# Bulletin No. 1997–21

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## Record

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- **Document type:** Agency decision

## Text

Bulletin No. 1997–21
May 27, 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.

EXEMPT ORGANIZATIONS
Announcement 97–53, page 22.
A list is given of organizations now classified as private
foundations.

EMPLOYMENT TAX
Page 4.
Railroad retirement; rate determination; quarterly.
The Railroad Retirement Board has determined that the
rate of tax imposed by Code section 3221 shall be 35
cents for the quarter beginning April 1, 1997.
Announcement 97–52, page 22.
Extension of test of employment tax early referral
procedures for appeals. This announcement describes
the method by which a taxpayer requests early referral
of one or more unagreed employment tax issues from
the District to Appeals.

ADMINISTRATIVE
Notice 97–31, page 5.
Qualified long-term care. Interim guidance is provided

Finding Lists begin on page 25.

on the definition of a “chronically ill individual” for
purposes of the definitions of “qualified long-term care
services” and a “qualified long-term care insurance
contract” under Code section 213(d).
Notice 97–32, page 8.
This notice sets forth the interim rules regarding the
rate of interest to be used by insurance companies to
compute under Code sections 807(c)(3) or 807(d)(2)
reserves for modified guaranteed contracts as defined in
Code section 817A, and the determination of policy
interest under Code section 812 with regard to these
contracts.
Rev. Proc. 97–27, page 10.
Changes in accounting periods and methods of accounting. General procedures are provided under Code
section 446(e) and section 1.446–1(e) of the Income
Tax Regulations for obtaining the Commissioner’s consent to change a method of accounting for federal
income tax purposes.

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

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 of ficers 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 cour tesy 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.

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

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,

The first Bulletin for each month includes an index for
the matters published during the preceding month.
These monthly indexes are cumulated on a quarterly and
semiannual basis, and are published in the first Bulletin
of the succeeding quarterly and semi-annual 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, D.C. 20402.

3

Part I. Rulings and Decisions Under the Inernal Revenue Code of 1986
Section 101.—Certain Death
Benefits

sent to change a method of accounting. See Rev.
Proc. 97–27, page 10.

26 CFR 1.101–1: Exclusion from gross income of
proceeds of life insurance contracts payable by
reason of death.

26 CFR 1.481–4: Adjustments taken into account
with consent.

Interim guidance is provided relating to the
definition of a ‘‘chronically ill individual’’ for
purposes of the treatment of certain accelerated
death benefits. See Notice 97–31, page 5.

Section 104.—Compensation for
Injuries or Sickness
26 CFR 1.104–1: Compensation for injuries or
sickness.
Interim guidance is provided relating to the
definition of a ‘‘chronically ill individual’’ for
purposes of the definition of a ‘‘qualified longterm care insurance contract’’ under section
7702B. See Notice 97–31, page 5.

Section 105.—Amounts Received
Under Accident and Health Plans
26 CFR 1.105–2: Amounts expended for medical
care.
Interim guidance is provided relating to the
definition of a ‘‘chronically ill individual’’ for
purposes of the definition of a ‘‘qualified longterm care insurance contract’’ under section
7702B. See Notice 97–31, page 5.

Section 213.—Medical, Dental,
Etc., Expenses
26 CFR 1.213–1: Medical, dental, etc., expenses.
Interim guidance is provided relating to the
definition of a ‘‘chronically ill individual’’ for
purposes of the definitions of ‘‘qualified long-term
care services’’ and a ‘‘qualified long-term care
insurance contract’’ under section 213(d). See
Notice 97–31, page 5.

General procedures are provided under section
1.446–1(e) for obtaining the Commissioner’s consent to change a method of accounting. See Rev.
Proc. 97–27, page 10.

Section 807.—Rules for Certain
Reserves
The notice sets forth the interim rules regarding
the rate of interest to be used by insurance
companies to compute under sections 807(c)(3) or
807(d)(2) reserves for modified guaranteed contracts as defined in section 817A, and the determination of policy interest under section 812 with
regard to these contracts.

Section 812.—Definition of
Company’s Share and
Policyholders’ Share
The notice sets forth the interim rules regarding
the rate of interest to be used by insurance
companies to compute under sections 807(c)(3) or
807(d)(2) reserves for modified guaranteed contracts as defined in section 817A, and the determination of policy interest under section 812 with
regard to these contracts.

Section 817A.—Special Rules for
Modified Guaranteed Contracts
The notice sets forth the interim rules regarding
the rate of interest to be used by insurance
companies to compute under sections 807(c)(3) or
807(d)(2) reserves for modified guaranteed contracts as defined in section 817A, and the determination of policy interest under section 812 with
regard to these contracts.

Section 3221.—Rate of Tax
Section 446.—General Rule for
Methods of Accounting
26 CFR 1.446–1: General rule for methods of
accounting.
General procedures are provided under section
1.446–1(e) for obtaining the Commissioner’s consent to change a method of accounting. See Rev.
Proc. 97–27, page 10.

Section 481.—Adjustments
Required by Changes in Method of
Accounting
26 CFR 1.481–1: Adjustments in general.
General procedures are provided under section
1.446–1(e) for obtaining the Commissioner’s con-

Determination of Quarterly Rate of
Excise Tax for Railroad Retirement
Supplemental Annuity Program
In accordance with directions in Section 3221(c) of the Railroad Retirement
Tax Act (16 U.S.C., Section 3221(c)),
the Railroad Retirement Board has determined that the excise tax imposed by
such Section 3221(c) on every employer, with respect to having individuals in his employ, for each work-hour
for which compensation is paid by such
employer for services rendered to him
during the quarter beginning April 1,
1997, shall be at the rate of 35 cents.

4

In accordance with directions in Section 15(a) of the Railroad Retirement
Act of 1974, the Railroad Retirement
Board has determined that for the quarter beginning April 1, 1997, 31.5 percent
of the taxes collected under Sections
3211(b) and 3221(c) of the Railroad
Retirement Tax Act shall be credited to
the Railroad Retirement Account and
68.5 percent of the taxes collected under
such Sections 3211(b) and 3221(c) plus
100 percent of the taxes collected under
Section 3221(d) of the Railroad Retirement Tax Act shall be credited to the
Railroad Retirement Supplemental Account.
Dated February 25, 1997.
By Authority of the Board.
Beatrice Ezerski,
Secretary to the Board.
(Filed by the Office of the Federal Register on
March 5, 1997, 8:45 a.m., and published in the
issue of the Federal Register for March 6, 1997,
62 F.R. 10297)

Section 4980C.—Requirements for
Issuers of Qualified Long-term Care
Insurance Contracts
Interim guidance is provided relating to the
definition of a ‘‘chronically ill individual’’ for
purposes of the term ‘‘qualified long-term care
insurance contract’’ and to certain issues relating
to consumer protection, rules for adjustments to
nonforfeiture benefits, and grandfather rules for
certain pre-1997 insurance contracts. See Notice
97–31, page 5.

Section 7121.—Closing
Agreements
26 CFR 301.7121–1: Closing agreements.
What is the method by which a taxpayer
requests early referral of one or more unagreed
empolyment tax issues from the District to Appeals? See Announcement 97–52, page 22.

Section 7702B.—Treatment of
Qualified Long-Term Care
Insurance
Interim guidance is provided relating to the
definition of a ‘‘chronically ill individual’’ and to
certain issues relating to consumer protection,
rules for adjustments to nonforfeiture benefits, and
grandfather rules for certain pre-1997 insurance
contracts. See Notice 97–31, page 5.

Part III. Administrative, Procedural, and Miscellaneous
Long-Term Care Services and
Insurance
Notice 97–31
This notice provides interim guidance
relating to qualified long-term care services and qualified long-term care insurance contracts under §§ 213, 7702B,
and 4980C of the Internal Revenue
Code. It is effective pending the publication of proposed regulations or other
guidance.
SUMMARY
The notice includes interim guidance
concerning the definition of a ‘‘chronically ill individual,’’ including safeharbor definitions of the terms ‘‘substantial assistance,’’ ‘‘hands-on assistance,’’
‘‘standby assistance,’’ ‘‘severe cognitive
impairment,’’ and ‘‘substantial supervision.’’ Under the long-term care provisions added to the Internal Revenue
Code in 1996, certain payments received
on account of a chronically ill individual
from a qualified long-term care insurance contract are excluded from income.
In addition, certain expenditures incurred for qualified long-term care services required by a chronically ill individual are deductible as medical care
expenses.
The notice also includes an interim
safe harbor that allows key provisions in
qualified long-term care insurance contracts to be interpreted by an insurance
company using the same standards that
the company used before 1997 to determine whether an individual is unable to
perform activities of daily living or is
cognitively impaired. In addition, the
notice provides interim guidance on the
scope of the statutory grandfather provisions that apply to individual and group
long-term care insurance contracts issued before 1997.
The safe harbors are designed to
provide standards for taxpayers to use in
interpreting the new long-term care provisions and to provide interim guidance
to facilitate operation of the insurance
market without the need for interim
amendment of contracts.
The guidance takes into account comments and information provided by State
insurance regulators (including the National Association of Insurance Commissioners), insurance companies offering
long-term care insurance, consumer representatives, groups representing individuals with chronic disabilities, the De-

partment of Health and Human Services,
health professionals expert in the care
and rehabilitation of individuals with
chronic illnesses, and others. The notice
addresses certain issues identified as
those for which interim guidance would
be most helpful. The Internal Revenue
Service and Treasury Department are
continuing to consider these and other
issues and welcome further comments.
STATUTORY CHANGES
Sections 7702B and 4980C, added by
§§ 321 and 326 of the Health Insurance
Portability and Accountability Act of
1996 (Pub. L. 104–191, 110 Stat. 1936,
2054 and 110 Stat. at 2065)(HIPAA),
establish requirements for qualified
long-term care insurance contracts and
issuers of those contracts. Section
7702B(b)(1)(A) requires a qualified
long-term care insurance contract to provide insurance protection only for qualified long-term care services. Generally,
§ 7702B applies to contracts issued after December 31, 1996, and § 4980C
applies to actions taken after December
31, 1996. See HIPAA §§ 321(f)(1) and
327.
Section 7702B(c)(1) defines ‘‘qualified long-term care services’’ as necessary diagnostic, preventive, therapeutic,
curing, treating, mitigating, and rehabilitative services, and maintenance or personal care services that are required by
a chronically ill individual, and provided
pursuant to a plan of care prescribed by
a licensed health care practitioner.
Section 7702B(c)(2)(A) defines a
‘‘chronically ill individual’’ as any individual who has been certified by a
licensed health care practitioner as —
(i) being unable to perform without substantial assistance from another individual at least 2 out of
6 activities of daily living listed in
§ 7702B(c)(2)(B) (ADLs) for a period of at least 90 days due to a loss
of functional capacity (the ADL Trigger);
(ii) having a level of disability similar to the level of disability described
in the ADL Trigger as determined
under regulations prescribed by the
Secretary of the Treasury in consultation with the Secretary of Health and
Human Services (the Similar Level
Trigger); or
(iii) requiring substantial supervision
to protect the individual from threats
to health and safety due to severe

