rp-98-60.pdf

Preserve advance releases and the authoritative Internal Revenue Bulletin rendition; directory timestamps are file-publication metadata, not legal effective dates. HTML bulletins begin June 2003; earlier available issues require full PDF parsing.

This collection currently includes the publisher’s available advance-release directory. Historical bulletin renditions are discovered separately; an advance-release record alone does not certify the collection archive complete.

Part III
Administrative, Procedural, and Miscellaneous
26 CFR 601.204: Changes in accounting periods and in methods of
accounting.
(Also Part I, §§ 162, 165, 166, 167, 168, 174, 197, 263, 263A,
446, 451, 454, 455, 461, 471, 472, 475, 481, 585, 1272; 1273,
1281, 1363; 1.165-2, 1.167(a)-11, 1.167(e)-1, 1.174-1, 1.174-3,
1.174-4, 1.263(a)-2, 1.263A-1, 1.263A-3, 1.446-1, 1.446-2, 1.454-
1, 1.455-6, 1.461-4, 1.461-5, 1.471-1, 1.471-2, 1.471-3, 1.472-6,
1.472-8, 1.481-1, 1.481-4, 1.1272-1, 1.1273-1, 1.1273-2.)
Rev. Proc. 98-60
TABLE OF CONTENTS
PAGE
SECTION 1. PURPOSE......................x
SECTION 2. BACKGROUND AND CHANGES...............x
.01 Change in method of accounting defined........x
.02 Securing permission to make a method change.....x
.03 Terms and conditions of a method change.......x
.04 No retroactive method change.............x
.05 Method change with a § 481(a) adjustment.......x
(1) Need for adjustment............... xx
(2) Adjustment period................ xx
.06 Method change using a cut-off method........ xx
.07 Consistency and clear reflection of income..... xx
.08 Separate trades or businesses........... xx
.09 Penalties..................... xx
.10 Change made as part of an examination....... xx
.11 Significant changes................ xx
SECTION 3. DEFINITIONS................... xx
.01 Application.................... xx
.02 Taxpayer...................... xx
(1) In general................... xx
(2) Consolidated group............... xx
.03 Filed....................... xx
.04 Mailed....................... xx
.05 Timely performance of acts............. xx
.06 Year of change................... xx

-2-
.07 Section 481(a) adjustment period.......... xx
.08 Under examination................. xx
(1) In general................... xx
(2) Partnerships and S corporations subject to TEFRAxx
.09 Issue under consideration............. xx
(1) Under examination................ xx
(2) Before an appeals office............ xx
(3) Before a federal court............. xx
.10 Change within the LIFO inventory method...... xx
SECTION 4. SCOPE...................... xx
.01 Applicability................... xx
.02 Inapplicability.................. xx
(1) Under examination................ xx
(2) Before an appeals office............ xx
(3) Before a federal court............. xx
(4) Consolidated group member............ xx
(5) Partnerships and S corporations......... xx
(6) Prior change.................. xx
(7) Section 381(a) transaction........... xx
.03 Nonautomatic changes................ xx
SECTION 5. TERMS AND CONDITIONS OF CHANGE.......... xx
.01 In general..................... xx
.02 Year of change................... xx
.03 Section 481(a) adjustment.............. xx
.04 Section 481(a) adjustment period.......... xx
(1) In general................... xx
(2) Short period as a separate taxable year..... xx
(3) Shortened or accelerated adjustment periods... xx
.05 NOL carryback limitation for taxpayer subject to criminal
investigation.................... xx
.06 Change treated as initiated by the taxpayer..... xx
SECTION 6. GENERAL APPLICATION PROCEDURES.......... xx
.01 Consent...................... xx
.02 Filing requirements................ xx
(1) Waiver of taxable year filing requirement.... xx
(2) Timely duplicate filing requirement....... xx
(3) Label...................... xx
(4) Signature requirements............. xx
(5) Additional statement required.......... xx
(6) Where to file copy............... xx
(7) No user fee................... xx
(8) Single application for certain consolidated groups
........................ xx
.03 Taxpayer under examination............. xx
(1) In general................... xx
(2) 90-day window period.............. xx
(3) 120-day window period.............. xx
(4) Consent of district director.......... xx
.04 Taxpayer before an appeals office......... xx

-3-
.05 Taxpayer before a federal court.......... xx
.06 Compliance with provisions............. xx
SECTION 7. AUDIT PROTECTION FOR TAXABLE YEARS PRIOR TO YEAR OF
CHANGE.................... xx
.01 In general..................... xx
.02 Exceptions..................... xx
(1) Change not made or made improperly....... xx
(2) Change in sub-method.............. xx
(3) Prior year Service-initiated change....... xx
(4) Criminal investigation............. xx
SECTION 8. EFFECT OF CONSENT................ xx
.01 In general..................... xx
.02 Retroactive change or modification......... xx
SECTION 9. REVIEW BY DISTRICT DIRECTOR........... xx
.01 In general..................... xx
.02 National office consideration........... xx
SECTION 10. REVIEW BY NATIONAL OFFICE............ xx
.01 In general..................... xx
.02 Incomplete application--21 day rule........ xx
.03 Conference in the national office......... xx
.04 National office determination........... xx
(1) Consent not granted............... xx
(2) Application changed............... xx
SECTION 11. APPLICABILITY OF REV. PROCS. 98-1 AND 98-4 . . . xx
SECTION 12. INQUIRIES.................... xx
SECTION 13. EFFECTIVE DATE................. xx
.01 In general..................... xx
.02 Transition rules.................. xx
.03 Special rules................... xx
(1) Change in method of accounting for depreciation.xx
(2) Change in method of accounting to discontinue the
mark-to-market method of accounting....... xx
(3) Change in method of accounting for a pool of debt
instruments................... xx
SECTION 14. EFFECT ON OTHER DOCUMENTS............ xx
SECTION 15. PAPERWORK REDUCTION ACT............. xx
DRAFTING INFORMATION.................... xx
APPENDIX (TABLE OF CONTENTS)................ xx
SECTION 1. PURPOSE

-4-
This revenue procedure provides the procedures by which a
taxpayer may obtain automatic consent to change the methods of
accounting described in the APPENDIX of this revenue procedure.
This revenue procedure clarifies, modifies, amplifies, and
supersedes Rev. Proc. 97-37, 1997-2 C.B. 455. It also
consolidates automatic consent procedures for changes in several
methods of accounting that were published subsequent to the
publication of Rev. Proc. 97-37, and provides new automatic
consent procedures for changes in several other methods of
accounting. A taxpayer complying with all the applicable
provisions of this revenue procedure has obtained the consent of
the Commissioner of Internal Revenue to change its method of
accounting under § 446(e) of the Internal Revenue Code and the
Income Tax Regulations thereunder.
SECTION 2. BACKGROUND AND CHANGES
.01 Change in method of accounting defined.
(1) Section 1.446-1(e)(2)(ii)(a) of the Income Tax
Regulations provides that a change in method of accounting
includes a change in the overall plan of accounting for gross
income or deductions, or a change in the treatment of any
material item. A material item is any item that involves the
proper time for the inclusion of the item in income or the taking
of the item as a deduction. In determining whether a taxpayer's
accounting practice for an item involves timing, generally the
relevant question is whether the practice permanently changes the
amount of the taxpayer's lifetime income. If the practice does

-5-
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.

-6-
(4) A change in method of accounting does not include
correction of mathematical or posting errors, or errors in the
computation of tax liability (such as errors in computation of
the foreign tax credit, net operating loss, percentage depletion,
or investment credit). See § 1.446-1(e)(2)(ii)(b).
.02 Securing permission to make a method change. Sections
446(e) and 1.446-1(e) state that, except as otherwise provided, a
taxpayer must secure the consent of the Commissioner before
changing a method of accounting for federal income tax purposes.
Section 1.446-1(e)(3)(i) requires that, in order to obtain the
Commissioner's consent to a method change, a taxpayer must file a
Form 3115, Application for Change in Accounting Method, during
the taxable year in which the taxpayer wants to make the proposed
change.
.03 Terms and conditions of a method change. Section
1.446-1(e)(3)(ii) authorizes the Commissioner to prescribe
administrative procedures setting forth the limitations, terms,
and conditions deemed necessary to permit a taxpayer to obtain
consent to change a method of accounting in accordance with
§ 446(e). The terms and conditions the Commissioner may
prescribe include the year of change, whether the change is to be
made with a § 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,

-7-
regardless of whether the change is from a permissible or an
impermissible method. See generally Rev. Rul. 90-38.
.05 Method change with a § 481(a) adjustment.
(1) Need for adjustment. Section 481(a) requires those
adjustments necessary to prevent amounts from being duplicated or
omitted to be taken into account when the taxpayer's taxable
income is computed under a method of accounting different from
the method used to compute taxable income for the preceding
taxable year. When there is a change in method of accounting to
which § 481(a) is applied, income for the taxable year preceding
the year of change must be determined under the method of
accounting that was then employed, and income for the year of
change and the following taxable years must be determined under
the new method of accounting as if the new method had always been
used.
Example. A taxpayer that is not required to use inventories
uses the overall cash receipts and disbursements method and
changes to an overall accrual method. The taxpayer has
$120,000 of income earned but not yet received (accounts
receivable) and $100,000 of expenses incurred but not yet
paid (accounts payable) as of the end of the taxable year
preceding the year of change. A positive § 481(a) adjustment
of $20,000 ($120,000 accounts receivable less $100,000
accounts payable) is required as a result of the change.
(2) Adjustment period. Section 481(c) and
§§ 1.446-1(e)(3)(ii) and 1.481-4 provide that the adjustment

-8-
required by § 481(a) may be taken into account in determining
taxable income in the manner and subject to the conditions agreed
to by the Commissioner and the taxpayer. Generally, in the
absence of such an agreement, the § 481(a) adjustment is taken
into account completely in the year of change, subject to
§ 481(b) which limits the amount of tax where the § 481(a)
adjustment is substantial. However, under the Commissioner's
authority in § 1.446-1(e)(3)(ii) to prescribe terms and
conditions for changes in methods of accounting, this revenue
procedure provides specific adjustment periods that are intended
to achieve an appropriate balance between the goals of mitigating
distortions of income that result from accounting method changes
and providing appropriate incentives for voluntary compliance.
.06 Method change using a cut-off method. The Commissioner
may determine that certain changes in methods of accounting will
be made without a § 481(a) adjustment, using a "cut-off method."
Under a cut-off method, only the items arising on or after the
beginning of the year of change (or other operative date) are
accounted for under the new method of accounting. Any items
arising before the year of change (or other operative date)
continue to be accounted for under the taxpayer's former method
of accounting. See, for example, § 263A (which generally applies
to costs incurred after December 31, 1986, for noninventory
property), § 461(h) (which generally applies to amounts incurred
on or after July 18, 1984), and § 1.446-3 (which applies to
notional principal contracts entered into on or after December

-9-
13, 1993). Because no items are duplicated or omitted from
income when a cut-off method is used to effect a change in
accounting method, no § 481(a) adjustment is necessary.
.07 Consistency and clear reflection of income. Methods of
accounting should clearly reflect income on a continuing basis,
and the Internal Revenue Service exercises its discretion under
§§ 446(e) and 481(c) in a manner that generally minimizes
distortions of income across taxable years and on an annual
basis.
.08 Separate trades or businesses.
(1) Sections 1.446-1(d)(1) and (2) provide that when a
taxpayer has two or more separate and distinct trades or
businesses, a different method of accounting may be used for each
trade or business provided the method of accounting used for each
trade or business clearly reflects the overall income of the
taxpayer as well as that of each particular trade or business.
No trade or business is separate and distinct unless a complete
and separable set of books and records is kept for that trade or
business.
(2) Section 1.446-1(d)(3) provides that if, by reason of
maintaining different methods of accounting, there is a creation
or shifting of profits or losses between the trades or businesses
of the taxpayer (for example, through inventory adjustments,
sales, purchases, or expenses) so that income of the taxpayer is
not clearly reflected, the trades or businesses of the taxpayer
are not separate and distinct.

