
date the taxpayer (or its representative) is
notified by Appeals that the case has been
referred to Appeals from Examination,
the date the taxpayer files a petition in the
Tax Court, the date on which the period
for filing a petition with the Tax Court expires, or the date of the notice of claim
disallowance.

1997–33 I.R.B.

(b) An examination does not end
as a result of the early referral of an issue
to Appeals under the provisions of Rev.
Proc. 96–9, 1996–1 C.B. 575.
(c) An examination resumes on
the date the taxpayer (or its representative) is notified by Appeals (or otherwise)
that the case has been referred to Examination for reconsideration.
(2) Partnerships and S corporations
subject to TEFRA. For an entity (including a limited liability company), treated
as a partnership or an S corporation for
federal income tax purposes, that is subject to the TEFRA unified audit and litigation provisions for partnerships and S corporations, an examination begins on the
date of the notice of the beginning of an
administrative proceeding sent to the Tax
Matters Partner/Tax Matters Person
(TMP). An examination ends:
(a) in a case in which the Service
accepts the partnership or S corporation
return as filed, on the date of the “no adjustments” letter or the “no change” notice of final administrative adjustment
sent to the TMP;
(b) in a fully agreed case, when all
the partners, members, or shareholders
execute a Form 870–P, 870–L, or 870–S;
or
(c) in an unagreed or a partially
agreed case, on the earliest of the date the
TMP (or its representative) is notified by
Appeals that the case has been referred to
Appeals from Examination, the date the
TMP (or a partner, member, or shareholder) requests judicial review, or the
date on which the period for requesting
judicial review expires.
But see section 4.02(5) of this revenue
procedure for certain rules that preclude
an entity from requesting a change in accounting method. Also note that S corporations are not subject to the TEFRA unified audit and litigation provisions for
taxable years beginning after December
31, 1996. See Small Business Job Protection Act of 1996, Pub. L. No. 104–188, §
1317(a), 110 Stat. 1755, 1787 (1996).
.09 Issue under consideration.
(1) Under examination. A taxpayer’s method of accounting for an item
is an issue under consideration for the taxable years under examination if the taxpayer receives written notification (for
example, by examination plan, information document request (IDR), or notifica-

21

tion of proposed adjustments or income
tax examination changes) from the examining agent(s) specifically citing the treatment of the item as an issue under consideration. For example, a taxpayer ’s
method of pooling under the dollar-value,
last-in, first-out (LIFO) inventory method
is an issue under consideration as a result
of an examination plan that identifies
LIFO pooling as a matter to be examined,
but it is not an issue under consideration
as a result of an examination plan that
merely identifies LIFO inventories as a
matter to be examined. Similarly, a taxpayer’s method of determining inventoriable costs under § 263A is an issue under
consideration as a result of an IDR that requests documentation supporting the
costs included in inventoriable costs, but
it is not an issue under consideration as a
result of an IDR that requests documentation supporting the amount of cost of
goods sold reported on the return. The
question of whether a method of accounting is an issue under consideration may be
referred to the national office as a request
for technical advice under the provisions
of Rev. Proc. 97–2, 1997–1 I.R.B. 64 (or
any successor).
(2) Before an appeals office. A taxpayer’s method of accounting for an item
is an issue under consideration for the taxable years before an appeals office if the
treatment of the item is included as an
item of adjustment in the examination report referred to Appeals or is specifically
identified in writing to the taxpayer by
Appeals.
(3) Before a federal court. A taxpayer’s method of accounting for an item
is an issue under consideration for the taxable years before a federal court if the
treatment of the item is included in the
statutory notice of deficiency, the notice
of claim disallowance, the notice of final
administrative adjustment, the pleadings
(for example, the petition, complaint, or
answer) or amendments thereto, or is
specifically identified in writing to the
taxpayer by the counsel for the government.
.10 Change within the LIFO inventory
method. A change within the LIFO inventory method is a change from one
LIFO inventory method or sub-method to
another LIFO inventory method or submethod. A change within the LIFO inventory method does not include a

August 18, 1997

change in method of accounting that
could be made by a taxpayer that does
not use the LIFO inventory method (for
example, a method governed by § 471 or
§ 263A).
SECTION 4. SCOPE
.01 Applicability. Except as otherwise
provided in section 4.02 of this revenue
procedure, this revenue procedure applies
to a taxpayer requesting the Commissioner’s consent to change to a method of
accounting described in the APPENDIX
of this revenue procedure. Except as otherwise provided in this revenue procedure
(see, for example, section 2.01 of the APPENDIX of this revenue procedure), this
revenue procedure is the exclusive procedure for a taxpayer within its scope to obtain the Commissioner’s consent.
.02 Inapplicability. Except as otherwise provided in the APPENDIX of this
revenue procedure (see, for example, sections 4.01 and 12.01 of the APPENDIX of
this revenue procedure), this revenue procedure does not apply in the following situations:
(1) Under examination. If, on the
date the taxpayer would otherwise file a
copy of the application with the national
office, the taxpayer is under examination
(as provided in section 3.08 of this revenue procedure), except as provided in
sections 6.03(2) (90-day window),
6.03(3) (120-day window), and 6.03(4)
(district director consent) of this revenue
procedure;
(2) Before an appeals office. If, on
the date the taxpayer would otherwise
file a copy of the application with the national office, the taxpayer is before an appeals office with respect to any income
tax issue and the method of accounting to
be changed is an issue under consideration by the appeals office (as provided in
section 3.09(2) of this revenue procedure);
(3) Before a federal court. If, on the
date the taxpayer would otherwise file a
copy of the application with the national
office, the taxpayer is before a federal
court with respect to any income tax issue
and the method of accounting to be
changed is an issue under consideration
by the federal court (as provided in section 3.09(3) of this revenue procedure);
(4) Consolidated group member. A
corporation that is (or was formerly) a

August 18, 19

[Text truncated at 120,000 characters. The full text is on the page linked above.]

---

Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/agency%3Airs%3A5c5f5d84613f0dbf. Public record. Not legal advice.