5

cognitive impairment (the Cognitive
Impairment Trigger).
The 6 ADLs listed in § 7702B(c)(2)(B)
are eating, toileting, transferring, bathing, dressing, and continence. Section
7702B(c)(2)(B) further provides that a
contract is not a qualified long-term care
insurance contract unless it takes into
account at least 5 of these 6 activities in
determining whether an individual is a
chronically ill individual.
In addition, § 322 of HIPAA
amended § 213 of the Code. For taxpayers who itemize deductions, § 213
generally allows a deduction for expenses paid during the taxable year, not
compensated for by insurance or otherwise, for medical care of the taxpayer,
his or her spouse, and dependents, to the
extent that the expenses exceed 7.5
percent of the taxpayer’s adjusted gross
income. As amended by HIPAA,
§ 213(d) provides that the term ‘‘medical care’’ includes (1) eligible premiums
paid for any qualified long-term care
insurance contract (as defined in
§ 7702B(b)) and (2) amounts paid for
qualified long-term care services (as
defined in § 7702B(c)).
INTERIM GUIDANCE
I. CHRONICALLY ILL INDIVIDUAL
This section of the notice provides
interim guidance including safe harbors
relating to the determination of whether
an individual is a ‘‘chronically ill individual’’ under § 7702B(c)(2). Taxpayers
(including uninsured individuals, insurance companies, employers, policyholders, and certificate holders) may rely on
this interim guidance to determine
whether an individual is a chronically ill
individual under the ADL Trigger or the
Cognitive Impairment Trigger for purposes of the definitions of ‘‘qualified
long-term care services’’ in § 7702B(c)
and ‘‘medical care’’ in § 213(d).
ADL Trigger. For purposes of the
ADL Trigger, taxpayers may rely on all
or any of the following safe-harbor
definitions —
(1) ‘‘Substantial assistance’’ means
hands-on assistance and standby assistance.
(2) ‘‘Hands-on assistance’’ means the
physical assistance of another person
without which the individual would be
unable to perform the ADL.
(3) ‘‘Standby assistance’’ means the
presence of another person within arm’s
reach of the individual that is necessary

to prevent, by physical intervention, injury to the individual while the individual is performing the ADL (such as
being ready to catch the individual if the
individual falls while getting into or out
of the bathtub or shower as part of
bathing, or being ready to remove food
from the individual’s throat if the individual chokes while eating).
An individual is a chronically ill
individual under the ADL Trigger only
if a licensed health care practitioner has
certified that the individual is unable to
perform (without substantial assistance
from another individual) at least 2 ADLs
for a period of at least 90 days due to a
loss of functional capacity. This 90-day
requirement does not establish a waiting
period before which benefits may be
paid or before which services may constitute qualified long-term care services.
Cognitive Impairment Trigger. For
purposes of the Cognitive Impairment
Trigger, taxpayers may rely on either or
both of the following safe-harbor definitions—
(1) ‘‘Severe cognitive impairment’’
means a loss or deterioration in intellectual capacity that is (a) comparable to
(and includes) Alzheimer’s disease and
similar forms of irreversible dementia,
and (b) measured by clinical evidence
and standardized tests that reliably measure impairment in the individual’s (i)
short-term or long-term memory, (ii)
orientation as to people, places, or time,
and (iii) deductive or abstract reasoning.
(2) ‘‘Substantial supervision’’ means
continual supervision (which may include cuing by verbal prompting, gestures, or other demonstrations) by another person that is necessary to protect
the severely cognitively impaired individual from threats to his or her health
or safety (such as may result from
wandering).
Under the Cognitive Impairment Trigger, unlike the ADL Trigger, a qualified
long-term care insurance contract is not
required to take any ADL into account
for purposes of determining whether an
individual is a chronically ill individual.
Safe-Harbor for Continuation of Pre1997 Insurance Standards. This safe
harbor applies to post-1996 long-term
care insurance contracts (including any
pre-1997 contracts not grandfathered under § 321(f)(2) and the grandfather
rules in this notice for certain pre-1997
insurance contracts) issued by an insurance company with outstanding pre1997 long-term care insurance contracts
that base eligibility for payments upon
the inability to perform any of the ADLs

(eating, toileting, transferring, bathing,
dressing, and continence) or cognitive
impairment. Insurance companies, policyholders, and certificate holders may
rely on this safe harbor (as well as the
safe-harbor definitions above for the
ADL and Cognitive Impairment Triggers) to determine whether an individual
is a chronically ill individual under both
or either the ADL Trigger and the
Cognitive Impairment Trigger for purposes of the definition of a ‘‘qualified
long-term care insurance contract,’’
whether or not the post-1996 contracts
generally incorporate the provisions of
§ 7702B(c)(2). In order to rely on any
of these safe harbors for federal tax
purposes, contracts are not required to
incorporate or refer to the safe harbors.
In applying the ADL Trigger to its
post-1996 contracts, an insurance company is permitted to use the same
standards that it uses to determine
whether an individual is unable to perform an ADL for purposes of eligibility
for benefit payments under its pre-1997
contracts (‘‘pre-1997 ADL standards’’).
If the insurance company makes determinations regarding an individual’s inability to perform an ADL under a
post-1996 contract using its pre-1997
ADL standards, the contract will be
deemed to satisfy the requirement under
the ADL Trigger that an individual is
unable to perform (without substantial
assistance from another person) that
ADL due to a loss of functional capacity. For example, if an insurance company has outstanding pre-1997 longterm care insurance contracts that
provide for benefit payments if the
insured is unable to perform at least 2
ADLs (whether or not the contracts
refer to substantial assistance), the company may interpret ‘‘substantial assistance’’ for purposes of the ADL Trigger
as requiring the same assistance as the
company requires under its pre-1997
contracts.
In applying the Cognitive Impairment
Trigger to its post-1996 contracts, an
insurance company is permitted to use
the same standards that it uses to determine whether an individual qualifies for
benefits due to cognitive impairment
under its pre-1997 contracts (‘‘pre-1997
cognitive impairment standards’’). If the
insurance company makes determinations regarding an individual’s cognitive
impairment under a post-1996 contract
using its pre-1997 cognitive impairment
standards, the contract will be deemed
to satisfy the requirement under the
Cognitive Impairment Trigger that an

6

individual requires substantial supervision to protect the individual from
threats to health and safety due to
severe cognitive impairment.
This safe harbor for continuation of
pre-1997 insurance standards applies
only for purposes of determining
whether an individual (1) is unable to
perform (without substantial assistance
from another person) an ADL due to a
loss of functional capacity or (2) requires substantial supervision to protect
the individual from threats to health and
safety due to severe cognitive impairment. This safe harbor does not apply
for purposes of the other statutory requirements of § 7702B(c)(2), such as
(1) the requirement that an individual’s
loss of functional capacity apply to at
least 2 of 5 or 6 ADLs, (2) the requirement for a certification by a licensed
health care practitioner, and (3) the
90-day requirement. These statutory requirements must be satisfied in order for
the individual to be a ‘‘chronically ill
individual’’ under the ADL or Cognitive
Impairment Trigger, whether or not
similar requirements are imposed under
the insurance company’s pre-1997 contracts.
II. QUALIFIED LONG-TERM CARE
INSURANCE
This section of the notice addresses
certain issues relating to the consumer
protection provisions of §§ 7702B(b),
7702B(g), and 4980C, rules for adjustments to nonforfeiture benefits under
§ 7702B(g)(4), and the grandfather rules
for certain pre-1997 insurance contracts.
Taxpayers (including insurance companies, employers, policyholders, and certificate holders) may rely on this interim
guidance for purposes of the definition
of ‘‘qualified long-term care insurance
contract’’ in § 7702B(b) and the requirements of § 4980C.
Consumer Protections Applicable to
Long-Term Care Insurance. Under
§§ 7702B(b)(1)(F), 7702B(g), and
4980C, qualified long-term care insurance contracts and issuers of those contracts are required to satisfy certain
requirements of the Long-Term Care
Insurance Model Act (Model Act) and
Long-Term Care Insurance Model Regulation (Model Regulation) promulgated
by the National Association of Insurance
Commissioners (NAIC), as adopted as
of January 1993. The requirements for
qualified long-term care insurance contracts under §§ 7702B(b)(1)(F) and
7702B(g) relate to guaranteed renewal
or noncancellability, prohibitions on

limitations and exclusions, extension of
benefits, continuation or conversion of
coverage, discontinuance and replacement of policies, unintentional lapse,
disclosure, prohibitions against postclaims underwriting, minimum standards, inflation protection, prohibitions
against preexisting conditions and probationary periods, and prior hospitalization. The requirements for qualified
long-term care insurance contracts under
§ 4980C relate to application forms and
replacement coverage, reporting requirements, filing requirements for marketing, standards for marketing, appropriateness of recommended purchase,
standard format outline of coverage,
delivery of a shopper’s guide, right to
return, outline of coverage, certificates
under group plans, policy summary,
monthly reports on accelerated death
benefits, and incontestability period.
Sections 7702B and 4980C reference
NAIC model provisions that specify
exact language (including punctuation),
captions, format, and content that must
be included in long-term care insurance
contracts, applications, outlines of coverage, policy summaries, and notices.
See, e.g., §§ 10, 13, and 24 of the
Model Regulation.
In the case of a State that has adopted
all or any portion of the Model Act or
Model Regulation, compliance with the
applicable requirement of State law is
considered compliance with the parallel
Model Act or Model Regulation requirement specified in § 7702B(g) or
§ 4980C, and failure to comply with
that requirement of State law is considered failure to comply with the parallel
Model Act or Model Regulation requirement in § 7702B(g) or § 4980C. For
example, if a particular State has
adopted Section 6C of the Model Act
(relating to preexisting conditions), then,
for a contract that is subject to that
State’s insurance laws, compliance
with that State law is considered compliance with § 7702B(g)(2)(A)(ii)(I) and
failure to comply with that State law is
considered failure to comply with
§ 7702B(g)(2)(A)(ii)(I). In accordance
with § 4980C(f), in the case of a State
that imposes a requirement that is more
stringent than the analogous requirement
imposed by § 7702B(g) or § 4980C,
compliance with the applicable requirement of State law is considered compliance with the parallel Model Act or
Model Regulation requirement in
§ 7702B(g) or § 4980C.
If a State has not adopted a provision
of the Model Act or Model Regulation

that is specified in § 7702B(g) or
§ 4980C (and has not adopted a requirement that is more stringent than the
requirement imposed by that provision),
the language, caption, format, and content requirements imposed by the Model
Act or Model Regulation provision with
respect to contracts, applications, outlines of coverage, policy summaries, and
notices will be considered satisfied for a
contract subject to the law of that State
if the language, captions, format, and
content are substantially identical in all
material respects to those required under
that Model Act or Model Regulation
provision.
Adjustments to Nonforfeiture Benefits
Under Insurance Contracts. Section
7702B(g)(4)(B)(ii) provides that the
amount of a nonforfeiture benefit available in the event of a default in premium payments may be subsequently
adjusted only as necessary to reflect
changes in claims, persistency, and interest that have been taken into account in
a change in the premium rates for
contracts issued on the same contract
form if the contract form has been
approved by the Secretary of the Treasury. Solely for the purpose of making
such adjustments, approval by the State
insurance commissioner or other applicable State authority will be treated as
approval by the Secretary of the Treasury.
Grandfather Rules for Certain Pre1997 Insurance Contracts. Section
321(f)(2) of HIPAA provides that a
contract issued before January 1, 1997,
is treated as a qualified long-term care
insurance contract if the contract met
the ‘‘long-term care insurance requirements of the State’’ in which the contract was sitused at the time it was
issued. For this purpose, the ‘‘long-term
care insurance requirements of the
State’’ means the State laws (including
statutory and administrative law) that
are intended to regulate insurance coverage that constitutes ‘‘long-term care insurance’’ (as defined in § 4 of the
Long-Term Care Insurance Model Act
as adopted by the NAIC in December,
1995), regardless of the terminology
used by the State in describing the
insurance coverage.
For purposes of applying the grandfather rule of § 321(f)(2) to a contract
other than a group contract, the issue
date of a contract is generally the date
assigned to the contract by the insurance
company, but in no event earlier than
the date the application is signed. How-