-10-
.09 Penalties. Any otherwise applicable penalty for the
failure of a taxpayer to change its method of accounting (for
example, the accuracy-related penalty under § 6662 or the fraud
penalty under § 6663) may be imposed if the taxpayer does not
timely file a request to change a method of accounting. See
§ 446(f). Additionally, the taxpayer's return preparer may also
be subject to the preparer penalty under § 6694. However,
penalties will not be imposed when a taxpayer changes from an
impermissible method of accounting to a permissible one by
complying with all applicable provisions of this revenue
procedure.
.10 Change made as part of an examination. Sections 446(b)
and 1.446-1(b)(1) provide that if a taxpayer does not regularly
employ a method of accounting that clearly reflects its income,
the computation of taxable income must be made in a manner that,
in the opinion of the Commissioner, does clearly reflect income.
If a taxpayer under examination is not eligible to change a
method of accounting under this revenue procedure, the change may
be made by the district director. A change resulting in a
positive § 481(a) adjustment will ordinarily be made in the
earliest taxable year under examination with a one-year § 481(a)
adjustment period.
.11 Significant changes. Significant changes to Rev. Proc.
97-37 include:

-11-
(1) Section 4.02(6) clarifies that the year of change is
included within the five-year prohibition regarding prior
changes;
(2) Section 6.02(2) clarifies that the automatic
extension of 6 months from the due date of the return provided in
§ 301.9100-2 is applicable;
(3) Section 9.01 clarifies that the district director is
to ascertain if a change in method of accounting was made in
compliance with all the applicable provisions of this revenue
procedure;
(4) Section 10.04 clarifies that an application reviewed
and changed by the national office is subject to review by the
district director as provided in section 9 of this revenue
procedure;
(5) Section 13.03 provides that the effective date of
this revenue procedure is December 21, 1998, for applications or
copies of applications filed with the national office under
section 2.01 or 2.02 of the APPENDIX;
(6) Section 2.01 of the APPENDIX provides that this
revenue procedure is the exclusive procedure for making that
change, includes property for which excess depreciation was
claimed, excludes property for which depreciation is determined
under § 1.167(a)-11, and requires additional information for any
public utility property;
(7) Section 2.02 of the APPENDIX requires additional
information for any public utility property;

-12-
(8) Section 3.01 of the APPENDIX is modified to provide
that the change does not apply to a taxpayer that wants to change
to the capitalization method for costs of developing (or
modifying) any package design that has an ascertainable useful
life;
(9) Section 10.01 of the APPENDIX provides that a
taxpayer is not required to file a Form 3115 to re-elect the LIFO
inventory method after a period of five taxable years beginning
with the year of change;
(10) Section 10.04 of the APPENDIX provides that a
taxpayer wanting to make an IPIC change where a bulk bargain
purchase previously occurred must first comply with Hamilton
Industries, Inc. v. Commissioner, 97 T.C. 120 (1991), and compute
a § 481(a) adjustment for the bargain purchase part of the
change;
(11) The following changes in methods of accounting have
been added to the APPENDIX of this revenue procedure:
(a) Section 1.02 of the APPENDIX regarding Year 2000
costs;
(b) Section 2A.01 of the APPENDIX regarding research
and experimental expenditures;
(c) Section 3.02 of the APPENDIX regarding line pack
gas and cushion gas;
(d) Section 5.04 of the APPENDIX regarding the Rule
of 78s;

-13-
(e) Section 8.05 of the APPENDIX regarding
cooperative advertising;
(f) Section 9.02 of the APPENDIX regarding estimating
inventory shrinkage;
(g) Section 10A.01 of the APPENDIX regarding the
mark-to-market method of accounting for a taxpayer’s first
taxable year ending after July 22, 1998; and
(h) Section 12.02 of the APPENDIX regarding pool of
debt instruments for the taxpayer’s first taxable year beginning
after August 5, 1997.
SECTION 3. DEFINITIONS
.01 Application. The term "application" includes a Form
3115, or any statement that is authorized under the APPENDIX of
this revenue procedure to be filed in lieu of a Form 3115, and
any attachments.
.02 Taxpayer.
(1) In general. The term "taxpayer" has the same meaning
as the term "person" defined in § 7701(a)(1) (rather than the
meaning of the term "taxpayer" defined in § 7701(a)(14)).
(2) Consolidated group. For purposes of (a) sections
3.08(1), 3.09(1), and 4.02(1) of this revenue procedure (taxpayer
under examination), (b) sections 3.09(2) and 4.02(2) of this
revenue procedure (taxpayer before an appeals office), or (c)
sections 3.09(3) and 4.02(3) of this revenue procedure (taxpayer
before a federal court), the term "taxpayer" includes a
consolidated group.

-14-
.03 Filed. Any form (including an application), statement,
or other document required to be filed under this revenue
procedure is filed on the date it is mailed to the proper address
(or an address similar enough to complete delivery). If the
form, statement, or other document is not mailed (or the date it
is mailed cannot be reasonably determined), it is filed on the
date it is delivered to the Service.
.04 Mailed. The date of mailing will be determined under
the rules of § 7502. For example, the date of mailing is the
date of the U.S. postmark or the applicable date recorded or
marked by a designated private delivery service. See Notice 98-
47, 1998-37 I.R.B. 8.
.05 Timely performance of acts. The rules of § 7503 apply
when the last day for the taxpayer's timely performance of any
act (for example, filing an application or submitting additional
information) falls on a Saturday, Sunday, or legal holiday. The
performance of any act is timely if the act is performed on the
next succeeding day that is not a Saturday, Sunday, or legal
holiday.
.06 Year of change. The year of change is the taxable year
for which a change in method of accounting is effective, that is,
the first taxable year the new method is to be used, even if no
affected items are taken into account for that year.
.07 Section 481(a) adjustment period. The § 481(a)
adjustment period is the applicable number of taxable years for
taking into account the § 481(a) adjustment required as a result

-15-
of the change in method of accounting. The year of change is the
first taxable year in the adjustment period and the § 481(a)
adjustment is taken into account ratably over the number of
taxable years in the adjustment period. The applicable
adjustment periods are set forth in section 5.04 of this revenue
procedure.
.08 Under examination.
(1) In general.
(a) Except as provided in section 3.08(2) of this
revenue procedure, an examination of a taxpayer with respect to a
federal income tax return begins on the date the taxpayer is
contacted in any manner by a representative of the Service for
the purpose of scheduling any type of examination of the return.
An examination ends:
(i) in a case in which the Service accepts the
return as filed, on the date of the "no change" letter sent to
the taxpayer;
(ii) in a fully agreed case, on the earliest of
the date the taxpayer executes a waiver of restrictions on
assessment or acceptance of overassessment (for example, Form
870, 4549, or 4605), the date the taxpayer makes a payment of tax
that equals or exceeds the proposed deficiency, or the date of
the "closing" letter (for example, Letter 891 or 987) sent to the
taxpayer; or
(iii) in an unagreed or a partially agreed case,
on the earliest of the date the taxpayer (or its representative)

-16-
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.
(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;

-17-
(b) in a fully agreed case, when all the partners,
members, or shareholders execute a Form 870-P, 870-L, or 870-S;
or
(c) in an unagreed or a partially agreed case, on the
earliest of the date the TMP (or its representative) is notified
by Appeals that the case has been referred to Appeals from
Examination, the date the TMP (or a partner, member, or
shareholder) requests judicial review, or the date on which the
period for requesting judicial review expires.
But see section 4.02(5) of this revenue procedure for certain
rules that preclude an entity from requesting a change in
accounting method. Also note that S corporations are not subject
to the TEFRA unified audit and litigation provisions for taxable
years beginning after December 31, 1996. See Small Business Job
Protection Act of 1996, Pub. L. No. 104-188, § 1317(a), 110 Stat.
1755, 1787 (1996).
.09 Issue under consideration.
(1) Under examination. A taxpayer's method of accounting
for an item is an issue under consideration for the taxable years
under examination if the taxpayer receives written notification
(for example, by examination plan, information document request
(IDR), or 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

-18-
under consideration as a result of an examination plan that
identifies LIFO pooling as a matter to be examined, but it is not
an issue under consideration as a result of an examination plan
that merely identifies LIFO inventories as a matter to be
examined. Similarly, a taxpayer’s method of determining
inventoriable costs under § 263A is an issue under consideration
as a result of an IDR that requests documentation supporting the
costs included in inventoriable costs, but it is not an issue
under consideration as a result of an IDR that requests
documentation supporting the amount of cost of goods sold
reported on the return. The question of whether a method of
accounting is an issue under consideration may be referred to the
national office as a request for technical advice under the
provisions of Rev. Proc. 98-2, 1998-1 I.R.B. 74 (or any
successor).
(2) Before an appeals office. A taxpayer's method of
accounting for an item is an issue under consideration for the
taxable years before an appeals office if the treatment of the
item is included as an item of adjustment in the examination
report referred to Appeals or is specifically identified in
writing to the taxpayer by Appeals.
(3) Before a federal court. A taxpayer's method of
accounting for an item is an issue under consideration for the
taxable years before a federal court if the treatment of the item
is included in the statutory notice of deficiency, the notice of
claim disallowance, the notice of final administrative

