n-18-35.pdf

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26 CFR 601.204: Changes in accounting periods and method of accounting.
(Also: Part I, Sections 446, 451; 1.451-1.)

Notice 2018-35

SECTION 1. PURPOSE

This notice provides transitional guidance relating to advance payments under Rev.
Proc. 2004-34, 2004-1 C.B. 991, as modified and clarified by Rev. Proc. 2011-18, 2011-
5 I.R.B. 443, and Rev. Proc. 2013-29, 2013-33 I.R.B. 141, and as modified by Rev.
Proc. 2011-14, 2011-4 I.R.B. 330. Section 13221 of “An Act to provide for reconciliation
pursuant to titles II and V of the concurrent resolution on the budget for fiscal year
2018,” Pub. L. No. 115-97 (December 22, 2017) (the “Act”) amended § 451 of the
Internal Revenue Code. The amendments included a new section 451(c), which allows
accrual method taxpayers to elect a limited deferral of the inclusion of income
associated with certain advance payments. The rules in new § 451(c) largely track the
approach in Rev. Proc. 2004-34. The Department of the Treasury (Treasury
Department) and the Internal Revenue Service (the Service) expect to issue future
guidance regarding the treatment of advance payments to implement this legislative
change. Taxpayers, with or without applicable financial statements, receiving advance
payments may continue to rely on Rev. Proc. 2004-34 until future guidance is effective.

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SECTION 2. BACKGROUND
Section 451(a) provides that the amount of any item of gross income is included
in gross income for the taxable year in which received by the taxpayer, unless, under
the method of accounting used in computing taxable income, the amount is to be
properly accounted for as of a different period.
Section 1.451-1(a) of the Income Tax Regulations provides that, under an
accrual method of accounting, income is includible in gross income when all the events
have occurred that fix the right to receive the income and the amount can be
determined with reasonable accuracy. All the events that fix the right to receive income
generally occur when: (1) the payment is earned through performance, (2) payment is
due to the taxpayer, or (3) payment is received by the taxpayer, whichever happens
earliest. See Rev. Rul. 2003-10, 2003-1 C.B. 288.
Rev. Proc. 2004-34 provides a full inclusion method (the Full Inclusion Method)
and a deferral method (the Deferral Method) of accounting for the treatment of advance
payments for goods, services, and other items. Under the Full Inclusion Method,
advance payments are included in income in the year of receipt. Under the Deferral
Method, an advance payment is included in gross income for the taxable year of receipt
to the extent recognized in revenue in a taxpayer’s applicable financial statement for
that taxable year or earned (for taxpayers without an applicable financial statement) in
that taxable year, and the remaining amount of the advance payment is included in the
next succeeding taxable year after the taxable year in which the payment is received.
Section 13221 of the Act amends § 451 by redesignating subsections (b) through
(i) as (d) through (k), respectively, and by inserting new subsections (b) and (c),

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effective generally for taxable years beginning after December 31, 2017. Section
451(b)(1)(A)(i) provides that for an accrual method taxpayer, the all events test for any
item of gross income shall not be treated as met any later than when the item is taken
into account as revenue in an applicable financial statement of the taxpayer. Section
451(c)(1)(A) generally provides that an accrual method taxpayer shall include an
advance payment in gross income in the taxable year of receipt. Alternatively, under
§ 451(c)(1)(B), an accrual method taxpayer may elect to defer the recognition of all or a
portion of an advance payment to the taxable year following the taxable year in which
the payment is received, except any portion of such advance payment that is required
under § 451(b) to be included in gross income in the taxable year in which the payment
is received.
Section 451(c)(4)(A) defines an advance payment as any payment: (1) the full
inclusion of which in the gross income of the taxpayer for the taxable year of receipt is a
permissible method of accounting, (2) any portion of which is included in revenue by the
taxpayer in an applicable financial statement, or such other financial statement as the
Secretary may specify, for a subsequent taxable year, and (3) which is for goods,
services, or such other items as may be identified by the Secretary. Section 451(c)
generally contains rules similar to Rev. Proc. 2004-34. See H.R. Rep. No. 115-466, at
429 (2017) (Conf. Rep.).
SECTION 3. INTERIM GUIDANCE FOR REV. PROC. 2004-34
The Treasury Department and the Service expect to issue guidance for the
treatment of advance payments to implement the changes made to § 451 by the Act.
Until further guidance for the treatment of advance payments is applicable, taxpayers

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may continue to rely on Rev. Proc. 2004-34 for the treatment of advance payments.
During this time, the Service will not challenge a taxpayer’s use of Rev. Proc. 2004-34
to satisfy the requirements of § 451, although the Service will continue to verify on
examination that taxpayers are properly applying Rev. Proc. 2004-34. In addition, the
Service intends to modify section 16.07 of Rev. Proc. 2017-30, 2017-18 I.R.B. 1131, to
provide a waiver of the eligibility rule in section 5.01(1)(f) of Rev. Proc. 2015-13, 2015-5
I.R.B. 419, to enable taxpayers to make a change to a method of accounting that is
permitted under Rev. Proc. 2004-34.
SECTION 4. REQUEST FOR COMMENTS ON ADVANCE PAYMENTS
The Treasury and Service invite comments containing suggestions for future
guidance under § 451(b) and (c). In particular, comments are requested concerning the
fol lowing issues under § 451(c): (1) whether taxpayers without an applicable financial
statement may continue to use the Deferral Method, as provided in Rev. Proc. 2004-34;
(2) whether clarity is needed for the definition of an applicable financial statement under
§ 451(b)(3); (3) whether the definition of applicable financial statement under § 451(b)
and (c) should be the same as the definition in section 4.06 of Rev. Proc. 2004-34;
(4) whether other items in addition to those listed in section 4.01(3) of Rev. Proc. 2004-
34 should be included in the definition of an advance payment; (5) whether certain
payments other than those listed in section 4.02 of Rev. Proc. 2004-34 should be
excluded from the definition of an advance payment; (6) whether any new procedural
rules for changing a method of accounting for advance payments would be appropriate
and helpful; and (7) the extent, if any, to which the Service may provide procedures
expanding the rules of § 451(c) to apply to additional taxpayers and types of income.

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WHERE TO SEND COMMENTS
Comments must be submitted by May 14, 2018. Comments, identified by Notice
2018-35, may be sent by one of the following methods:
• By Mail:
Internal Revenue Service
Attn: CC:PA:LPD:PR (Notice 2018-35)
Room 5203
P.O. Box 7604
Ben Franklin Station
Washington, DC 20044

• By Hand or Courier Delivery: Submissions may be hand-delivered Monday
through Friday between the hours of 8 a.m. and 4 p.m. to:
Courier’s Desk
Internal Revenue Service
Attn: CC:PA:LPD:PR
(Notice 2018-35)
1111 Constitution Avenue, NW
Washington, DC 20224

• Electronic: Alternatively, persons may submit comments electronically to
Notice.Comments@irscounsel.treas.gov. Please include “Notice 2018-35)” in the
subject line of any electronic communications.
All submissions will be available for public inspection and copying in room 1621,
1111 Constitution Avenue, NW, Washington, DC, from 9 a.m. to 4 p.m.
SECTION 5. DRAFTING INFORMATION
The principal author of this notice is Peter E. Ford of the Office of Associate Chief
Counsel (Income Tax & Accounting). For further information regarding this notice,
contact Peter E. Ford, at (202) 317-7011 (not a toll-free call).