7

ever, if the period between the date of
application and the date on which the
contract is actually placed in force is
substantially longer than under the insurance company’s usual business practice, then the issue date is the date the
contract is placed in force.
For purposes of applying the grandfather rule of § 321(f)(2) to a group
contract, the issue date of the contract is
the date the group contract was issued.
Thus, insurance coverage under certificates evidencing the addition, on or after
January 1, 1997, of individuals to the
coverage available under a grandfathered group contract is accorded the
same grandfather treatment under
§ 321(f)(2) as the preexisting coverage
under the grandfathered group contract.
A policyholder’s right to return a
long-term care insurance contract within
a ‘‘free-look’’ period following delivery
(with a refund of any premiums that
have been paid) is not taken into account in determining the issue date of
the contract.
For purposes of applying the grandfather rule of § 321(f)(2), any material
change in a contract will be considered
the issuance of a new contract. This
includes any change in the terms of the
contract altering the amount or timing of
any item payable by the policyholder (or
certificate holder), the insured, or the
insurance company. For example, for
purposes of § 321(f)(2), any change in
the terms of a contract altering the
amount or timing of benefits (including
nonforfeiture benefits) or premiums constitutes a material change that will be
considered the issuance of a new contract. A substitution of the insured under
an individual contract, or a change
(other than an immaterial change) in the
eligibility for membership in the group
covered by a group contract, also constitutes a material change that will be
considered the issuance of a new contract. However, the unilateral exercise of
an option or right granted to a policyholder under the contract as in effect on
December 31, 1996, will not constitute a
material change. For this purpose, a
unilateral exercise includes only a
change that becomes effective without
any consent or other non-ministerial
action by the issuer of the contract. A
contract issued in an exchange after
December 31, 1996, for an existing
contract is considered a contract issued
after that date.

COMMENTS REQUESTED
The Internal Revenue Service and
Treasury Department invite comments
concerning the application of new
§§ 7702B and 4980C, the amendments
made to § 213, and other federal income tax provisions relating to longterm care as enacted under HIPAA
§§ 321 through 326, including the standards and definitions in this notice.
Comments are particularly requested on:
(1) whether the relief provided for insurance contracts complying with the interim guidance provided in this notice
needs to be extended beyond the effective date of more definitive guidance;
and (2) the types of disability that
should be included in any regulations
that may be prescribed under the Similar
Level Trigger. Comments should be submitted by August 4, 1997. Written comments should be sent to: Internal Revenue Service, P.O. Box 7604, Ben
Franklin Station, Attn: CC:CORP:T:R,
Room 5228, Washington, DC 20044.
Alternatively, submissions may be hand
delivered between the hours of 8 a.m.
and 5 p.m. to: CC:DOM:CORP:R (Notice 97–31), Courier’s Desk, Internal
Revenue Service, 1111 Constitution Avenue, NW, Washington, DC. Finally,
taxpayers may submit comments electronically via the Internal Revenue
Service INTERNET site at: http://
www.irs.ustreas.gov/prod/tax_regs/
comments.html. All submitted comments
will be available for public inspection
and copying.
FURTHER INFORMATION
For further information, contact Ms.
A. Kathie Jacob Kiss at (202) 622–4920
regarding section I of this notice and
Ms. Katherine A. Hossofsky at (202)
622–3970 regarding section II of this
notice (not toll-free calls).
PROCEDURAL INFORMATION
This document serves as an ‘‘administrative pronouncement’’ as that term is
defined in § 1.6661–3(b)(2) of the Income Tax Regulations and may be relied
upon to the same extent as a revenue
ruling or a revenue procedure.
(Also Part I, sections 807, 812, 817A)

Modified Guaranteed Contracts
Notice 97–32
SUMMARY: This notice provides interim rules with regard to the interest

rate to be used in the determinations
under §§ 807(c)(3), 807(d)(2)(B), and
812 for a ‘‘modified guaranteed contract,’’ as defined in § 817A(d). It also
describes the manner in which § 811(d)
is to be applied to these contracts.
Section 817A was added by § 1612 of
the Small Business Job Protection Act
of 1996, Pub. L. 104–188, 110 Stat.
1755. Section 817A is effective for
taxable years beginning after December
31, 1995. See Small Business Job Protection Act § 1612(c)(1). This notice is
effective pending the publication of further guidance.
BACKGROUND: Life insurance companies issue modified guaranteed annuity and life insurance contracts. A modified guaranteed contract temporarily
guarantees a higher return than the permanently guaranteed crediting rate, in
exchange for shifting additional investment risk to the policyholder in the
form of a market value adjustment. The
temporary guarantee may be a fixed rate
or a rate based on bond or equity yields,
such as a percentage of an increase in
the S&P 500 index. During the temporary guarantee period, the amount paid
to the policyholder upon surrender is
increased or decreased by the market
value adjustment, which is determined
by a formula in the modified guaranteed
contract. The market value adjustment
generally is based on a published bond
index. Modified guaranteed contracts
can be issued out of a life insurance
company’s general account or segregated account. Section 817A provides
special tax treatment for certain modified guaranteed contracts issued out of a
segregated account.
For this purpose, the term ‘‘modified
guaranteed contract’’ (‘‘MGC’’) is defined as an annuity, life insurance, or
pension plan contract (other than a variable contract described in § 817) under
which all or part of the amounts received under the contract are allocated
to a segregated account. Assets in this
segregated account must be valued from
time to time with reference to market
values, and reserves must be valued at
market for annual statement purposes.
Further, an MGC must provide either
for a net surrender value or for a
policyholder’s fund (as defined in
§ 807(e)(1)). If only a portion of a
contract is not described in § 817, such
portion is treated as a separate contract
for purposes of applying § 817A.
The tax reserves for an MGC are
computed under either § 807(c)(3) or

8

§ 807(d). Section 807(c)(3) provides
that reserves for obligations under insurance and annuity contracts not involving
life, accident, or health contingencies
are computed using an appropriate rate
of interest. The appropriate rate of interest is the highest (as of the time the
obligation first did not involve life,
accident, or health contingencies) of the
following rates: (1) the ‘‘applicable Federal interest rate’’ (as defined in
§ 807(d)(2)(B)(i)); (2) the ‘‘prevailing
State assumed interest rate’’ (as defined
in § 807(d)(2)(B)(ii)); or (3) the rate of
interest assumed by the insurance company to determine the contract’s guaranteed benefit. Section 807(c) also provides that the reserves computed under
§ 807(c)(3) are never less than the net
surrender value of the contract. 1
For an MGC that gives rise to life
insurance reserves, as defined in
§ 816(b), reserves are computed under
§ 807(d). Under § 807(d)(1), the life
insurance reserves for a contract cannot
exceed the statutory reserves (as defined
in § 809(b)(4)(B)) for the contract. Subject to that cap, a contract’s life insurance reserves equal the greater of: (1)
the contract’s net surrender value; or (2)
the contract’s Federally prescribed reserve determined under § 807(d)(2).
Section 807(d)(2) provides that the
Federally prescribed reserves for a contract are determined using: (1) the tax
reserve method applicable to the contract; (2) the greater of the applicable
Federal interest rate or the prevailing
State assumed interest rate in effect on
the date of the issuance of the contract;
and (3) the prevailing commissioners’
standard tables for mortality and morbidity. In the case of a life insurance
contract covered by the Commissioners’
Reserve Valuation Method (‘‘CRVM’’)
or an annuity contract covered by the
Commissioners’ Annuities Reserve Valuation Method (‘‘CARVM’’), § 807(d)(3)
provides that the tax reserve method
applicable to a contract is the CRVM or
CARVM prescribed by the National Association of Insurance Commissioners
(‘‘NAIC’’), which is in effect on the
date of the issuance of the contract.
Section 811(d) imposes an additional
reserve computation restriction for contracts that guarantee beyond the end of
1
For contracts other than MGCs, § 807(e)(1) provides that net surrender value is determined taking
into account any penalty or charge which would
be imposed upon surrender but ignoring any
market value adjustment. The net surrender values
of MGCs, however, take into account market
value adjustments. § 817A(a).

the taxable year payment or crediting of
amounts in the nature of interest in
excess of the greater of the prevailing
state assumed interest rate or the applicable Federal interest rate. In those
circumstances, § 811(d) requires that
the contract’s future guaranteed benefits
be determined as though the interest in
excess of the greater of the prevailing
state assumed interest rate or the applicable Federal rate were guaranteed only
to the end of the taxable year.
Section 812 prorates the dividends
received deduction and the exclusion for
tax exempt interest between a life insurance company and its policyholders to
prevent the company from receiving a
double tax benefit for amounts added to
reserves. See also §§ 805(a)(4), 807(a)
and 807(b). The proration is based on
the company’s share of ‘‘net investment
income’’ (as defined in § 812(c)) for the
taxable year. The company’s share of
net investment income equals the excess, if any, of the net investment
income over the sum of the ‘‘policy
interest’’ (as defined in § 812(b)(2)) and
‘‘gross investment income’s proportionate share of policyholder dividends’’ (as
defined in § 812(b)(3)) for the taxable
year. Policy interest includes ‘‘required
interest’’ (at the greater of the prevailing
State assumed rate or the applicable
Federal interest rate) on reserves under
§ 807(c) (other than § 807(c)(2)). See
§ 812(b)(2)(A). If neither the prevailing
State assumed rate nor the applicable
Federal interest rate is used, another
appropriate rate is used to calculate
required interest. Thus, for a contract
described in § 807(c)(3), if the rate of
interest assumed by an insurance company in determining the contract’s guaranteed benefit exceeds the applicable
Federal interest rate and the State assumed rate, required interest is computed using the assumed interest rate.
Under § 817A(e)(2), the Service is
authorized to determine annually with
regard to MGCs the interest rates applicable under §§ 807(c)(3), 807(d)(2)(B)
and 812. The Service is authorized to
exercise this authority by issuing a periodic announcement of the appropriate
market interest rates or formula for
determining such rates. H.R. Conf. Rept.
No. 737, 104th Cong. 2d Sess. 313
(1996). Section 817A(e) also authorizes
the Service to modify or waive the
application of § 811(d) (relating to interest guaranteed beyond the end of the
taxable year), and to prescribe other