-19-
adjustment, the pleadings (for example, the petition, complaint,
or answer) or amendments thereto, or is specifically identified
in writing to the taxpayer by the counsel for the government.
.10 Change within the LIFO inventory method. A change
within the LIFO inventory method is a change from one LIFO
inventory method or sub-method to another LIFO inventory method
or sub-method. A change within the LIFO inventory method does
not include a change in method of accounting that could be made
by a taxpayer that does not use the LIFO inventory method (for
example, a method governed by § 471 or 263A).
SECTION 4. SCOPE
.01 Applicability. This revenue procedure applies to a
taxpayer requesting the Commissioner's consent to change to a
method of accounting described in the APPENDIX of this revenue
procedure. This revenue procedure is the exclusive procedure for
a taxpayer within its scope to obtain the Commissioner's consent.
.02 Inapplicability. Except as otherwise provided in the
APPENDIX of this revenue procedure (see, for example, sections
4.01, 5.04, 8.05, 9.02, 10A.01, 12.01, and 12.02 of the APPENDIX
of this revenue procedure), this revenue procedure does not apply
in the following situations:
(1) Under examination. If, on the date the taxpayer
would otherwise file a copy of the application with the national
office, the taxpayer is under examination (as provided in section
3.08 of this revenue procedure), except as provided in sections

-20-
6.03(2) (90-day window), 6.03(3) (120-day window), and 6.03(4)
(district director consent) of this revenue procedure;
(2) Before an appeals office. If, on the date the
taxpayer would otherwise file a copy of the application with the
national office, the taxpayer is before an appeals office with
respect to any income tax issue and the method of accounting to
be changed is an issue under consideration by the appeals office
(as provided in section 3.09(2) of this revenue procedure);
(3) Before a federal court. If, on the date the taxpayer
would otherwise file a copy of the application with the national
office, the taxpayer is before a federal court with respect to
any income tax issue and the method of accounting to be changed
is an issue under consideration by the federal court (as provided
in section 3.09(3) of this revenue procedure);
(4) Consolidated group member. A corporation that is (or
was formerly) a member of a consolidated group is under
examination, before an appeals office, or before a federal court
(for purposes of sections 4.02(1), (2), and (3) of this revenue
procedure) if the consolidated group is under examination, before
an appeals office, or before a federal court for a taxable
year(s) that the corporation was a member of the group;
(5) Partnerships and S corporations. For an entity
(including a limited liability company) treated as a partnership
or an S corporation for federal income tax purposes, if, on the
date the entity would otherwise file a copy of the application
with the national office, the entity’s accounting method to be

-21-
changed is an issue under consideration in an examination of a
partner, member, or shareholder’s federal income tax return or an
issue under consideration by an appeals office or by a federal
court with respect to a partner, member, or shareholder’s federal
income tax return;
(6) Prior change. If the taxpayer, within the last five
taxable years (including the year of change), (a) has made a
change in the same method of accounting (with or without
obtaining the Commissioner’s consent), or (b) has applied to
change the same method of accounting without effecting the change
(whether, for example, the application to change was withdrawn,
not perfected, not granted, or denied); or
(7) Section 381(a) transaction. If the taxpayer engages
in a transaction to which § 381(a) applies within the proposed
taxable year of change (determined without regard to any
potential closing of the year under § 381(b)(1)).
.03 Nonautomatic changes. If a taxpayer is precluded by
other than sections 4.02(1) through 4.02(5) of this revenue
procedure from using this revenue procedure to make a change in
method of accounting, the taxpayer requesting such a change must
file a Form 3115 with the Commissioner in accordance with the
requirements of § 1.446-1(e)(3)(i) and Rev. Proc. 97-27, 1997-1
C.B. 680 (or any other applicable Code, regulation, or
administrative provision).
SECTION 5. TERMS AND CONDITIONS OF CHANGE

-22-
.01 In general. An accounting method change filed under this
revenue procedure must be made pursuant to the terms and
conditions provided in this revenue procedure.
.02 Year of change. The year of change is the taxable year
designated on the application and for which the application is
timely filed under section 6.02(2).
.03 Section 481(a) adjustment. Unless otherwise provided in
this revenue procedure, a taxpayer making a change in method of
accounting under this revenue procedure must take into account a
§ 481(a) adjustment in the manner provided in section 5.04
of this revenue procedure.
.04 Section 481(a) adjustment period.
(1) In general. Except as otherwise provided in section
5.04(3) or the APPENDIX of this revenue procedure, the § 481(a)
adjustment period for positive and negative § 481(a) adjustments
is four taxable years.
(2) Short period as a separate taxable year. If the year
of change, or any taxable year during the § 481(a) adjustment
period, is a short taxable year, the § 481(a) adjustment must be
included in income as if that short taxable year were a full 12-
month taxable year. See Rev. Rul. 78-165, 1978-1 C.B. 276.
Example 1. A calendar year taxpayer received permission to
change an accounting method beginning with the 1998 calendar
year. The § 481(a) adjustment is $30,000 and the adjustment
period is four taxable years. The taxpayer subsequently
receives permission to change its annual accounting period to
September 30, effective for the taxable year ending September
30, 1999. The taxpayer must include $7,500 of the § 481(a)
adjustment in gross income for the short period from January
1, 1999, through September 30, 1999.

-23-
Example 2. Corporation X, a calendar year taxpayer, received
permission to change an accounting method beginning with the
1998 calendar year. The § 481(a) adjustment is $30,000 and
the adjustment period is four taxable years. On July 1,
2000, Corporation Z acquires Corporation X in a transaction
to which § 381(a) applies. Corporation Z is a calendar year
taxpayer that uses the same method of accounting to which
Corporation X changed in 1998. Corporation X must include
$7,500 of the § 481(a) adjustment in gross income for its
short period income tax return for January 1, 2000, through
June 30, 2000. In addition, Corporation Z must include
$7,500 of the § 481(a) adjustment in gross income in its
income tax return for calendar year 2000.
(3) Shortened or accelerated adjustment periods. The
§ 481(a) adjustment period provided in section 5.04(1) or the
APPENDIX of this revenue procedure will be shortened or
accelerated in the following situations.
(a) De minimis rule. A taxpayer may elect to use a
one-year adjustment period in lieu of the § 481(a) adjustment
period otherwise provided by this revenue procedure if the entire
§ 481(a) adjustment is less than $25,000 (either positive or
negative). A taxpayer makes an election under this de minimis
rule by so indicating on the application. For example, for a
taxpayer filing a Form 3115, the taxpayer must complete the
appropriate line on the Form 3115 to elect this de minimis rule.
(b) Cooperatives. A cooperative within the meaning
of § 1381(a) generally must take the entire amount of a § 481(a)
adjustment into account in computing taxable income for the year
of change. See Rev. Rul. 79-45, 1979-1 C.B. 284.
(c) Ceasing to engage in the trade or business.
(i) In general. A taxpayer that ceases to engage
in a trade or business or terminates its existence must take the

-24-
remaining balance of any § 481(a) adjustment relating to the
trade or business into account in computing taxable income in the
taxable year of the cessation or termination. Except as provided
in sections 5.04(3)(c)(iv) and (v) of this revenue procedure, a
taxpayer is treated as ceasing to engage in a trade or business
if the operations of the trade or business cease or substantially
all the assets of the trade or business are transferred to
another taxpayer. For this purpose, "substantially all" has the
same meaning as in section 3.01 of Rev. Proc. 77-37, 1977-2 C.B.
568.
(ii) Examples of transactions that are treated as
the cessation of a trade or business. The following is a
nonexclusive list of transactions that are treated as the
cessation of a trade or business for purposes of accelerating the
§ 481(a) adjustment under section 5.04(3)(c) of this revenue
procedure:
(A) the trade or business to which the
§ 481(a) adjustment relates is incorporated;
(B) the trade or business to which the
§ 481(a) adjustment relates is purchased by another taxpayer in a
transaction to which § 1060 applies;
(C) the trade or business to which the
§ 481(a) adjustment relates is terminated or transferred pursuant
to a taxable liquidation;

-25-
(D) a division of a corporation ceases to
operate the trade or business to which the § 481(a) adjustment
relates; or
(E) the assets of a trade or business to which
the § 481(a) adjustment relates are contributed to a partnership.
(iii) Conversion to or from S corporation status.
Except as provided in section 10.01 of the APPENDIX of this
revenue procedure, no acceleration of a § 481(a) adjustment is
required under section 5.04(3)(c) of this revenue procedure when
a C corporation elects to be treated as an S corporation or an S
corporation terminates its S election and is then treated as a C
corporation.
(iv) Certain transfers to which § 381(a) applies.
No acceleration of the § 481(a) adjustment is required under
section 5.04(3)(c) of this revenue procedure when a taxpayer
transfers substantially all the assets of the trade or business
that gave rise to the § 481(a) adjustment to another taxpayer in
a transfer to which § 381(a) applies and the accounting method
(the change to which gave rise to the § 481(a) adjustment) is a
tax attribute that is carried over and used by the acquiring
corporation immediately after the transfer pursuant to § 381(c).
The acquiring corporation is subject to any terms and conditions
imposed on the transferor (or any predecessor of the transferor)
as a result of its change in method of accounting.
(v) Certain transfers pursuant to § 351 within a
consolidated group.

-26-
(A) In general. No acceleration of the § 481(a)
adjustment is required under section 5.04(3)(c) of this revenue
procedure when one member of an affiliated group filing a
consolidated return transfers substantially all the assets of the
trade or business that gave rise to the § 481(a) adjustment to
another member of the same consolidated group in an exchange
qualifying under § 351 and the transferee member adopts and uses
the same method of accounting (the change to which gave rise to
the § 481(a) adjustment) used by the transferor member. The
transferor member must continue to take the § 481(a) adjustment
into account pursuant to the terms and conditions set forth in
this revenue procedure. The transferor member must take into
account activities of the transferee member (or any successor) in
determining whether acceleration of the § 481(a) adjustment is
required. For example, except as 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
5.04(3)(c)(iv) or 5.04(3)(c)(v)(A) of this revenue procedure.
(B) Exception. The provisions of section
5.04(3)(c)(v)(A) of this revenue procedure cease to apply and the
transferor member must take any remaining balance of the § 481(a)
adjustment into account in the taxable year immediately preceding

-27-
any of the following: (1) the taxable year the transferor member
ceases to be a member of the group; (2) the taxable year any
transferee member owning substantially all the assets of the
trade or business which gave rise to the § 481(a) adjustment
ceases to be a member of the group; or (3) a separate return year
of the common parent of the group. In applying the preceding
sentence, the rules of paragraphs (j)(2), (j)(5), and (j)(6) of
§ 1.1502-13 apply, but only if the method of accounting to which
the transferor member changed and to which the § 481(a)
adjustment relates is adopted, carried over, or used by any
transferee member acquiring the assets of the trade or business
that gave rise to the § 481(a) adjustment immediately after
acquisition of such assets. For example, the transferor member
is not required to accelerate the § 481(a) adjustment if a
transferee member ceases to be a member of a consolidated group
by reason of an acquisition to which § 381(a) applies and the
acquiring corporation (1) is a member of the same group as the
transferor member, and (2) continues, under § 381(c)(4) and the
regulations thereunder, to use the same method of accounting as
that used by the transferor member with respect to the assets of
the trade or business to which the § 481(a) adjustment relates.
.05 NOL carryback limitation for taxpayer subject to criminal
investigation. Generally, no portion of any net operating loss
that is attributable to a negative § 481(a) adjustment may be
carried back to a taxable year prior to the year of change that
is the subject of any pending or future criminal investigation or

-28-
proceeding concerning (1) directly or indirectly, any issue
relating to the taxpayer’s federal tax liability, or (2) the
possibility of false or fraudulent statements made by the
taxpayer with respect to any issue relating to its federal tax
liability.
.06 Change treated as initiated by the taxpayer. For
purposes of § 481, a change in method of accounting made under
this revenue procedure is a change in method of accounting
initiated by the taxpayer.
SECTION 6. GENERAL APPLICATION PROCEDURES
.01 Consent. Pursuant to § 1.446-1(e)(2)(i), the consent of
the Commissioner is hereby granted to any taxpayer within the
scope of this revenue procedure to change a method of accounting,
provided the taxpayer complies with all the applicable provisions
of this revenue procedure.
.02 Filing requirements.
(1) Waiver of taxable year filing requirement. The
requirement under § 1.446-1(e)(3)(i) to file a Form 3115 within
the taxable year for which the change is requested is waived for
any application for a change in method of accounting filed
pursuant to this revenue procedure. See § 1.446-1(e)(3)(ii).
(2) Timely duplicate filing requirement.
(a) In general. A taxpayer changing a method of
accounting pursuant to this revenue procedure must complete and
file an application in duplicate. Except as otherwise provided
in the APPENDIX of this revenue procedure (see, for example,

-29-
section 12.02 of the APPENDIX of this revenue procedure), the
original must be attached to the taxpayer’s timely filed
(including extensions) original federal income tax return for the
year of change, and a copy of the application must be filed with
the national office (see section 6.02(6) of this revenue
procedure for the address) no earlier than the first day of the
year of change and no later than when the original is filed with
the federal income tax return for the year of change.
(b) Limited relief for late application.
(i) Automatic extension. An automatic extension
of 6 months from the due date of the return for the year of
change (excluding extensions) is granted to file an application,
provided the taxpayer (A) timely filed (including extensions) its
federal income tax return for the year of change, (B) files an
amended return within the 6-month extension period in a manner
that is consistent with the new method of accounting, (C)
attaches the original application to the amended return, (D)
files a copy of the application with the national office no later
than when the original is filed with the amended return, and (E)
writes at the top of the application AFILED PURSUANT TO
§ 301.9100-2.@
(ii) Other extensions. A taxpayer that fails to
file the application for the year of change as provided in
section 6.02(2)(a) or 6.02(2)(b)(i) of this revenue procedure
will not be granted an extension of time to file under § 301.9100

-30-
of the Procedure and Administration Regulations, except in
unusual and compelling circumstances. See § 301.9100-3(c)(2).
(3) Label.
(a) In order to assist in processing an application
under this revenue procedure, the section of the APPENDIX of this
revenue procedure describing the specific change in method of
accounting should be included in the application. For example, a
phrase such as "Section 1.01 of the APPENDIX of Rev. Proc. 98-60"
should be included on the appropriate line on the Form 3115.
(b) If a taxpayer is authorized under the APPENDIX of
this revenue procedure to file a statement in lieu of a Form
3115, the taxpayer must include the taxpayer's name and employer
identification number (or social security number in the case of
an individual) at the top of the first page of the statement
underneath any other required label.
(4) Signature requirements. The application must be
signed by, or on behalf of, the taxpayer requesting the change by
an individual with authority to bind the taxpayer in such
matters. For example, an officer must sign on behalf of a
corporation, a general partner on behalf of a state law
partnership, a member-manager on behalf of a limited liability
company, a trustee on behalf of a trust, or an individual
taxpayer on behalf of a sole proprietorship. If the taxpayer is
a member of a consolidated group, an application submitted on
behalf of the taxpayer must be signed by a duly authorized
officer of the common parent. See the signature requirements set

-31-
forth in the General Instructions attached to a current Form 3115
regarding those who are to sign. If an agent is authorized to
represent the taxpayer before the Service, receive the original
or a copy of the correspondence concerning the application, or
perform any other act(s) regarding the application filed on
behalf of the taxpayer, a power of attorney reflecting such
authorization(s) must be attached to the application. A
taxpayer’s representative without a power of attorney to
represent the taxpayer as indicated in this section will not be
given any information regarding the application.
(5) Additional statement required. In addition to
providing all the information that is required by the
application, a taxpayer must attach to the application a written
statement providing as follows:
(a) the taxpayer agrees to all of the terms and
conditions in this revenue procedure; and
(b) if a § 481(a) adjustment is required, the reason
for claiming the § 481(a) adjustment period over which the
taxpayer agrees to take the applicable § 481(a) adjustment into
account.
(6) Where to file copy.
(a) For a taxpayer other than an exempt organization,
the copy of the application must be addressed to the Commissioner
of Internal Revenue, Attention: CC:DOM:IT&A (Automatic Rulings
Branch), P.O. Box 7604, Benjamin Franklin Station, Washington,
D.C. 20044 (or, in the case of a designated private delivery

-32-
service: Commissioner of Internal Revenue, Attention:
CC:DOM:IT&A (Automatic Rulings Branch), 1111 Constitution Avenue,
NW, Washington, D.C. 20224).
(b) For an exempt organization, the copy of the
application must be addressed to the Assistant Commissioner
(Employee Plans and Exempt Organizations), Attention: E:EO, P.O.
Box 120, Benjamin Franklin Station, Washington, D.C. 20044 (or,
in the case of a designated private delivery service: Assistant
Commissioner (Employee Plans and Exempt Organizations),
Attention: E:EO, 1111 Constitution Avenue, NW, Washington, D.C.
20224).
(c) The copy of the application may also be hand
delivered:
(i) To the drop box at the 12 Street entrance of
th
1111 Constitution Avenue, NW, Washington, D.C. No receipt will
be given at the drop box. For a taxpayer other than an exempt
organization, the copy of the application must be addressed to
the Commissioner of Internal Revenue, Attention: CC:DOM:IT&A
(Automatic Rulings Branch), 1111 Constitution Avenue, NW,
Washington, D.C. 20224. For an exempt organization, the copy of
the application must be addressed to the Assistant Commissioner
(Employee Plans and Exempt Organizations), Attention: E:EO, 1111
Constitution Avenue, NW, Washington, D.C. 20224; or
(ii) Between the hours of 8:15 a.m. and 5:00 p.m.,
to the courier’s desk at the main entrance of 1111 Constitution
Avenue, NW, Washington, D.C. A receipt will be given at the

-33-
courier’s desk. For a taxpayer other than an exempt
organization, the copy of the application must be addressed to
the Commissioner of Internal Revenue, Attention: CC:DOM:IT&A
(Automatic Rulings Branch), 1111 Constitution Avenue, NW,
Washington, D.C. 20224. For an exempt organization, the copy of
the application must be addressed to the Assistant Commissioner
(Employee Plans and Exempt Organizations), Attention: E:EO, 1111
Constitution Avenue, NW, Washington, D.C. 20224
(7) No user fee. A user fee is not required for an
application filed under this revenue procedure, and, except as
provided in section 6.02(6)(c)(ii) of this revenue procedure, the
receipt of an application filed under this revenue procedure will
not be acknowledged.
(8) Single application for certain consolidated groups.
A parent corporation may file a single application to change an
identical method of accounting on behalf of more than one member
of a consolidated group. To qualify, the taxpayers in the
consolidated group must be members of the same affiliated group
under § 1504(a) that join in the filing of a consolidated tax
return, and they must be changing from the identical present
method of accounting to the identical proposed method of
accounting. All aspects of the change in method of accounting,
including the present and proposed methods, the underlying facts,
and the authority for the change, must be identical, except for
the § 481(a) adjustment. See section 15.07(3) of Rev. Proc. 98-

-34-
1, 1998-1 I.R.B. at 54 (or any successor), for the information
required to be submitted with the application.
.03 Taxpayer under examination.
(1) In general. Except as otherwise provided in the
APPENDIX of this revenue procedure (see, for example, sections
4.01, 5.04, 8.05, 9.02, 10A.01, 12.01, and 12.02 of the APPENDIX
of this revenue procedure), a taxpayer that is under examination
may file an application to change a method of accounting under
section 6 of this revenue procedure only if the taxpayer is
within the provisions of section 6.03(2) (90-day window), 6.03(3)
(120-day window), or 6.03(4) (district director consent) of this
revenue procedure. A taxpayer that files an application beyond
the time periods provided in the 90-day and 120-day windows is
not eligible for the automatic extension of time and will not be
granted an extension of time to file under § 301.9100, except in
unusual and compelling circumstances.
(2) 90-day window period.
(a) A taxpayer may file a copy of the application
with the national office to change a method of accounting under
this revenue procedure during the first 90-days of any taxable
year (the "90-day window") if the taxpayer has been under
examination for at least 12 consecutive months as of the first
day of the taxable year. This 90-day window is not available if
the method of accounting the taxpayer is changing is an issue
under consideration at the time the copy of the application is

-35-
filed or an issue the examining agent(s) has placed in suspense
at the time the copy of the application is filed.
(b) A taxpayer changing a method of accounting under
this 90-day window must provide a copy of the application to the
examining agent(s) at the same time it files the copy of the
application with the national office. The application must
contain the name(s) and telephone number(s) of the examining
agent(s). The taxpayer must attach to the application a separate
statement signed by the taxpayer certifying that, to the best of
the taxpayer’s knowledge, the same method of accounting is not an
issue under consideration or an issue placed in suspense by the
examining agent(s).
(3) 120-day window period.
(a) A taxpayer may file a copy of the application
with the national office to change a method of accounting under
this revenue procedure during the 120-day period following the
date an examination ends (the "120-day window"), regardless of
whether a subsequent examination has commenced. This 120-day
window is not available if the method of accounting the taxpayer
is changing is an issue under consideration at the time a copy of
the application is filed or an issue the examining agent(s) has
placed in suspense at the time the copy of the application is
filed.
(b) A taxpayer changing a method of accounting under
this 120-day window must provide a copy of the application to the
examining agent(s) for any examination that is in process at the

-36-
same time it files the copy of the application with the national
office. The application must contain the name(s) and telephone
number(s) of the examining agent(s). The taxpayer must attach to
the application a separate statement signed by the taxpayer
certifying that, to the best of the taxpayer’s knowledge, the
same method of accounting is not an issue under consideration or
an issue placed in suspense by the examining agent(s).
(4) Consent of district director.
(a) A taxpayer under examination may change its
method of accounting under this revenue procedure if the district
director consents to the change. The district director will
consent to the change unless, in the opinion of the district
director, the method of accounting to be changed would ordinarily
be included as an item of adjustment in the year(s) for which the
taxpayer is under examination. For example, the district
director will consent to a change from a clearly permissible
method of accounting. The district director will also consent to
a change from an impermissible method of accounting where the
impermissible method was adopted subsequent to the years under
examination. The question of whether the method of accounting
from which the taxpayer is changing is permissible or was adopted
subsequent to the years under examination may be referred to the
national office as a request for technical advice under the
provisions of Rev. Proc. 98-2 (or any successor).
(b) A taxpayer changing a method of accounting under
this revenue procedure with the consent of the district director