regulations that are necessary or appropriate to carry out the purposes of
§ 817A.
The legislative history of § 817A indicates that an appropriate interest rate
is a current market rate. H.R. Conf. Rep.
No. 737, at 313. The interest rate may
be determined, for example, using either
a rate that is appropriate for the obligations under the contract to which the
reserve relates or the yield on the assets
underlying the MGCs. Id.
INTERIM RULES FOR MGCs: Pending the publication of further guidance,
an insurance company is required to determine under §§ 807(c)(3) or 807(d)(2)
the reserves for a MGC using, with
regard to the contract’s temporary guarantee period, an annual interest rate
equal to the greater of—
(a) the interest rate assumed by the
insurance company to determine future
guaranteed benefits under the applicable tax reserve method for the contract or, for reserves computed under
§ 807(c)(3), the interest rate assumed by
the company to determine the contract’s
guaranteed benefit; or
(b) the Moody’s Corporate Bond
Yield Average-Monthly Average Corporates (‘‘Moody’s rate’’) as published
by Moody’s Investors Service, Inc., or
any successor thereto, for the month that
includes the last day of the taxable year,
multiplied by:
(i) 1.1 if the MGC provides for a
market value adjustment or a guaranteed
return based in whole or in part on the
performance of stocks, other equity instruments or equity-based derivatives,
including but not limited to a contract
which guarantees a return based on the
S&P 500 index; and
(ii) 1.0 for all other MGCs.
With respect to an MGC’s temporary
guarantee period, section 811(d) shall be
applied by substituting the rate of interest applicable to the contract’s temporary guarantee period under this notice
for the applicable Federal interest rate
and the prevailing State assumed interest
rate. During the temporary guarantee
period, the interest rate to be used to
determine required interest under
§ 812(b)(2)(A) is the rate that applies
with regard to that period for purposes
of §§ 807(c)(3) or 807(d)(2)(B).
For periods outside the temporary
guarantee period, §§ 807(c)(3), 807(d)(2), 811(d) and 812(b)(2)(A) continue to
apply without modification.

9

EXAMPLE 1
IC, a life insurance company as defined in § 816, issued an MGC on July
1, 1996. The MGC is an annuity contract that gives rise to life insurance
reserves, as defined in § 816(b). IC is a
calendar year taxpayer. The MGC guarantees that interest will be credited at
8% per year for the first 5 contract
years and 4% per year thereafter. During
the 5 year temporary guarantee period,
the MGC provides for a market value
adjustment based on changes in a published bond index and not on the performance of stocks, other equity instruments or equity based derivatives. The
Moody’s rate for December 1996 is
7.5%. The applicable Federal interest
rate and the prevailing State assumed
interest rate for 1996 are 6.63% and
5.75%, respectively.
To determine under § 807(d)(2) the
end of year 1996 reserves for the MGC,
IC must use a discount interest rate of
8% (the interest rate assumed by the
insurance company to determine future
guaranteed benefits during the 5 year
temporary guarantee period) with regard
to the unexpired portion of the temporary guarantee period. The discount rate
applicable to periods outside the 5 year
temporary guarantee period is 6.63%.
The interest rate to be used in computing required interest under § 812(b)(2)(A) for 1996 is 8%.
EXAMPLE 2
The facts are the same as in Example
1, except that the MGC guarantees that
interest will be credited at 7% per year
for the first 5 contract years. To determine under § 807(d)(2) the end of year
1996 reserves for the MGC, IC must use
a discount interest rate of 7.5%
(Moody’s rate multiplied by 1.0) with
regard to the unexpired portion of the 5
year temporary guarantee period. The
discount rate applicable to periods outside the 5 year temporary guarantee
period is 6.63%. The interest rate to be
used in computing required interest under § 812(b)(2)(A) for 1996 is 7.5%
(Moody’s rate multiplied by 1.0).
COMMENTS REQUESTED: The Internal Revenue Service invites comments
concerning the application of new
§ 817A and the application of this notice to various types of MGCs, including
equity indexed annuities and life insurance contracts. Specifically, comments
are requested regarding whether different interest rates should apply to equity
indexed contracts based upon the differ-

ent participation rates, guarantees, market value adjustments, or other pertinent
factors under the contracts. Written comments should be sent to Internal Revenue Service, P.O. Box 7604, Ben
Franklin Station, Washington, DC
20044. Alternatively, submissions may
be hand delivered between the hours of
8 a.m. and 5 p.m. to: CC:DOM:CORP:R
(Notice 97–32), Courier’s Desk, Internal Revenue Service, 1111 Constitution Avenue, NW, Washington, DC.
Finally, taxpayers may submit comments electronically via the Internal
Revenue Service INTERNET site at
http://www.irs.ustreas.gov/prod/tax_regs/
comments.html. All submitted comments
will be available for public inspection
and copying.
FURTHER INFORMATION: For further
information regarding this notice, contact Ms. Katherine A. Hossofsky at
(202) 622–3970 (not a toll-free call).
PROCEDURAL INFORMATION: This
document serves as an ‘‘administrative
pronouncement’’ as that term is defined
in § 1.6661–3(b)(2) of the Income Tax
Regulations and may be relied upon to
the same extent as a revenue ruling or
revenue procedure.
26 CFR 601.204: Changes in accounting periods
and in methods of accounting.
(Also Part I, §§ 446, 481; 1.446–1, 1.481–1,
1.481–4.)

Rev. Proc. 97–27
TABLE OF CONTENTS
PAGE
SECTION 1. PURPOSE . . . . . . . . 11
.01 In general . . . . . . . . . . . . . . . 11
.02 Voluntary compliance . . . . . . 11
.03 Significant changes. . . . . . . . 11
SECTION 2. BACKGROUND . . .
.01 Change in method of
accounting defined . . . . . . . .
.02 Securing permission to make
a method change. . . . . . . . . .
.03 Terms and conditions of a
method change . . . . . . . . . . .
.04 No retroactive method
change . . . . . . . . . . . . . . . . . .
.05 Method change with a
§ 481(a) adjustment . . . . . . .
(1) Need for adjustment. . . .
(2) Adjustment period . . . . .
.06 Method change using a
cut-off method . . . . . . . . . . . .
.07 Consistency and clear
reflection of income . . . . . . .
.08 Separate trades or
businesses . . . . . . . . . . . . . . .

11
11
12
12
12
12
12
12
12
12
12

.09 Penalties . . . . . . . . . . . . . . . . 12
.10 Change made as part of an
examination. . . . . . . . . . . . . . 12
SECTION 3. DEFINITIONS . . . .
.01 Taxpayer . . . . . . . . . . . . . . . .
(1) In general . . . . . . . . . . . .
(2) Consolidated group . . . .
.02 Filed . . . . . . . . . . . . . . . . . . .
.03 Mailed . . . . . . . . . . . . . . . . . .
.04 Timely performance of acts .
.05 Year of change . . . . . . . . . . .
.06 Section 481(a) adjustment
period . . . . . . . . . . . . . . . . . .
.07 Under examination . . . . . . . .
(1) In general . . . . . . . . . . . .
(2) Partnerships and S
corporations subject to
TEFRA. . . . . . . . . . . . . . . . . .
.08 Issue under consideration . .
(1) Under examination . . . .
(2) Before an appeals office
........................
(3) Before a federal court .
.09 Change within the LIFO
inventory method . . . . . . . . .

13
13
13
13
13
13
13
13

SECTION 4. SCOPE . . . . . . . . . .
.01 Applicability . . . . . . . . . . . . .
.02 Inapplicability . . . . . . . . . . .
(1) Automatic change . . . . .
(2) Under examination . . . .
(3) Before an appeals
office . . . . . . . . . . . . . . . . . .
(4) Before a federal court .
(5) Consolidated group
member . . . . . . . . . . . . . . . .
(6) Partnerships and S
corporations . . . . . . . . . . . . .

14
14
14
14
14

SECTION 5. PROCEDURES FOR
TAXPAYERS NOT UNDER
EXAMINATION . . . . . . . . . . . . . .
.01 Submission of application . .
(1) In general . . . . . . . . . . .
(2) Limited relief for late
application . . . . . . . . . . . . . .
.02 Terms and conditions of
change . . . . . . . . . . . . . . . . .
(1) In general . . . . . . . . . . .
(2) Year of change . . . . . . .
(3) Section 481(a)
adjustment period . . . . . . . .
(4) NOL carryback
limitation for taxpayer
subject to criminal
investigation . . . . . . . . . . . . .
(5) Change treated as
initiated by the taxpayer . . .

13
13
13
13
13
13
14
14

15
15
15
15
15
15
15
15

SECTION 7. SECTION 481(a)
ADJUSTMENT PERIOD . . . . . . . 16
.01 In general . . . . . . . . . . . . . . 16
.02 Short period as a separate
taxable year . . . . . . . . . . . . . 16
.03 Shortened or accelerated
adjustment periods . . . . . . . 16
(1) De minimis rule . . . . . . 16
(2) Cooperatives . . . . . . . . . 16
(3) Ceasing to engage in the
trade or business . . . . . . . . . 16

14

14
14
14
14

14
14
14
14
14
14
14
14

14
15

SECTION 6. PROCEDURES FOR
TAXPAYERS UNDER
EXAMINATION, BEFORE AN
APPEALS OFFICE, OR BEFORE
A FEDERAL COURT . . . . . . . . . . 15

10

.01 Taxpayer under
examination . . . . . . . . . . . . .
(1) In general . . . . . . . . . . .
(2) 90-day window period .
(3) 120-day window period
(4) Consent of district
director . . . . . . . . . . . . . . . .
.02 Taxpayer before an appeals
office . . . . . . . . . . . . . . . . . .
.03 Taxpayer before a federal
court . . . . . . . . . . . . . . . . . . .
.04 Terms and conditions of
change . . . . . . . . . . . . . . . . .

SECTION 8. GENERAL
APPLICATION PROCEDURES .
.01 Application—Service
discretion . . . . . . . . . . . . . . .
.02 Terms and
conditions—Service
discretion . . . . . . . . . . . . . . .
.03 Compliance with provisions
.04 Facts and circumstances
considered in processing
applications . . . . . . . . . . . . .
.05 Specific rules in connection
with prior applications . . . .
(1) Method change made . .
(2) Method change not
made . . . . . . . . . . . . . . . . . . .
.06 Where to file . . . . . . . . . . . .
.07 User fee . . . . . . . . . . . . . . . .
.08 Signature requirements . . . .
.09 Incomplete Form 3115—21
day rule . . . . . . . . . . . . . . . .
.10 Conference in the national
office . . . . . . . . . . . . . . . . . .
.11 Consent Agreement . . . . . . .
(1) In general . . . . . . . . . . .
(2) Signature requirements .
(3) 45-day requirement . . . .
(4) Change in method of
accounting not made by the
taxpayer . . . . . . . . . . . . . . . .
.12 Two or more trades or
businesses . . . . . . . . . . . . . .
(1) In general . . . . . . . . . . .
(2) Information required . . .
(3) Separate Forms 3115
required . . . . . . . . . . . . . . . .
.13 Consolidated groups . . . . . .
(1) In general . . . . . . . . . . .