-37-
must attach to the application a statement from the district
director consenting to the change. The taxpayer must provide a
copy of the application to the district director at the same time
it files a copy of the application with the national office. The
application must contain the name(s) and telephone number(s) of
the examining agent(s).
.04 Taxpayer before an appeals office. Except as otherwise
provided in the APPENDIX of this revenue procedure (see, for
example, sections 4.01, 5.04, 8.05, 9.02, 10A.01, 12.01, and
12.02 of the APPENDIX of this revenue procedure), a taxpayer that
is before an appeals office must attach to the application a
separate statement signed by the taxpayer certifying that, to the
best of the taxpayer’s knowledge, the same method of accounting
is not an issue under consideration by the appeals office. The
taxpayer must provide a copy of the application to the appeals
officer at the same time it files a copy of the application with
the national office. The application must contain the name and
telephone number of the appeals officer.
.05 Taxpayer before a federal court. Except as otherwise
provided in the APPENDIX of this revenue procedure (see, for
example, sections 4.01, 5.04, 8.05, 9.02, 10A.01, 12.01, and
12.02 of the APPENDIX of this revenue procedure), a taxpayer that
is before a federal court must attach to the application a
separate statement signed by the taxpayer certifying that, to the
best of the taxpayer’s knowledge, the same method of accounting
is not an issue under consideration by the federal court. The

-38-
taxpayer must provide a copy of the application to the counsel
for the government at the same time it files a copy of the
application with the national office. The application must
contain the name and telephone number of the counsel for the
government.
.06 Compliance with provisions. If a taxpayer to which this
revenue procedure applies changes to a method of accounting
without complying with all the applicable provisions of this
revenue procedure (for example, the taxpayer changes to a method
of accounting that varies from the applicable accounting method
described in this revenue procedure or the taxpayer is outside
the scope of this revenue procedure), the taxpayer has initiated
a change in method of accounting without obtaining the consent of
the Commissioner as required by § 446(e). Upon examination, a
taxpayer that has initiated an unauthorized change in method of
accounting may be denied the change. Alternatively, such a
taxpayer may be required to effect the change in an earlier or
later taxable year and may be denied the benefit of spreading the
§ 481(a) adjustment over the number of taxable years otherwise
prescribed by this revenue procedure.
SECTION 7. AUDIT PROTECTION FOR TAXABLE YEARS PRIOR TO YEAR OF
CHANGE
.01 In general. Except as provided in section 7.02 or the
APPENDIX of this revenue procedure, when a taxpayer timely files
a copy of the application with the national office in compliance
with all the applicable provisions of this revenue procedure, the

-39-
Service will not require the taxpayer to change its method of
accounting for the same item for a taxable year prior to the year
of change.
.02 Exceptions.
(1) Change not made or made improperly. The Service may
change a taxpayer’s method of accounting for prior taxable years
if (a) the taxpayer fails to implement the change; (b) the
taxpayer implements the change but does not comply with all the
applicable provisions of this revenue procedure, or (c) the
method of accounting is changed or modified because there has
been a misstatement or omission of material facts (see section
8.02(2) of this revenue procedure).
(2) Change in sub-method. The Service may change a
taxpayer’s method of accounting for prior taxable years if the
taxpayer is changing a sub-method of accounting within the
method. For example, an examining agent may propose to terminate
the taxpayer’s use of the LIFO inventory method during a prior
taxable year even though the taxpayer changes its method of
valuing increments in the current year.
(3) Prior year Service-initiated change. The Service may
make adjustments to the taxpayer’s returns for the same item for
taxable years prior to the requested year of change to reflect a
prior year Service-initiated change.
(4) Criminal investigation. The Service may change a
taxpayer’s method of accounting for the same item for taxable

-40-
years prior to the year of change if there is any pending or
future criminal investigation or proceeding concerning
(a) directly or indirectly, any issue relating to the taxpayer’s
federal tax liability for any taxable year prior to the year of
change, or (b) the possibility of false or fraudulent statements
made by the taxpayer with respect to any issue relating to its
federal tax liability for any taxable year prior to the year of
change.
SECTION 8. EFFECT OF CONSENT
.01 In general. A taxpayer that changes to a method of
accounting pursuant to this revenue procedure may be required to
change or modify that method of accounting for the following
reasons:
(1) the enactment of legislation;
(2) a decision of the United States Supreme Court;
(3) the issuance of temporary or final regulations;
(4) the issuance of a revenue ruling, revenue procedure,
notice, or other statement published in the Internal Revenue
Bulletin;
(5) the issuance of written notice to the taxpayer that
the change in method of accounting was not in compliance with all
the applicable provisions of this revenue procedure or is not in
accord with the current views of the Service; or
(6) a change in the material facts on which the consent
was based.

-41-
.02 Retroactive change or modification. Except in rare or
unusual circumstances, if a taxpayer that changes its method of
accounting under this revenue procedure is subsequently required
under section 8.01 of this revenue procedure to change or modify
that method of accounting, the required change or modification
will not be applied retroactively, provided that:
(1) the taxpayer complied with all the applicable
provisions of this revenue procedure;
(2) there has been no misstatement or omission of
material facts;
(3) there has been no change in the material facts on
which the consent was based;
(4) there has been no change in the applicable law; and
(5) the taxpayer to whom consent was granted acted in
good faith in relying on the consent, and applying the change or
modification retroactively would be to the taxpayer’s detriment.
SECTION 9. REVIEW BY DISTRICT DIRECTOR
.01 In general. The district director must apply a change
in method of accounting made in compliance with all the
applicable provisions of this revenue procedure in determining
the taxpayer’s liability, unless the district director recommends
that the change in method of accounting should be modified or
revoked. (See section 6.06 of this revenue procedure if a change
in method of accounting is made without complying with all the
applicable provisions of this revenue procedure.) The district
director will ascertain if the change in method of accounting was

-42-
made in compliance with all the applicable provisions of this
revenue procedure, including whether:
(1) the representations on which the change was based
reflect an accurate statement of the material facts;
(2) the amount of the § 481(a) adjustment was properly
determined;
(3) the change in method of accounting was implemented in
compliance with all the applicable provisions of this revenue
procedure.
The district director will also ascertain whether:
(4) there has been any change in the material facts on
which the change was based during the period the method of
accounting was used; and
(5) there has been any change in the applicable law
during the period the method of accounting was used.
.02 National office consideration. If the district director
recommends that a change in method of accounting (other than the
§ 481(a) adjustment) made in compliance with all the applicable
provisions of this revenue procedure should be modified or
revoked, the district director will forward the matter to the
national office for consideration before any further action is
taken. Such a referral to the national office will be treated as
a request for technical advice, and the provisions of Rev. Proc.
98-2 (or any successor) will be followed.
SECTION 10. REVIEW BY NATIONAL OFFICE

-43-
.01 In general. Any application filed under this revenue
procedure may be reviewed by the national office. If the
application is reviewed by the national office, the procedures in
sections 10.02 through 10.04 of this revenue procedure apply.
.02 Incomplete application--21 day rule. If the Service
reviews an application and determines that the application is not
properly completed in accordance with the instructions of the
Form 3115 or the provisions of this revenue procedure, or if
supplemental information is needed, the Service will notify the
taxpayer. The notification will specify the information that
needs to be provided, and the taxpayer will be permitted 21 days
from the date of the notification to furnish the necessary
information. The Service reserves the right to impose shorter
reply periods if subsequent requests for additional information
are made. An extension of the 21-day period to furnish
information, not to exceed 15 days, may be granted to a taxpayer.
A request for an extension of the 21-day period must be made in
writing and submitted within the 21-day period. If the extension
request is denied, there is no right of appeal.
.03 Conference in the national office. If the national
office tentatively determines that the taxpayer has changed its
method of accounting without complying with all the applicable
provisions of this revenue procedure (for example, the taxpayer
changed to a method of accounting that varies from the applicable
accounting method described in this revenue procedure or the
taxpayer is outside the scope of this revenue procedure), the

-44-
national office will notify the taxpayer of its tentative adverse
determination and will offer the taxpayer a conference of right,
if the taxpayer has requested a conference. For conference
procedures for taxpayers other than exempt organizations, see
section 11 of Rev. Proc. 98-1 (or any successor). For conference
procedures for exempt organizations, see section 12 of Rev. Proc.
98-4, 1998-1 I.R.B. 113 (or any successor).
.04 National office determination.
(1) Consent not granted. Except as provided in section
10.04(2) of this revenue procedure, if the national office
determines that a taxpayer has changed its method of accounting
without complying with all the applicable provisions of this
revenue procedure, the national office will notify the taxpayer
that consent to make the change in method of accounting is not
granted. See section 6.06 of this revenue procedure.
(2) Application changed. If the national office
determines that a taxpayer has changed its method of accounting
without complying with all the applicable provisions of this
revenue procedure, the national office, in its discretion, may
allow the taxpayer (a) to make appropriate adjustments to conform
its change in method of accounting to the applicable provisions
of this revenue procedure, and (b) to make conforming amendments
to any federal income tax returns filed for the year of change
and subsequent taxable years. Any application changed under
section 10.04(2) of this revenue procedure is subject to review

-45-
by the district director as provided in section 9 of this revenue
procedure.
SECTION 11. APPLICABILITY OF REV. PROCS. 98-1 AND 98-4
Rev. Procs. 98-1 and 98-4 (or any successors) are
applicable to applications filed under this revenue procedure,
unless specifically excluded or overridden by other published
guidance (including the special procedures in this document).
SECTION 12. INQUIRIES
Inquiries regarding this revenue procedure may be addressed
to the Commissioner of Internal Revenue, Attention: CC:DOM:IT&A,
1111 Constitution Avenue, NW, Washington, D.C. 20224.
SECTION 13. EFFECTIVE DATE
.01 In general. Except as provided in sections 13.02 and
13.03 of this revenue procedure, this revenue procedure is
effective for taxable years ending on or after December 21, 1998.
The Service will return any application that is filed on or after
December 21, 1998, if the application is filed with the national
office pursuant to the Code, regulations, or administrative
guidance other than this revenue procedure and the change in
method of accounting is within the scope of this revenue
procedure.
.02 Transition rules. If a taxpayer filed an application or
ruling request with the national office to make a change in
method of accounting authorized by this revenue procedure, and
the application or ruling request is pending with the national
office on December 21, 1998, the taxpayer may make the change

-46-
under this revenue procedure. However, the national office will
process the application or ruling request in accordance with the
authority under which it was filed, unless prior to the later of
February 1, 1999, or the issuance of the letter ruling granting
or denying consent to the change, the taxpayer notifies the
national office that it wants to make the change under this
revenue procedure. If the taxpayer timely notifies the national
office that it wants to make the method change under this revenue
procedure, the national office will require the taxpayer to make
appropriate modifications to the application or ruling request to
comply with the applicable provisions of this revenue procedure.
In addition, any user fee that was submitted with the application
or ruling request will be returned to the taxpayer.
.03 Special rules.
(1) Change in method of accounting for depreciation. For
a change in method of accounting described in section 2.01 or
2.02 of the APPENDIX of this revenue procedure, this revenue
procedure is effective for applications or copies of applications
filed with the national office on or after December 21, 1998.
(2) Change in method of accounting to discontinue the
mark-to-market method of accounting. For a change in method of
accounting described in section 10A.01 of the APPENDIX of this
revenue procedure, this revenue procedure is effective for the
taxpayer’s first taxable year ending after July 22, 1998.
(3) Change in method of accounting for a pool of debt
instruments. For a change in method of accounting described in

-47-
section 12.02 of the APPENDIX of this revenue procedure, this
revenue procedure is effective for the taxpayer’s first taxable
year beginning after August 5, 1997.
SECTION 14. EFFECT ON OTHER DOCUMENTS
.01 Rev. Proc. 97-37, is clarified, modified, amplified, and
superseded.
.02 Rev. Rul. 98-39, 1998-33 I.R.B. 4 (see section 8.05 of
the APPENDIX of this revenue procedure regarding cooperative
advertising), is modified.
SECTION 15. PAPERWORK REDUCTION ACT
The collections of information contained in this revenue
procedure have been reviewed and approved by the Office of
Management and Budget in accordance with the Paperwork Reduction
Act (44 U.S.C. 3507) under control number 1545-1551.
An agency may not conduct or sponsor, and a person is not
required to respond to, a collection of information unless the
collection of information displays a valid OMB control number.
The collections of information in this revenue procedure
are in sections 6, 10, and sections 2, 3, 5, 6, 7, 10, 10A, and
12 of the APPENDIX. This information is necessary and will be
used to determine whether the taxpayer properly changed to a
permitted method of accounting. The collections of information
are required for the taxpayer to obtain consent to change its
method of accounting. The likely respondents are the following:
individuals, farms, business or other for-profit institutions,
nonprofit institutions, and small businesses or organizations.

-48-
The estimated total annual reporting and/or recordkeeping
burden is 15,514 hours.
The estimated annual burden per respondent/recordkeeper
varies from / hour to 8 / hours, depending on individual
11
62
circumstances, with an estimated average of 1 / hours. The
1
2
estimated number of respondents is 13,500.
The estimated annual frequency of responses is on occasion.
Books or records relating to a collection of information
must be retained as long as their contents may become material in
the administration of any internal revenue law. Generally tax
returns and tax return information are confidential, as required
by 26 U.S.C. 6103.
DRAFTING INFORMATION
The principal author of this revenue procedure is Dwight N.
Mersereau of the Office of Assistant Chief Counsel (Income Tax
and Accounting). For further information regarding this revenue
procedure, contact Mr. Mersereau on (202) 622-4970 (not a toll-
free call). For further information regarding the APPENDIX of
this revenue procedure contact the following individuals: (1)
for changes in methods of accounting under sections 2.01 and 2.02
of the APPENDIX of this revenue procedure, Peter Friedman of the
Office of Assistant Chief Counsel (Passthroughs and Special
Industries) on (202) 622-3110 (not a toll-free call); (2) for
changes in methods of accounting under section 2A.01 of the
APPENDIX of this revenue procedure, Leslie H. Finlow of the
Office of Assistant Chief Counsel (Passthroughs and Special

-49-
Industries) on (202) 622-3120 (not a toll free call); (3) for
changes in methods of accounting under sections 5.04, 6, 12, and
13 of the APPENDIX of this revenue procedure, William Blanchard
of the Office of Assistant Chief Counsel (Financial Institutions
and Products) on (202) 622-3950 (not a toll-free call); (4) for
changes in methods of accounting under section 10A.01 of the
APPENDIX of this revenue procedure, Pamela Lew of the Office of
Assistant Chief Counsel (Financial Institutions and Products) on
(202) 622-3950 (not a toll-free call); (5) for changes in methods
of accounting under section 11 of the APPENDIX of this revenue
procedure, Craig R. Wojay of the Office of Assistant Chief
Counsel (Financial Institutions and Products) on (202) 622-3920
(not a toll-free call); and (6) for all other sections, Mr.
Mersereau on (202) 622-4970 (not a toll-free call).
APPENDIX
CHANGES IN METHODS OF ACCOUNTING TO WHICH
THIS REVENUE PROCEDURE APPLIES
SECTION 1. TRADE OR BUSINESS EXPENSES (§ 162)........ xx
.01 Advances made by a lawyer on behalf of clients --
Description of change and scope........... xx
.02 Year 2000 costs -- Description of change and scope.xx
SECTION 2. DEPRECIATION OR AMORTIZATION (§ 167, 168 OR 197) . xx
.01 Impermissible to permissible method of accounting for
depreciation or amortization............. xx
(1) Description of change.............. xx
(2) Scope...................... xx
(3) Additional requirements............. xx
(4) Section 481(a) adjustment............ xx
(5) Basis adjustment................ xx
(6) Meaning of depreciation allowable........ xx
.02 Permissible to permissible method of accounting for
depreciation..................... xx
(1) Description of change.............. xx
(2) Scope...................... xx

-50-
(3) Changes covered................. xx
(4) Additional requirements............. xx
(5) Section 481(a) adjustment............ xx
.03 Sale or lease transactions............. xx
(1) Description of change and scope......... xx
(2) Manner of making the change........... xx
(3) No audit protection............... xx
SECTION 2A. RESEARCH AND EXPERIMENTAL EXPENDITURES (§ 174) . xx
.01 Changes to a different method or different amortization
period....................... xx
(1) Description of change.............. xx
(2) Scope...................... xx
(3) Manner of making the change........... xx
(4) Additional requirement............. xx
(5) No audit protection............... xx
.02 Reserved...................... xx
SECTION 3. CAPITAL EXPENDITURES (§ 263)........... xx
.01 Package design costs................ xx
(1) Description of change and scope......... xx
(2) Additional requirements............. xx
.02 Line pack gas; cushion gas. ............ xx
(1) Description of change and scope......... xx
(2) Additional requirements............. xx
SECTION 4. UNIFORM CAPITALIZATION (§ 263A)......... xx
.01 Certain uniform capitalization (UNICAP) methods used by
small resellers, formerly small resellers, and reseller-
producers...................... xx
(1) Description of change and scope......... xx
(2) Definitions................... xx
(3) Section 481(a) adjustment............ xx
(4) No audit protection............... xx
(5) Example..................... xx
.02 Reserved...................... xx
SECTION 5. METHODS OF ACCOUNTING (§ 446).......... xx
.01 Cash or hybrid method to accrual method...... xx
(1) Description of change and scope......... xx
(2) Section 481(a) adjustment............ xx
(3) Change to a special method of accounting.... xx
.02 Multi-year service warranty contracts....... xx
(1) Description of change and scope......... xx
(2) Manner of making the change........... xx
.03 Multi-year insurance policies for multi-year service
warranty contracts -- Description of change and scope
.......................... xx
(1) Applicability.................. xx
(2) Inapplicability................. xx
(3) Description of method.............. xx

-51-
.04 Interest accruals on short-term consumer loans -- Rule
of 78s method.................... xx
(1) Description of change and scope......... xx
(2) Background................... xx
(3) Manner of making the change........... xx
SECTION 6. OBLIGATIONS ISSUED AT DISCOUNT (§ 454)...... xx
.01 Series E or EE U.S. savings bonds......... xx
(1) Description of change and scope......... xx
(2) Manner of making the change........... xx
.02 Reserved...................... xx
SECTION 7. PREPAID SUBSCRIPTION INCOME (§ 455)....... xx
.01 Prepaid subscription income............ xx
(1) Description of change and scope......... xx
(2) Manner of making the change........... xx
.02 Reserved...................... xx
SECTION 8. TAXABLE YEAR OF DEDUCTION (§ 461)........ xx
.01 Timing of incurring liabilities for employee
compensation.................... xx
(1) Description of change and scope......... xx
(2) Amounts taken into account........... xx
.02 Timing of incurring liabilities for real property taxes
.......................... xx
(1) Description of change.............. xx
(2) Scope...................... xx
(3) Amounts taken into account........... xx
.03 Timing of incurring liabilities under a workers'
compensation act, tort, breach of contract, or violation
of law....................... xx
(1) Description of change and scope......... xx
(2) Amounts taken into account...........xxx
.04 Timing of incurring liabilities for payroll taxes. xxx
(1) Description of change and scope.........xxx
(2) Recurring item exception............xxx
(3) Amounts taken into account...........xxx
.05 Cooperative advertising...............xxx
(1) Description of change and scope.........xxx
(2) Scope limitations inapplicable.........xxx
SECTION 9. INVENTORIES (§ 471)...............xxx
.01 Cash discounts -- Description of change and scope. xxx
.02 Estimating inventory "shrinkage"..........xxx
(1) Description of change and scope.........xxx
(2) Scope limitations inapplicable.........xxx
(3) Additional requirements.............xxx
(4) Audit protection................xxx
(5) Future change..................xxx
SECTION 10. LAST-IN, FIRST-OUT (LIFO) INVENTORIES (§ 472) . . xxx
.01 Change from the LIFO inventory method.......xxx

-52-
(1) Description of change and scope.........xxx
(2) Limitation on LIFO election...........xxx
(3) Effect of subchapter S election by corporation. xxx
(4) Additional requirements.............xxx
.02 Determining the cost of used vehicles purchased or taken
as a trade-in....................xxx
(1) Description of change and scope.........xxx
(2) Manner of making the change...........xxx
.03 Alternative LIFO inventory method for retail automobile
dealers.......................xxx
(1) Description of change and scope.........xxx
(2) Manner of making the change...........xxx
.04 Inventory price index computation (IPIC) method under
the LIFO inventory method..............xxx
(1) Description of change and scope.........xxx
(2) Manner of making the change...........xxx
(3) Bargain purchase................xxx
.05 Determining current-year cost under the LIFO inventory
method.......................xxx
(1) Description of change and scope.........xxx
(2) Manner of making the change...........xxx
SECTION 10A. MARK-TO-MARKET ACCOUNTING METHOD FOR DEALERS IN
SECURITIES (§ 475).............xxx
.01 Discontinuing the mark-to-market method of accounting
for nonfinancial customer paper...........xxx
(1) Description of change and scope.........xxx
(2) Additional Requirements.............xxx
(3) No audit protection...............xxx
.02 Reserved......................xxx
SECTION 11. BANK RESERVES FOR BAD DEBTS (§ 585).......xxx
.01 Changing from the § 585 reserve method to the § 166
specific charge-off method.............xxx
(1) Description of change and scope.........xxx
(2) Section 481(a) adjustment............xxx
(3) Change from § 585 required when electing S
corporation status...............xxx
.02 Reserved......................xxx
SECTION 12. ORIGINAL ISSUE DISCOUNT (§§ 1272; 1273).....xxx
.01 De minimis original issue discount (OID)......xxx
(1) Description of change and scope.........xxx
(2) Manner of making the change...........xxx
(3) Additional requirements.............xxx
(4) No audit protection...............xxx
.02 Pool of debt instruments..............xxx
(1) Description of change and scope.........xxx
(2) Additional requirements.............xxx
SECTION 13. SHORT-TERM OBLIGATIONS (§ 1281).........xxx
.01 Interest income on short-term obligations.....xxx