17
17
17
17
17
17
17
17
18
18
18
18
18
18
18
18
18
18
19
19
19
19
19
19

(2) Separate Forms 3115
not required . . . . . . . . . . . . . 19
.14 Applicability of Rev. Proc.
97–1 and Rev Proc. 97–4 . . 19
.15 Effect on other offices of the
Service . . . . . . . . . . . . . . . . . 19
SECTION 9. AUDIT
PROTECTION FOR TAXABLE
YEARS PRIOR TO YEAR OF
CHANGE . . . . . . . . . . . . . . . . . . . .
.01 In general . . . . . . . . . . . . . .
.02 Exceptions . . . . . . . . . . . . . .
(1) Change not made or
made improperly . . . . . . . . .
(2) Change in sub-method .
(3) Prior year
Service-initiated change . . .
(4) Criminal investigation .

19
19
19
19
19
19
19

SECTION 10. EFFECT OF
CONSENT . . . . . . . . . . . . . . . . . . . 19
.01 In general . . . . . . . . . . . . . . 19
.02 Retroactive change or
modification . . . . . . . . . . . . . 20
SECTION 11. REVIEW BY
DISTRICT DIRECTOR . . . . . . . . 20
.01 In general . . . . . . . . . . . . . . 20
.02 National office
consideration . . . . . . . . . . . . 20
SECTION 12.

INQUIRIES . . . .

SECTION 13. EFFECTIVE
DATE . . . . . . . . . . . . . . . . . . . . . . .
.01 In general . . . . . . . . . . . . . .
.02 Transition rules . . . . . . . . . .
(1) Currently pending
Forms 3115 . . . . . . . . . . . . .
(2) New Forms 3115 . . . . . .
(3) Open window periods
under Rev. Proc. 92–20 . . . .

20
20
20
20
20
20
20

SECTION 14. EFFECT ON
OTHER DOCUMENTS . . . . . . . .
.01 Rev. Proc. 92–20 . . . . . . . . .
.02 Rev. Proc. 93–48 (notional
principal contracts) . . . . . . .
.03 Notice 89–15 (long-term
contracts) . . . . . . . . . . . . . . .

20

SECTION 15. PAPERWORK
REDUCTION ACT . . . . . . . . . . . .

20

DRAFTING INFORMATION . . .

21

20
20
20

SECTION 1. PURPOSE
.01 In general. This revenue procedure provides the general procedures
under § 446(e) of the Internal Revenue
Code and § 1.446–1(e) of the Income
Tax Regulations for obtaining the consent of the Commissioner of Internal
Revenue to change a method of accounting for federal income tax purposes. This revenue procedure modifies

and supersedes Rev. Proc. 92–20,
1992–1 C.B. 685.
.02 Voluntary compliance.
(1) This revenue procedure provides incentives to encourage prompt
voluntary compliance with proper tax
accounting principles. Under this approach, a taxpayer generally receives
more favorable terms and conditions
(for example, a later year of change and
a longer § 481(a) adjustment period for
a positive adjustment) if the taxpayer
files its request for a change in accounting method before the Internal Revenue
Service contacts the taxpayer for examination. A taxpayer that is contacted for
examination and required to change its
method of accounting by the Service
generally receives less favorable terms
and conditions and may also be subject
to penalties.
(2) Although prompt voluntary
compliance can generally be encouraged
through incentives, the Service recognizes that this approach may not be
appropriate or effective in all cases. For
example, a number of taxpayers have
deferred making changes required by
amendments to the Internal Revenue
Code or the Income Tax Regulations.
Because it is generally not appropriate
to permit changes on a basis more
favorable than applicable under the governing statute or regulation, the Service
may, in other published guidance, provide special terms and conditions that
are designed to place the taxpayer in a
position no more favorable than if the
taxpayer had timely complied with the
required change. See, for example, Rev.
Proc. 93–48, 1993–2 C.B. 580 (regarding changes in method of accounting for
notional principal contracts to comply
with the requirements of § 1.446–3).
.03 Significant changes. Many of the
complex rules and requirements of Rev.
Proc. 92–20 have been simplified or
eliminated. For example, the Category
A, Category B, Designated A, and Designated B classifications have been
eliminated, the 90–day window at the
beginning of an examination has been
eliminated, the 30-day window for taxpayers under continuous examination
has been expanded to 90 days and the
number of consecutive months the taxpayer is required to be under examination has been reduced from 18 to 12, the
definition of ‘‘under examination’’ has
been clarified, the consent requirement
for taxpayers before an appeals office or
a federal court has been replaced with a
notification procedure, the various
§ 481(a) adjustment periods have been

11

replaced with a single 4-year § 481(a)
adjustment period for both positive and
negative adjustments, and several of the
terms and conditions relating to the
§ 481(a) adjustment have been eliminated.
SECTION 2. BACKGROUND
.01 Change in method of accounting
defined.
(1) Section 1.446–1(e)(2)(ii)(a)
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 accounting does not include correction of
mathematical or posting errors, or errors
in the computation of tax liability (such
as errors in computation of the foreign
tax credit, net operating loss, percentage
depletion, or investment credit). See
§ 1.446–1(e)(2)(ii)(b).
.02 Securing permission to make a
method change. 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) 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 desires 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 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 method 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 method of
accounting will be made without a
§ 481(a) adjustment, using a ‘‘cut-off
method.’’ Under a cut-off method, only
the items arising on or after the beginning of the year of change (or other
operative date) are accounted for under
the new method of accounting. Any
items arising before the year of change
(or other operative date) continue to be
accounted for under the taxpayer’s
former method of accounting. See, for
example, § 263A (which generally applies to costs incurred after December
31, 1986, for noninventory property),
§ 461(h) (which generally applies to
amounts incurred on or after July 18,
1984), and § 1.446–3 (which applies to
notional principal contracts entered into
on or after December 13, 1993). Because no items are duplicated or omitted
from income when a cut-off method is
used to effect a change in accounting
method, no § 481(a) adjustment is necessary.

12

.07 Consistency and clear reflection
of income. Methods of accounting
should clearly reflect income on a continuing basis, and the 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.
Accordingly, if a taxpayer requests to
change from a method of accounting
that clearly reflects income, the Service,
in determining whether to consent to the
taxpayer’s request, will weigh the need
for consistency against the taxpayer’s
reason for desiring to change its method
of accounting.
.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 the appropriate 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 computation of taxable income must

be made in a manner that, in the opinion
of the Commissioner, does clearly reflect income. If a taxpayer under examination is not eligible to change an
accounting method under this revenue
procedure, the change may be made by
the district director. A change resulting
in a positive § 481(a) adjustment will
ordinarily be made in the earliest taxable year under examination with a
one-year § 481(a) adjustment period.
SECTION 3. DEFINITIONS
.01 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 3.07(1), 3.08(1),
4.02(2) and 6.01 (taxpayer under examination), (b) sections 3.08(2), 4.02(3) and
6.02 (taxpayer before an appeals office),
or (c) sections 3.08(3), 4.02(4) and 6.03
(taxpayer before a federal court), the
term ‘‘taxpayer’’ includes a consolidated
group.
.02 Filed. Any form (including a
Form 3115), 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.
.03 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 delivery service. See
Notice 97–26, 1997–17 I.R.B. 6.
.04 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 a Form
3115, submitting additional information,
returning a Consent Agreement (see section 8.11 of this revenue procedure), or
holding a conference) falls on a Saturday, Sunday, or legal holiday. The performance of any act is timely if the act
is performed on the next succeeding day
that is not a Saturday, Sunday, or a legal
holiday.
.05 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. The year of change is also the
first taxable year for complying with all
the terms and conditions set forth in the
Consent Agreement.
.06 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 sections
5.02(3) and 6.04 of this revenue procedure.
.07 Under examination.
(1) In general.
(a) Except as provided in section
3.07(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.
(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.

13

(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(6) 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).
.08 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
notification of proposed adjustments or
income tax examination changes) from
the examining agent(s) specifically citing the treatment of the item as an issue
under consideration. For example, a taxpayer’s method of pooling under the
dollar-value, last-in first-out LIFO inventory method is an issue under consideration as a result of an examination
plan that identifies LIFO pooling as a
matter to be examined, but it is not an
issue under consideration as a result of
an examination plan that merely identi-

fies 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.
.09 Change within the LIFO inventory method. A change within the LIFO
inventory method is a change from one
LIFO inventory method or sub-method
to another LIFO inventory method or
sub-method. A change within the LIFO
inventory method does not include a
change in method of accounting that
could be made by a taxpayer that does
not use the LIFO inventory method (for
example, a method governed by § 471
or § 263A).
SECTION 4. SCOPE
.01 Applicability. Except as specifically provided in other published guidance or in section 4.02 of this revenue
procedure, this revenue procedure applies to all taxpayers requesting the
Commissioner’s consent to change a
method of accounting for federal income
tax purposes.

.02 Inapplicability. This revenue procedure does not apply in the following
situations:
(1) Automatic change. If the
change in method of accounting is required to be made pursuant to a published automatic change procedure. Taxpayers are encouraged to review the
automatic change procedures listed in
section 9.03 of Rev. Proc. 97–1, 1997–1
I.R.B. 11, 37 (or any successor), before
submitting a Form 3115 pursuant to this
revenue procedure;
(2) Under examination. If the taxpayer is under examination, except as
provided in sections 6.01(2) (90-day
window), 6.01(3) (120-day window),
and 6.01(4) (district director consent) of
this revenue procedure;
(3) Before an appeals office. If the
taxpayer is before an appeals office with
respect to any income tax issue and the
accounting method to be changed is an
issue under consideration by the appeals
office;
(4) Before a federal court. If the
taxpayer is before a federal court with
respect to any income tax issue and the
accounting method to be changed is an
issue under consideration by the federal
court; or
(5) Consolidated group member. A
corporation that is (or was formerly) a
member of a consolidated group is under examination, before an appeals office, or before a federal court (for
purposes of sections 4.02(2), (3), and (4)
of this revenue procedure) if the consolidated group is under examination,
before an appeals office, or before a
federal court for a taxable year(s) that
the corporation was a member of the
group.
(6) Partnerships and S corporations. For an entity (including a limited
liability company) treated as a partnership or an S corporation for federal
income tax purposes, if the entity’s
accounting method to be changed is an
issue under consideration in an examination of a partner, member, or shareholder’s federal income tax return or an
issue under consideration by an appeals
office or by a federal court with respect
to a partner, member, or shareholder’s
federal income tax return.
SECTION 5. PROCEDURES FOR
TAXPAYERS NOT UNDER
EXAMINATION
.01 Submission of application.
(1) In general.