-53-
(1) Description of change and scope.........xxx
(2) Section 481(a) adjustment period........xxx
.02 Stated interest on short-term loans of cash method banks
in the Eighth Circuit................xxx
(1) Description of change and scope.........xxx
(2) Section 481(a) adjustment period........xxx
(3) No ruling protection..............xxx
SECTION 1. TRADE OR BUSINESS EXPENSES (§ 162)
.01 Advances made by a lawyer on behalf of clients --
Description of change and scope. This change applies to a lawyer
handling cases on a contingent fee basis that advances money to
pay for costs of litigation or for other expenses on behalf of
clients and that wants to change the method of accounting for
such advances from treating them as deductible business expenses
to treating them as loans. See Boccardo v. United States, 12 Cl.
Ct. 184 (1987); Canelo v. Commissioner, 53 T.C. 217 (1969), aff'd
per curiam, 447 F.2d 484 (9th Cir. 1971).
.02 Year 2000 costs -- Description of change and scope.
This change applies to a taxpayer that wants to change its method
of accounting for Year 2000 costs (as defined in Rev. Proc. 97-
50, 1997-2 C.B. 525) to conform to the method described in
section 3 of Rev. Proc. 97-50. Section 3 of Rev. Proc. 97-50
provides that Year 2000 costs fall within the purview of Rev.
Proc. 69-21, 1969-2 C.B. 303, and that the Service will not
disturb a taxpayer’s treatment of its Year 2000 costs as
deductible expenses or capital expenditures if the taxpayer
treats these costs in accordance with Rev. Proc. 69-21.
SECTION 2. DEPRECIATION OR AMORTIZATION (§ 167, 168, OR 197)

-54-
.01 Impermissible to permissible method of accounting for
depreciation or amortization.
(1) Description of change.
(a) This change applies to a taxpayer that wants to
change from an impermissible method of accounting for
depreciation or amortization (depreciation) under which the
taxpayer did not claim the depreciation allowable, to a
permissible method of accounting for depreciation under which the
taxpayer will claim the depreciation allowable.
(b) A change from a taxpayer’s impermissible method
of accounting for depreciation under which the taxpayer did not
claim the depreciation allowable to a permissible method of
accounting for depreciation under which the taxpayer will claim
the depreciation allowable is a change in method of accounting
for which the consent of the Commissioner is required. Sections
1.167(e)-1(a) and 1.446-1(e)(2)(ii)(b). This method change,
however, does not include any correction of mathematical or
posting errors. Section 1.446-1(e)(2)(ii)(b).
(2) Scope.
(a) Applicability. This change applies to any
taxpayer that has used an impermissible method of accounting for
depreciation in at least the two taxable years immediately
preceding the year of change, and is changing that accounting
method to a permissible method of accounting for depreciation,
for any item of property:

-55-
(i) for which, under the taxpayer’s impermissible
method of accounting, the taxpayer has not taken into account any
depreciation allowance or has taken into account some
depreciation but less than or more than the depreciation
allowable (claimed less than or more than the depreciation
allowable);
(ii) for which depreciation is determined under
§ 167, 168, 197, or 168 prior to its amendment in 1986 (former
§ 168); and
(iii) that is owned by the taxpayer at the
beginning of the year of change.
(b) Inapplicability. This change does not apply to:
(i) any property to which § 1016(a)(3) (regarding
property held by a tax-exempt organization) applies;
(ii) any taxpayer that is subject to § 263A and
that is required to capitalize the costs with respect to which
the taxpayer wants to change its method of accounting under
section 2.01 of this APPENDIX, if the taxpayer is not
capitalizing the costs as required;
(iii) any intangible property subject to § 167,
except for property subject to § 167(f) (regarding certain
property excluded from § 197);
(iv) any property subject to § 167(g) (regarding
property depreciated under the income forecast method);
(v) any § 1250 property that a taxpayer is
reclassifying to an asset class of Rev. Proc. 87-56, 1987-2 C.B.

-56-
674, or Rev. Proc. 83-35, 1983-1 C.B. 745, as appropriate, that
does not explicitly include § 1250 property (for example, asset
class 57.0, Distributive Trades and Services);
(vi) any property for which a taxpayer is revoking
a timely valid election, or making a late election, under § 167,
168, former § 168, or § 13261(g)(2) or (3) of the Revenue
Reconciliation Act of 1993 (1993 Act), 1993-3 C.B. 1, 128
(relating to amortizable § 197 intangibles). A taxpayer may
request consent to revoke or make the election by submitting a
request for a letter ruling under Rev. Proc. 98-1, 1998-1 I.R.B.
7 (or any successor);
(vii) any property subject to § 167 (other than
§ 167(f), regarding certain property excluded from § 197), for
which a taxpayer is changing only the estimated useful life of
the property. A change in the estimated useful life of property
for which depreciation is determined under § 167 (other than
§ 167(f)) must be made prospectively (see, for example,
§ 1.167(b)-2(c)). (In contrast, section 2.01 of this APPENDIX
generally applies to a change in the recovery period of property
for which depreciation is determined under § 168 or former
§ 168);
(viii) any depreciable property that changes use
but continues to be owned by the same taxpayer (see, for example,
§ 168(i)(5));

-57-
(ix) any property for which depreciation is
determined in accordance with § 1.167(a)-11 (regarding the Class
Life Asset Depreciation Range System (ADR));
(x) any change in method of accounting involving a
change from deducting the cost or other basis of any property as
an expense to capitalizing and depreciating the cost or other
basis;
(xi) any change in method of accounting involving
a change from one permissible method of accounting for the
property to another permissible method of accounting for the
property. For example:
(A) a change from the straight-line method of
depreciation to the income forecast method of depreciation for
videocassettes. See Rev. Rul. 89-62, 1989-1 C.B. 78; or
(B) a change from charging the depreciation
reserve with costs of removal and crediting the depreciation
reserve with salvage proceeds to deducting costs of removal as an
expense (provided the costs of removal are not required to be
capitalized under any provision of the Code, such as, § 263(a))
and including salvage proceeds in taxable income (see section
2.02 of this APPENDIX for making this change for property for
which depreciation is determined under § 167);
(xii) any change in method of accounting involving
both a change from treating the cost or other basis of the
property as nondepreciable property to treating the cost or other
basis of the property as depreciable property and the adoption of

-58-
a method of accounting for depreciation requiring an election
under § 167, 168, former § 168, or § 13261(g)(2) or (3) of the
1993 Act (for example, a change in the treatment of the space
consumed in landfills placed in service in 1990 from
nondepreciable to depreciable property (assuming section
2.01(2)(c)(xiii) of the APPENDIX does not apply) and the making
of an election under § 168(f)(1) to depreciate this property
under the unit-of-production method of depreciation under § 167);
(xiii) any change in method of accounting for an
item of income or deduction other than depreciation, even if a
taxpayer's present method of accounting may have resulted in the
taxpayer claiming less than or more than the depreciation
allowable. For example, a change in method of accounting
involving:
(A) a change in inventory costs (for example,
when property is reclassified from inventory property to
depreciable property, or vice versa) (but see section 3.02 of
this APPENDIX for making a change from inventory property to
depreciable property for unrecoverable line pack gas or
unrecoverable cushion gas); or
(B) a change in the character of a transaction
from sale to lease, or vice versa (but see section 2.03 of this
APPENDIX for making this change); or
(xiv) a change from determining depreciation under
§ 168 to determining depreciation under former § 168 for any

-59-
property subject to the transition rules in § 203(b) or 204(a) of
the Tax Reform Act of 1986, 1986-3 (Vol. 1) C.B. 1, 60-80.
(3) Additional requirements. A taxpayer also must comply
with the following:
(a) Permissible depreciation method. A taxpayer must
change to a permissible method of accounting for depreciation for
the item of property. This method is the same method that
determines the depreciation allowable for the item of property
(as provided in section 2.01(6) of this APPENDIX).
(b) Statements required. A taxpayer must provide the
following statements, if applicable, and attach them to the
completed application:
(i) a detailed description of the former and new
methods of accounting. A general description of these methods of
accounting is unacceptable (for example, MACRS to MACRS or
erroneous method to proper method);
(ii) to the extent not provided elsewhere on the
application, a statement describing the taxpayer's business or
income-producing activities. Also, if the taxpayer has more than
one business or income-producing activity, a statement describing
the taxpayer's business or income-producing activity in which the
item of property at issue is primarily used by the taxpayer;
(iii) to the extent not provided elsewhere on the
application, a statement of the facts and law supporting the new
method of accounting, new classification of the item of property,
and new asset class in, as appropriate, Rev. Proc. 87-56 or Rev.