14

(a) A Form 3115 must be filed
during the year of change, as provided
in § 1.446–1T(e)(3)(i). If the taxable
year is a short period, the Form 3115
must be filed no later than the last day
of the short taxable year.
(b) The Service recommends
that the Form 3115 be filed as early as
possible during the year of change to
provide the Service adequate time to
respond to the Form 3115 prior to the
original due date of the taxpayer’s return for the year of change.
(2) Limited relief for late application. A taxpayer that fails to file a Form
3115 during the year of change as
provided in section 5.01(1) of this revenue procedure will not be granted an
extension of time to file under
§ 301.9100 of the Procedure and Administration Regulations, except in unusual and compelling circumstances. See
§ 301.9100–3T(c)(2)(i).
.02 Terms and conditions of change.
(1) In general. Except as specifically provided in other published guidance, an accounting method change filed
under this revenue procedure, if granted,
must be made pursuant to the terms and
conditions provided in this revenue procedure (including sections 8.02 and
13.02 of this revenue procedure).
(2) Year of change. The year of
change is the taxable year with respect
to which the Form 3115 is timely filed
under section 5.01 of this revenue procedure. However, Rev. Proc. 93–48 (regarding notional principal contracts) is
an example of other published guidance
that provides for a different year of
change.
(3) Section 481(a) adjustment period.
(a) In general. Except as provided in sections 5.02(3)(b) and 7.03 of
this revenue procedure, the § 481(a)
adjustment period for positive and negative § 481(a) adjustments is four taxable
years.
(b) Changes within the LIFO
method. Any change within the LIFO
inventory method must be made using a
cut-off method. However, Announcement 91–173, 1991–47 I.R.B. 29 (regarding LIFO taxpayers changing their
method of accounting for certain bulk
bargain purchases of inventory to comply with Hamilton Industries, Inc. v.
Commissioner, 97 T.C. 120 (1991)) is
an example of other published guidance
that requires a § 481(a) adjustment.
(4) NOL carryback limitation for
taxpayer subject to criminal investigation. Generally, no portion of any net

operating loss that is attributable to a
negative § 481(a) adjustment may be
carried back to a taxable year prior to
the year of change that is the subject of
any pending or future criminal investigation or proceeding concerning (a) directly or indirectly, any issue relating to
the taxpayer’s federal tax liability, or (b)
the possibility of false or fraudulent
statements made by the taxpayer with
respect to any issue relating to its
federal tax liability.
(5) Change treated as initiated by
the taxpayer. For purposes of § 481, an
accounting method change filed under
this revenue procedure, if granted, is a
change in method of accounting initiated
by the taxpayer.
SECTION 6. PROCEDURES FOR
TAXPAYERS UNDER
EXAMINATION, BEFORE AN
APPEALS OFFICE, OR BEFORE A
FEDERAL COURT
.01 Taxpayer under examination.
(1) In general. A taxpayer that is
under examination may not file a Form
3115 to request a change in accounting
method under this revenue procedure,
except as provided in sections 6.01(2)
(90-day window), 6.01(3) (120-day window), and 6.01(4) (district director consent) of this revenue procedure. A taxpayer that files a Form 3115 beyond the
time periods provided in the 90-day and
120-day windows will not be granted an
extension of time to file under
§ 301.9100, except in unusual and compelling circumstances.
(2) 90-day window period.
(a) A taxpayer may file a Form
3115 to request a change in accounting
method during the first 90 days of any
taxable year (‘‘90-day window’’) if the
taxpayer has been under examination for
at least 12 consecutive months as of the
first day of the taxable year. This 90-day
window is not available if the method of
accounting the taxpayer is requesting to
change is an issue under consideration
at the time the Form 3115 is filed or is
an issue the examining agent(s) has
placed in suspense at the time the Form
3115 is filed.
(b) A taxpayer requesting a
change under this 90-day window must
provide a copy of the Form 3115 to the
examining agent(s) at the same time it
files the original Form 3115 with the
national office. The Form 3115 must
contain the name(s) and telephone number(s) of the examining agent(s). The
taxpayer must attach to the Form 3115 a

separate statement signed by the taxpayer certifying that, to the best of the
taxpayer’s knowledge, the same method
of accounting is not an issue under
consideration or an issue placed in suspense by the examining agent(s).
(3) 120-day window period.
(a) A taxpayer may file a Form
3115 to request a change in accounting
method during the 120-day period following the date an examination ends
(‘‘120-day window’’) regardless of
whether a subsequent examination has
commenced. This 120-day window is
not available if the method of accounting the taxpayer is requesting to change
is an issue under consideration at the
time the Form 3115 is filed or is an
issue the examining agent(s) has placed
in suspense at the time the Form 3115 is
filed.
(b) A taxpayer requesting a
change under this 120-day window must
provide a copy of the Form 3115 to the
examining agent(s) for any examination
that is in process at the same time it
files the original Form 3115 with the
national office. The Form 3115 must
contain the name(s) and telephone number(s) of the examining agent(s). The
taxpayer must attach to the Form 3115 a
separate statement signed by the taxpayer certifying that, to the best of the
taxpayer’s knowledge, the same method
of accounting is not an issue under
consideration or an issue placed in suspense by the examining agent(s).
(4) Consent of district director.
(a) A taxpayer under examination may request to change an accounting method under this revenue procedure if the district director consents to
the filing of the request. The district
director will consent to the filing of the
Form 3115 unless, in the opinion of the
district director, the method of accounting to be changed would ordinarily be
included as an item of adjustment in the
year(s) for which the taxpayer is under
examination. For example, the district
director will consent to the filing of a
Form 3115 to change from a clearly
permissible method of accounting. The
district director will also consent to the
filing of a Form 3115 to change from an
impermissible method of accounting
where the impermissible method was
adopted subsequent to the years under
examination. The question of whether
the method of accounting from which
the taxpayer is changing is permissible
or was adopted subsequent to the years
under examination may be referred to
the national office as a request for

15

technical advice under the provisions of
Rev. Proc. 97–2 (or any successor).
(b) A taxpayer requesting a
change with the consent of the district
director must attach to the Form 3115 a
statement from the district director consenting to the taxpayer filing the Form
3115. The taxpayer must provide a copy
of the Form 3115 to the district director
at the same time it files the original of
that form with the national office. The
Form 3115 must contain the name(s)
and telephone number(s) of the examining agent(s).
.02 Taxpayer before an appeals office. A taxpayer that is before an appeals
office with respect to any income tax
issue may request a change in accounting method if the accounting method to
be changed is not an issue under consideration by the appeals office. The taxpayer must attach to the Form 3115 a
separate statement signed by the taxpayer certifying that, to the best of the
taxpayer’s knowledge, the same method
of accounting is not an issue under
consideration by the appeals office. The
taxpayer must provide a copy of the
Form 3115 to the appeals officer at the
same time it files the original Form
3115 with the national office. The Form
3115 must contain the name and telephone number of the appeals officer.
.03 Taxpayer before a federal court.
A taxpayer that is before a federal court
with respect to any income tax issue
may request a change in accounting
method if the accounting method to be
changed is not an issue under consideration by the federal court. The taxpayer
must attach to the Form 3115 a separate
statement signed by the taxpayer certifying that, to the best of the taxpayer’s
knowledge, the same method of accounting is not an issue under consideration by the federal court. The taxpayer
must provide a copy of the Form 3115
to the counsel for the government at the
same time it files the original Form
3115 with the national office. The Form
3115 must contain the name and telephone number of the counsel for the
government.
.04 Terms and conditions of change.
For a taxpayer under examination filing
a Form 3115 during the 90-day or
120-day window, or with the consent of
the district director, or for a taxpayer
before an appeals office or a federal
court, the terms and conditions are the
same as those provided in section 5.02
of this revenue procedure for taxpayers
not under examination.

SECTION 7. SECTION 481(a)
ADJUSTMENT PERIOD
.01 In general. The § 481(a) adjustment periods are provided in sections
5.02(3) and 6.04 of this revenue procedure.
.02 Short period as a separate taxable year. If the year of change, or any
taxable year during the § 481(a) adjustment period, is a short taxable year, the
§ 481(a) adjustment must be included in
income as if that short taxable year were
a full 12-month taxable year. See Rev.
Rul. 78–165, 1978–1 C.B. 276.
Example 1. A calendar year taxpayer received
permission to change an accounting method beginning with the 1997 calendar year. The § 481(a)
adjustment is $30,000 and the adjustment period is
four taxable years. The taxpayer subsequently
receives permission to change its annual accounting period to September 30, effective for the
taxable year ending September 30, 1998. The
taxpayer must include $7,500 of the § 481(a)
adjustment in gross income for the short period
from January 1, 1998, through September 30,
1998.
Example 2. Corporation X, a calendar year taxpayer, received permission to change an accounting method beginning with the 1997 calendar year.
The § 481(a) adjustment is $30,000 and the
adjustment period is four taxable years. On July 1,
1999, Corporation Z acquires Corporation X in a
transaction to which § 381(a) applies. Corporation
Z is a calendar year taxpayer that uses the same
method of accounting to which Corporation X
changed in 1997. Corporation X must include
$7,500 of the § 481(a) adjustment in gross income
for its short period income tax return for January
1, 1999, through June 30, 1999. In addition,
Corporation Z must include $7,500 of the
§ 481(a) adjustment in gross income in its income
tax return for calendar year 1999.

.03 Shortened or accelerated adjustment periods. The four-year § 481(a)
adjustment period provided in sections
5.02(3) and 6.04 of this revenue procedure will be shortened or accelerated in
the following situations.
(1) De minimis rule. A taxpayer
may elect to use a one-year adjustment
period in lieu of the § 481(a) adjustment period otherwise provided by this
revenue procedure if the entire § 481(a)
adjustment is less than $25,000 (either
positive or negative). The taxpayer must
complete the appropriate line on the
Form 3115 to elect this de minimis rule.
(2) Cooperatives. A cooperative
within the meaning of § 1381(a) generally must take the entire amount of a
§ 481(a) adjustment into account in
computing taxable income for the year
of change. See Rev. Rul. 79–45, 1979–1
C.B. 284.
(3) Ceasing to engage in the trade
or business.
(a) In general. A taxpayer that
ceases to engage in a trade or business

or terminates its existence must take the
remaining balance of any § 481(a) adjustment relating to the trade or business
into account in computing taxable income in the taxable year of the cessation or termination. Except as provided
in sections 7.03(3)(d) and (e) of this
revenue procedure, a taxpayer is treated
as ceasing to engage in a trade or
business if the operations of the trade or
business cease or substantially all the
assets of the trade or business are
transferred to another taxpayer. For this
purpose, ‘‘substantially all’’ has the
same meaning as in section 3.01 of Rev.
Proc. 77–37, 1977–2 C.B. 568.
(b) Examples of transactions
that are treated as the cessation of a
trade or business. The following is a
nonexclusive list of transactions that are
treated as the cessation of a trade or
business for purposes of accelerating the
§ 481(a) adjustment under this section
7.03(3):
(i) the trade or business to
which the § 481(a) adjustment relates is
incorporated;
(ii) the trade or business to
which the § 481(a) adjustment relates is
purchased by another taxpayer in a
transaction to which § 1060 applies;
(iii) the trade or business to
which the § 481(a) adjustment relates is
terminated or transferred pursuant to a
taxable liquidation;
(iv) a division of a corporation ceases to operate the trade or
business to which the § 481(a) adjustment relates; or
(v) the assets of a trade or
business to which the § 481(a) adjustment relates are contributed to a partnership.
(c) Conversion to or from S corporation status.
(i) In general. Except as provided in sections 7.03(3)(c)(ii) and (iii)
of this revenue procedure, no acceleration of a § 481(a) adjustment is required under this section 7.03(3)(c)
when a C corporation elects to be
treated as an S corporation or an S
corporation terminates its S election and
is then treated as a C corporation.
(ii) S election effective for
year of LIFO discontinuance. If a C
corporation elects to be treated as an S
corporation for the taxable year in
which it discontinues use of the LIFO
inventory method, § 1363(d) requires an
increase in the taxpayer’s gross income
for the LIFO recapture amount (as defined in § 1363(d)(3)) for the taxable
year preceding the year of change (the

16

taxpayer’s last taxable year as a C
corporation), and a corresponding adjustment to the basis of the taxpayer’s
inventory as of the end of the taxable
year preceding the year of change. Any
increase in income tax as a result of the
inclusion of the LIFO recapture amount
is payable in four equal installments,
beginning with the taxpayer’s last taxable year as a C corporation as provided
in § 1363(d)(2). Any corresponding basis adjustment is taken into account in
computing the § 481(a) adjustment (if
any) that results upon the discontinuance
of the LIFO method by the corporation.
(iii) S election effective for a
year after LIFO discontinuance. If a C
corporation elects to be treated as an S
corporation for a taxable year after the
taxable year in which it discontinued
use of the LIFO inventory method, the
remaining balance of any positive
§ 481(a) adjustment must be included in
its gross income in its last taxable year
as a C corporation. If this inclusion
results in an increase in tax for its last
taxable year as a C corporation, this
increase in tax is payable in four equal
installments, beginning with the taxpayer’s last taxable year as a C corporation
as provided in § 1363(d)(2), unless the
taxpayer is required to take the remaining balance of the § 481(a) adjustment
into account in the last taxable year as a
C corporation under another acceleration
provision in section 7.03(3) of this revenue procedure.
(d) Certain transfers to which
§ 381(a) applies. No acceleration of the
§ 481(a) adjustment is required under
this section 7.03(3) when a taxpayer
transfers substantially all the assets of
the trade or business that gave rise to
the § 481(a) adjustment to another taxpayer in a transfer to which § 381(a)
applies and the accounting method (the
change to which gave rise to the
§ 481(a) adjustment) is a tax attribute
that is carried over and used by the
acquiring corporation immediately after
the transfer pursuant to § 381(c). The
acquiring corporation is subject to any
terms and conditions imposed on the
transferor (or any predecessor of the
transferor) as a result of its change in
method of accounting.
(e) Certain transfers pursuant to
§ 351 within a consolidated group.
(i) In general. No acceleration
of the § 481(a) adjustment is required
under this section 7.03(3) when one
member of an affiliated group filing a
consolidated return transfers substantially all the assets of the trade or

business that gave rise to the § 481(a)
adjustment to another member of the
same consolidated group in an exchange
qualifying under § 351 and the transferee member adopts and uses the same
method of accounting (the change to
which gave rise to the § 481(a) adjustment) used by the transferor member.
The transferor member must continue to
take the § 481(a) adjustment into account pursuant to the terms and conditions set forth in its Consent Agreement
(as provided in section 8.11 of this
revenue procedure). The transferor
member must take into account activities of the transferee member (or any
successor) in determining whether acceleration of the § 481(a) adjustment is
required. For example, except as provided in the following sentence, the
transferor member must take any remaining § 481(a) adjustment into account in computing taxable income in
the taxable year in which the transferee
member ceases to engage in the trade or
business to which the § 481(a) adjustment relates. The § 481(a) adjustment is
not accelerated when the transferee
member engages in a transaction described in section 7.03(3)(d) or section
7.03(3)(e)(i) of this revenue procedure.
(ii) Exception. The provisions
of section 7.03(3)(e)(i) of this revenue
procedure cease to apply and the
transferor member must take any remaining balance of the § 481(a) adjustment into account in the taxable year
immediately preceding any of the following: (A) the taxable year the
transferor member ceases to be a member of the group; (B) the taxable year
any transferee member owning substantially all the assets of the trade or
business which gave rise to the § 481(a)
adjustment ceases to be a member of the
group; or (C) a separate return year of
the common parent of the group. In
applying the preceding sentence, the
rules of paragraphs (j)(2), (j)(5), and
(j)(6) of § 1.1502–13 apply, but only if
the method of accounting to which the
transferor member changed and to
which the § 481(a) adjustment relates is
adopted, carried over, or used by any
transferee member acquiring the assets
of the trade or business that gave rise to
the § 481(a) adjustment immediately after acquisition of such assets. For example, the transferor member is not
required to accelerate the § 481(a) adjustment if a transferee member ceases
to be a member of a consolidated group
by reason of an acquisition to which
§ 381(a) applies and the acquiring cor-

poration (A) is a member of the same
group as the transferor member, and (B)
continues, under § 381(c)(4) and the
regulations thereunder, to use the same
method of accounting as that used by
the transferor member with respect to
the assets of the trade or business to
which the § 481(a) adjustment relates.
SECTION 8. GENERAL
APPLICATION PROCEDURES
.01 Application—Service discretion.
The Service reserves the right to decline
to process any Form 3115 filed under
this revenue procedure in situations in
which it would not be in the best
interest of sound tax administration to
permit the requested change. In this
regard, the Service will consider
whether the change in method of accounting would clearly and directly frustrate compliance efforts of the Service
in administering the income tax laws.
.02 Terms and conditions—Service
discretion. Except as specifically provided in other published guidance, a
change in method of accounting filed
under this revenue procedure, if granted,
must be made pursuant to the terms and
conditions provided in this revenue procedure. Notwithstanding this general
rule, the Service may determine that,
based on the unique facts of a particular
case and in the interest of sound tax
administration, terms and conditions that
differ from those provided in this revenue procedure are more appropriate for
a change made under this revenue procedure.
.03 Compliance with provisions. If a
taxpayer changes its method of accounting without authorization or without
complying with all the provisions of this
revenue procedure, the taxpayer has initiated a change in method of accounting
without obtaining the consent of the
Commissioner required by § 446(e).
Upon examination, a taxpayer that has
initiated an unauthorized change in
method of accounting may be required
to effect the change in an earlier or later
taxable year and may be denied the
benefit of spreading the § 481(a) adjustment over the number of taxable years
otherwise prescribed by this revenue
procedure.
.04 Facts and circumstances considered in processing applications. In processing an application for a change in
method of accounting, the Service will
consider all the facts and circumstances,
including:

17

(1) if the method of accounting
requested is consistent with the Code,
regulations, revenue rulings, revenue
procedures, and decisions of the United
States Supreme Court;
(2) if the use of the method of
accounting requested will clearly reflect
income;
(3) if the present method of accounting clearly reflects income;
(4) the need for consistency in the
accounting area (see section 2.07 of this
revenue procedure);
(5) the taxpayer’s reason(s) for the
change;
(6) the tax effect of the § 481(a)
adjustment;
(7) if the taxpayer’s books and
records and financial statements will
conform to the proposed method of
accounting; and
(8) if the taxpayer previously requested to change its method of accounting for the same item but did not
make the change.
.05 Specific rules in connection with
prior applications.
(1) Method change made.
(a) In general. If the taxpayer
changed its method of accounting for
the same item within the four taxable
years preceding the year of change
(under either an automatic change procedure or a procedure requiring advance
consent), a copy of the application for
the previous change, the signed Consent
Agreement (see section 8.11 of this
revenue procedure) if applicable, and
any other correspondence from the Service, must be attached to the Form 3115
filed for the subsequent taxable year. An
explanation must be furnished stating
why the taxpayer is again requesting to
change its method of accounting for the
same item. The Service will consider the
explanation in determining whether the
subsequent request for change in method
of accounting will be granted.
(b) LIFO inventory method
change. If a taxpayer previously received permission from the Commissioner to change from the LIFO inventory method, the Commissioner will not
consent to the taxpayer’s readoption of
the LIFO inventory method for five
taxable years (beginning with the taxable year the taxpayer changed from the
LIFO inventory method), in the absence
of a showing of unusual and compelling
circumstances.
(2) Method change not made. If a
prior Form 3115 (filed under either an
automatic change procedure or a procedure requiring advance consent) was

withdrawn, not perfected, or denied, or
if a Consent Agreement (see section
8.11 of this revenue procedure) was sent
to the taxpayer but was not signed and
returned to the Service, or if the change
was not made, and the taxpayer files
another application to change the same
item for a year of change within four
taxable years of the prior application, a
copy of the earlier application (that is,
the first Form 3115), together with any
correspondence from the Service, must
be attached to the Form 3115 filed for
the subsequent taxable year. An explanation must be furnished stating why the
earlier application was withdrawn or not
perfected, or why the change was not
made. The Service will consider the
explanation in determining whether the
subsequent request for change in method
of accounting will be granted.
.06 Where to file. A taxpayer, other
than an exempt organization, applying
for a change in accounting method pursuant to this revenue procedure must
complete and file a current Form 3115,
together with the appropriate user fee,
with the Commissioner of Internal Revenue, Attention: CC:DOM:CORP:T, P.O.
Box 7604, Benjamin Franklin Station,
Washington, DC 20044. An exempt organization must complete and file a
current Form 3115, together with the
appropriate user fee, with the Assistant
Commissioner (Employee Plans and Exempt Organizations), Attention: E:EO,
P.O. Box 120, Benjamin Franklin Station, Washington, DC 20044.
.07 User fee. Taxpayers are required
to pay user fees for requests for changes
in accounting method made under this
revenue procedure. Rev. Proc. 97–1 (or
any successor) contains the schedule of
user fees and provides guidance for
administering the user fee requirements.
.08 Signature requirements. The Form
3115 must be signed by, or on behalf of,
the taxpayer requesting the change by
an individual with authority to bind the
taxpayer in such matters. For example,
an officer must sign on behalf of a
corporation, a general partner on behalf
of a state law partnership, a membermanager on behalf of a limited liability
company, a trustee on behalf of a trust,
or an individual taxpayer on behalf of a
sole proprietorship. If the taxpayer is a
member of a consolidated group, a Form
3115 submitted on behalf of the taxpayer must be signed by a duly authorized officer of the common parent. See
the signature requirements set forth in
the General Instructions attached to a
current Form 3115 regarding those who

are to sign. If an agent is authorized to
represent the taxpayer before the Service, receive the original or a copy of
the correspondence concerning the request, or perform any other act(s) regarding the Form 3115 filed on behalf
of the taxpayer, a power of attorney
reflecting such authorization(s) must be
attached to the Form 3115. A taxpayer’s
representative without a power of attorney to represent the taxpayer as indicated in this section will not be given
any information regarding the Form
3115.
.09 Incomplete Form 3115—21 day
rule. If the Service receives a Form
3115 that is not properly completed in
accordance with the instructions on the
Form 3115 and the provisions of this
revenue procedure, or if supplemental
information is needed, the Service will
notify the taxpayer. The notification will
specify the information that needs to be
provided, and the taxpayer will be permitted 21 days from the date of the
notification to furnish the necessary information. The Service reserves the right
to impose shorter reply periods if subsequent requests for additional information
are made. If the required information is
not submitted to the Service within the
reply period, the Form 3115 will not be
processed. An additional period, not to
exceed 15 days, to furnish information
may be granted to a taxpayer. The
request for an extension of time must be
made in writing and submitted within
the 21-day period. If the extension request is denied, there is no right of
appeal.
.10 Conference in the national office.
The taxpayer must complete the appropriate line on the Form 3115 to request
a conference of right if an adverse
response is contemplated by the Service.
If the taxpayer does not complete the
appropriate line on the Form 3115 or
request a conference in a later written
communication, the Service will presume that the taxpayer does not desire a
conference. If requested, a conference
will be arranged in the national office
prior to the Service’s formal reply to the
taxpayer’s Form 3115. For taxpayers
other than exempt organizations, see
section 11 of Rev. Proc. 97–1 (or any
successor). For exempt organizations,
see section 12 of Rev. Proc. 97–4,
1997–1 I.R.B. 96 (or any successor).
.11 Consent Agreement.
(1) In general. Unless otherwise
specifically provided, the Commissioner’s permission to change a taxpayer’s
method of accounting for a specific

18

taxable year will be set forth in a ruling
letter (original and one copy) from the
national office that identifies the item or
items being changed, the § 481(a) adjustment (if any), and the terms and
conditions under which the change is to
be effected for the taxable year specified
in the ruling letter. See §§ 1.446–1(e)(3)
and 1.481–4. If the taxpayer agrees to
the terms and conditions contained in
the ruling letter, the taxpayer must sign
and date the agreement copy of the
ruling letter in the appropriate space.
The signed copy of the ruling letter will
constitute an agreement (Consent Agreement) within the meaning of § 481(c)
and as required by § 1.481–4(b). The
Consent Agreement must be returned to
the address provided in the Consent
Agreement within 45 days of the date of
its issuance. In addition, a copy of the
Consent Agreement must be attached to
the taxpayer’s income tax return for the
year of change. If a taxpayer signs and
returns the Consent Agreement, the taxpayer must implement the change in
accounting method in accordance with
the terms and conditions provided in the
Consent Agreement and this revenue
procedure. See § 1.481–4(b).
(2) Signature requirements. The
Consent Agreement must be signed by,
or on behalf of, the taxpayer making the
request. The individual signing the Consent Agreement must have the authority
to bind the taxpayer in such matters (in
general, it may not be signed by the
taxpayer’s representative).
(3) 45-day requirement. If the taxpayer does not return the signed Consent Agreement within 45 days of the
date of its issuance, the ruling letter
granting permission for the change will
be null and void.
(4) Change in method of accounting not made by the taxpayer.
(a) If the taxpayer decides not to
effect the change in accordance with the
terms and conditions of the ruling letter,
the taxpayer must so indicate by returning the ruling letter and the unsigned
Consent Agreement to the national office addressed as follows: Commissioner
of Internal Revenue, Attention: [Individual whose name and symbols appear
at the top of the Consent Agreement],
P.O. Box 14095, Benjamin Franklin Station, Washington, DC 20044, with an
explanation of why the accounting
method change will not be effected.
(b) If the taxpayer disagrees
with the terms and conditions of the
ruling letter, the taxpayer must express
the disagreement together with an expla-

nation of the reason(s) within the 45-day
period set forth above. The Service will
consider the reason(s) for disagreement
and notify the taxpayer whether the
original ruling letter will be modified. If
the ruling letter is not modified, the
taxpayer will be notified and given 15
days from the date of the notification
either to accept the original ruling letter
by signing and returning the Consent
Agreement, or to reject the change by
returning the ruling letter and the unsigned Consent Agreement to the address in section 8.11(4)(a) of this revenue procedure.
.12 Two or more trades or businesses.
(1) In general. Sections 1.446–
1(d)(1) and (2) permit different methods
of accounting to be used for each trade
or business of a taxpayer. However, in
considering whether to grant an accounting method change for one of the trades
or businesses of a taxpayer, the Service
will consider whether the change will
result in the creation or shifting of
profits or losses between the trades or
businesses, and whether the proposed
method will clearly reflect the taxpayer’s income as required under § 446
and the regulations thereunder.
(2) Information required. A taxpayer requesting a change in method of
accounting for one of its trades or
businesses must identify all other trades
or businesses by name and the method
of accounting used by each trade or
business for the particular item that is
the subject of the requested change in
method of accounting.
(3) Separate Forms 3115 required.
If a taxpayer operates two or more
separate and distinct trades or businesses
and has kept separable books and
records (and employed different methods of accounting for the businesses), a
Form 3115 and separate user fee is
required for each separate trade or business should the taxpayer desire to
change the methods of accounting of the
separate trades or businesses.
.13 Consolidated groups.
(1) In general. Section 1.1502–
17(a) permits separate methods of accounting to be used by each member of
a consolidated group, subject to the
provisions of § 446 and the regulations
thereunder. However, in considering
whether to grant accounting method
changes to group members, the Service
will consider the effects of the changes
on the income of the group. A common
parent requesting a change in method of
accounting on behalf of a member of

the consolidated group must submit any
information necessary to permit the Service to evaluate the effect of the requested change on the income of the
consolidated group. Except as provided
in section 8.13(2) of this revenue procedure, a Form 3115 and separate user fee
must be submitted for each member of
the group for which a change in accounting method is requested pursuant
to this revenue procedure.
(2) Separate Forms 3115 not required. A common parent may request
an identical accounting method change
on a single Form 3115 on behalf of
more than one member of a consolidated group at a reduced user fee. To
qualify, the taxpayers in the consolidated
group must be members of the same
affiliated group under § 1504(a) that
join in the filing of a consolidated tax
return, and they must be requesting to
change from the identical present
method of accounting to the identical
proposed method of accounting. All aspects of the requested accounting
method change, including the present
and proposed methods, the underlying
facts, and the authority for the request,
must be identical, except for the
§ 481(a) adjustment. See section
15.07(1) and (3) of Rev. Proc. 97–1 at
48–49 (or any successor) for the information required to be submitted with the
Form 3115.
.14 Applicability of Rev. Proc. 97–1
and Rev Proc. 97–4. Rev. Proc. 97–1
and Rev. Proc. 97–4 (or any successors),
respectively, are applicable to a Form
3115 filed under this revenue procedure,
unless specifically excluded or overridden by other published guidance (including the special procedures in this
document).
.15 Effect on other offices of the
Service. The provisions of this revenue
procedure are not intended to preclude
an appropriate representative of the Service (for example, an appeals official
with delegated settlement authority)
from settling a particular taxpayer’s case
involving an accounting method issue
by agreeing to terms and conditions that
differ from those provided in this revenue procedure when it is in the best
interest of the government to do so.
SECTION 9. AUDIT PROTECTION
FOR TAXABLE YEARS PRIOR TO
YEAR OF CHANGE
.01 In general. Except as provided in
section 9.02 of this revenue procedure,
when a taxpayer timely files a Form

19

3115 pursuant to this revenue procedure,
the Service will not require the taxpayer
to change its method of accounting for
the same item for a taxable year prior to
the year of change.
.02 Exceptions.
(1) Change not made or made improperly. The Service may change a
taxpayer’s method of accounting for
prior taxable years if (a) the taxpayer
withdraws or does not perfect its request, (b) the national office denies the
request, (c) the taxpayer declines to
implement the change in method of
accounting pursuant to the terms and
conditions of the Consent Agreement
and this revenue procedure, (d) the
taxpayer implements the change but
does not comply with the terms and
conditions contained in the Consent
Agreement and this revenue procedure,
or (e) the national office modifies or
revokes the ruling retroactively because
there has been a misstatement or an
omission of material facts. See section
10.02(2) of this revenue procedure.
(2) Change in sub-method. The
Service may change a taxpayer’s method of accounting for prior taxable years
if the taxpayer is changing a sub-method
of accounting within the method. For
example, an examining agent may propose to terminate the taxpayer’s use of
the LIFO inventory method during a
prior taxable year even though the taxpayer changes its method of valuing
increments in the current year.
(3) Prior year Service-initiated
change. The Service may make adjustments to the taxpayer’s returns for the
same item for taxable years prior to the
requested year of change to reflect a
prior year Service-initiated change.
(4) Criminal investigation. The
Service may change a taxpayer’s
method of accounting for the same item
for taxable years prior to the requested
year of change if there is any pending
or future criminal investigation or proceeding concerning (a) directly or indirectly, any issue relating to the taxpayer’s federal tax liability for any taxable
year prior to the year of change, or (b)
the possibility of false or fraudulent
statements made by the taxpayer with
respect to any issue relating to its
federal tax liability for any taxable year
prior to the year of change.
SECTION 10. EFFECT OF CONSENT
.01 In general. A taxpayer that
changes to a method of accounting
pursuant to this revenue procedure may

be required to change or modify that
method of accounting for the following
reasons:
(1) the enactment of legislation;
(2) a decision of the United States
Supreme Court;
(3) the issuance of temporary or
final regulations;
(4) the issuance of a revenue ruling, revenue procedure, notice, or other
statement published in the Internal Revenue Bulletin;
(5) the issuance of written notice
to the taxpayer that the change in
method of accounting was granted in
error or is not in accord with the current
views of the Service; or
(6) a change in the material facts
on which the consent was based.
.02 Retroactive change or modification. Except in rare or unusual circumstances, if a taxpayer that changes its
method of accounting under this revenue
procedure is subsequently required under this section 10 to change or modify
that method of accounting, the required
change or modification will not be applied retroactively provided that:
(1) the taxpayer complied with all
the applicable provisions of the Consent
Agreement and this revenue procedure;
(2) there has been no misstatement
or omission of material facts;
(3) there has been no change in the
material facts on which the consent was
based;
(4) there has been no change in the
applicable law; and
(5) the taxpayer to whom consent
was granted acted in good faith in
relying on the consent, and applying the
change or modification retroactively
would be to the taxpayer’s detriment.
SECTION 11. REVIEW BY DISTRICT
DIRECTOR
.01 In general. The district director
must apply a ruling obtained under this
revenue procedure in determining the
taxpayer’s liability unless the district
director recommends that the ruling
should be modified or revoked. The
district director will ascertain if:
(1) the representations on which
the ruling was based reflect an accurate
statement of the material facts;
(2) the amount of the § 481(a)
adjustment was properly determined;
(3) the change in method of accounting was implemented as proposed
in accordance with the terms and conditions of the Consent Agreement and this
revenue procedure;

(4) there has been any change in
the material facts on which the ruling
was based during the period the method
of accounting was used; and
(5) there has been any change in
the applicable law during the period the
method of accounting was used.
.02 National office consideration. If
the district director recommends that the
ruling (other than the amount of the
§ 481(a) adjustment) should be modified or revoked, the district director will
forward the matter to the national office
for consideration before any further action is taken. Such a referral to the
national office will be treated as a
request for technical advice, and the
provisions of Rev. Proc. 97–2 (or any
successor) will be followed.

year of change) in Rev. Proc. 92–20,
and (b) the applicable § 481(a) adjustment period and the authority therefor.
(3) Open window periods under
Rev. Proc. 92–20. If, on May 15, 1997,
a taxpayer is within a window period
provided in Rev. Proc. 92–20, the taxpayer may file a Form 3115 under this
revenue procedure during the remainder
of that window period and apply the
terms and conditions in Rev. Proc.
92–20 for the applicable window period.
The taxpayer must affirmatively state in
an attachment to the Form 3115 (a) that
it agrees to apply the terms and conditions of the applicable window period in
Rev. Proc. 92–20, and (b) t

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/agency%3Airs%3Abbb4b7a1f5162786. Public record. Not legal advice.