-60-
Proc. 83-35. If the taxpayer is the owner and lessor of the item
of property at issue, the statement of the facts and law
supporting the new asset class also must describe the business or
income-producing activity in which that item of property is
primarily used by the lessee;
(iv) to the extent not provided elsewhere on the
application, a statement identifying the year in which the item
of property was placed in service;
(v) if the item of property is depreciated under
former § 168, a statement identifying the asset class in Rev.
Proc. 83-35 that applies under the taxpayer's former and new
methods of accounting (if none, state and explain);
(vi) if any item of property is public utility
property within the meaning of § 168(i)(10) or former
§ 167(l)(3)(A), as applicable, a statement providing that the
taxpayer agrees to the following additional terms and conditions:
(A) a normalization method of accounting
(within the meaning of former § 167(l)(3)(G), former
§ 168(e)(3)(B), or § 168(i)(9), as applicable) will be used for
the public utility property subject to the application;
(B) as of the beginning of the year of change,
the taxpayer will adjust its deferred tax reserve account or
similar reserve account in the taxpayer’s regulatory books of
account by the amount of the deferral of federal income tax
liability associated with the § 481(a) adjustment applicable to
the public utility property subject to the application; and

-61-
(C) within 30 calendar days of filing the
federal income tax return for the year of change, the taxpayer
will provide a copy of the completed application to any
regulatory body having jurisdiction over the public utility
property subject to the application;
(vii) if the taxpayer is changing the
classification of an item of § 1250 property placed in service
after August 19, 1996, to a retail motor fuels outlet under
§ 168(e)(3)(E)(iii), a statement containing the following
representation: "For purposes of § 168(e)(3)(E)(iii) of the
Internal Revenue Code, the taxpayer represents that (A) 50
percent or more of the gross revenue generated from the item of
§ 1250 property is from the sale of petroleum products (not
including gross revenue from related services, such as the labor
cost of oil changes and gross revenue from the sale of
nonpetroleum products such as tires and oil filters), (B) 50
percent or more of the floor space in the item of property is
devoted to the sale of petroleum products (not including floor
space devoted to related services, such as oil changes and floor
space devoted to nonpetroleum products such as tires and oil
filters), or (C) the item of § 1250 property is 1,400 square feet
or less."; and
(viii) if the taxpayer is changing the
classification of an item of property from § 1250 property to
§ 1245 property under § 168 or former § 168, a statement of the
facts and law supporting the new § 1245 property classification,

-62-
and a statement containing the following representation: "Each
item of property that is the subject of the application filed
under section 2.01 of the APPENDIX of Rev. Proc. 98-60 for the
year of change beginning [Insert the date], and that is
reclassified from [Insert, as appropriate: nonresidential real
property, residential rental property, 19-year real property,
18-year real property, or 15-year real property] to an asset
class of [Insert, as appropriate, either: Rev. Proc. 87-56,
1987-2 C.B. 674, or Rev. Proc. 83-35, 1983-1 C.B. 745] that does
not explicitly include § 1250 property, is § 1245 property for
depreciation purposes."
(4) Section 481(a) adjustment. Because the adjusted
basis of the property is changed as a result of a method change
made under section 2.01 of this APPENDIX (see section 2.01(5) of
this APPENDIX), items are duplicated or omitted. Accordingly,
this change is made with a § 481(a) adjustment. This adjustment
may result in either a negative § 481(a) adjustment (a decrease
in taxable income) or a positive § 481(a) adjustment (an increase
in taxable income). This § 481(a) adjustment equals the
difference between the total amount of depreciation taken into
account in computing taxable income for the property under the
taxpayer's former method of accounting, and the total amount of
depreciation allowable for the property under the taxpayer's new
method of accounting (as determined under section 2.01(6) of this
APPENDIX), for open and closed years prior to the year of change.
However, the amount of the § 481(a) adjustment must be adjusted

-63-
to account for the proper amount of the depreciation allowable
that is required to be capitalized under any provision of the
Code (for example, § 263A) at the beginning of the year of
change.
(5) Basis adjustment. As of the beginning of the year of
change, the basis of depreciable property to which section 2.01
of this APPENDIX applies must reflect the reductions required by
§ 1016(a)(2) for the depreciation allowable for the property (as
determined under section 2.01(6) of this APPENDIX).
(6) Meaning of depreciation allowable.
(a) In general. Section 2.01(6) of this APPENDIX
provides the amount of the depreciation allowable, determined
under § 167, 168, 197, or former § 168. This amount, however,
may be limited by other provisions of the Code (for example,
§ 280F).
(b) Section 167 property. Generally, for any taxable
year, the depreciation allowable for property for which
depreciation is determined under § 167, is determined either:
(i) under the depreciation method adopted by a
taxpayer for the property; or
(ii) if that depreciation method does not result
in a reasonable allowance for depreciation or a taxpayer has not
adopted a depreciation method for the property, under the
straight-line depreciation method.
For determining the estimated useful life and salvage value of
the property, see §§ 1.167(a)-1(b) and (c), respectively. The

-64-
depreciation allowable for any taxable year for property subject
to § 167(f) (regarding certain property excluded from § 197) is
determined by using the depreciation method and useful life
prescribed in § 167(f).
(c) Section 168 property. The depreciation allowable
for any taxable year for property for which depreciation is
determined under § 168, is determined by using either:
(i) the general depreciation system in § 168(a);
or
(ii) the alternative depreciation system in
§ 168(g) if the property is required to be depreciated under the
alternative depreciation system pursuant to § 168(g)(1) or other
provisions of the Code (for example, property described in
§ 263A(e)(2)(A) or 280F(b)(1)). Property required to be
depreciated under the alternative depreciation system pursuant to
§ 168(g)(1) includes property in a class (as set out in § 168(e))
for which the taxpayer made a timely election under § 168(g)(7).
(d) Section 197 property. The depreciation allowable
for any taxable year for an amortizable § 197 intangible
(including any property for which a timely election under
§ 13261(g)(2) of the 1993 Act was made) is determined by using
the straight-line method over a 15-year period.
(e) Former § 168 property. The depreciation
allowable for any taxable year for property subject to former
§ 168 is determined by using either:

-65-
(i) the accelerated method of cost recovery
applicable to the property (for example, for 5-year property, the
recovery method under former § 168(b)(1)); or
(ii) the straight-line method applicable to the
property if the property is required to be depreciated under the
straight-line method (for example, property described in former
§ 168(f)(12) or former § 280F(b)(2)) or if the taxpayer elected
to determine the depreciation allowance under the optional
straight-line percentage (for example, the straight-line method
in former § 168(b)(3)).
.02 Permissible to permissible method of accounting for
depreciation.
(1) Description of change. This change applies to a
taxpayer that wants to change from a permissible method of
accounting for depreciation under § 167 to another permissible
method of accounting for depreciation under § 167. Pursuant to
§§ 1.167(a)-7(a) and (c), a taxpayer may account for depreciable
property either by treating each individual asset as an account
or by combining two or more assets in a single account and, for
each account, depreciation allowances are computed separately.
(2) Scope.
(a) Applicability. This change applies to any
taxpayer wanting to make a change in method of accounting for
depreciation specified in section 2.02(3) of this APPENDIX for
the property in an account:

-66-
(i) for which the present and proposed methods of
accounting for depreciation specified in section 2.02(3) of this
APPENDIX are permissible methods for the property under § 167;
and
(ii) that is owned by the taxpayer at the
beginning of the year of change.
(b) Inapplicability. This change does not apply to:
(i) any taxpayer that is subject to § 263A and
that is required to capitalize the costs with respect to which
the taxpayer wants to change its method of accounting under
section 2.02 of this APPENDIX, if the taxpayer is not
capitalizing the costs as required;
(ii) any property to which § 1016(a)(3) (regarding
property held by a tax-exempt organization) applies;
(iii) any intangible property;
(iv) any property described in § 167(f) (regarding
certain property excluded from § 197);
(v) any property subject to § 167(g) (regarding
property depreciated under the income forecast method);
(vi) any property for which depreciation is
determined under § 168 or § 168 prior to its amendment in 1986
(former § 168);
(vii) any property that the taxpayer elected under
§ 168(f)(1) or former § 168(e)(2) to exclude from the application
of, respectively, § 168 or former § 168;

-67-
(viii) any property for which depreciation is
determined in accordance with § 1.167(a)-11 (regarding the Class
Life Asset Depreciation Range System (ADR)); or
(ix) any depreciable property for which the
taxpayer is changing the depreciation method pursuant to
§ 1.167(e)-1(b) (change from declining-balance method to
straight-line method), § 1.167(e)-1(c) (certain changes for
§ 1245 property), or § 1.167(e)-1(d) (certain changes for § 1250
property). These changes must be made prospectively and are not
permitted under the cited regulations for property for which the
depreciation is determined under § 168 or former § 168.
(3) Changes covered. Section 2.02 of this APPENDIX only
applies to the following changes in methods of accounting for
depreciation:
(a) a change from the straight-line method to the
sum-of-the-years-digits method, the sinking fund method, the
unit-of-production method, or the declining-balance method using
any proper percentage of the straight-line rate;
(b) a change from the declining-balance method using
any percentage of the straight-line rate to the
sum-of-the-years-digits method, the sinking fund method, or the
declining-balance method using a different proper percentage of
the straight-line rate;
(c) a change from the sum-of-the-years-digits method
to the sinking fund method, the declining-balance method using

-68-
any proper percentage of the straight-line rate, or the
straight-line method;
(d) a change from the unit-of-production method to
the straight-line method;
(e) a change from the sinking fund method to the
straight-line method, the unit-of-production method, the
sum-of-the-years-digits method, or the declining-balance method
using any proper percentage of the straight-line rate;
(f) a change in the interest factor used in
connection with a compound interest method or sinking fund
method;
(g) a change in averaging convention as set forth in
§ 1.167(a)-10(b). However, as specifically provided in
§ 1.167(a)-10(b), in any taxable year in which an averaging
convention substantially distorts the depreciation allowance for
the taxable year, it may not be used (see Rev. Rul. 73-202,
1973-1 C.B. 81);
(h) a change from charging the depreciation reserve
with costs of removal and crediting the depreciation reserve with
salvage proceeds to deducting costs of removal as an expense and
including salvage proceeds in taxable income as set forth in
§ 1.167(a)-8(e)(2). See Rev. Rul. 74-455, 1974-2 C.B. 63. This
change, however, may be made under this revenue procedure only
if:
(i) the change is applied to all items in the
account for which the change is being made; and

-69-
(ii) the removal costs are not required to be
capitalized under any provision of the Code (for example,
§ 263(a), 263A, or 280B);
(i) a change from crediting the depreciation reserve
with the salvage proceeds realized on normal retirement sales to
computing and recognizing gains and losses on such sales (see
Rev. Rul. 70-165, 1970-1 C.B. 43);
(j) a change from crediting ordinary income
(including the combination method of crediting the lesser of
estimated salvage value or actual salvage proceeds to the
depreciation reserve, with any excess of salvage proceeds over
estimated salvage value credited to ordinary income) with the
salvage proceeds realized on normal retirement sales, to
computing and recognizing gains and losses on such sales (see
Rev. Rul. 70-166, 1970-1 C.B. 44); or
(k) a change from item accounting for specific assets
to multiple asset accounting for the same assets, or vice versa.
(4) Additional requirements. A taxpayer also must comply
with the following:
(a) Basis for depreciation. At the beginning of the
year of change, the basis for depreciation of property to which
this change applies is the adjusted basis of the property as
provided in § 1011 at the end of the taxable year immediately
preceding the year of change (determined under the taxpayer's
present method of accounting for depreciation). If applicable
under the taxpayer's proposed method of accounting for

-70-
depreciation, this adjusted basis is reduced by the estimated
salvage value of the property (for example, a change to the
straight-line method).
(b) Rate of depreciation. The rate of depreciation
for property changed to:
(i) the straight-line or sum-of-the-years-digits
method of depreciation must be based on the remaining useful life
of the property as of the beginning of the year of change; or
(ii) the declining-balance method of depreciation
must be based on the useful life of the property measured from
the placed-in-service date, and not the expected remaining life
from the date the change becomes effective.
(c) Regulatory requirements. For changes in method
of depreciation to the sum-of-the-years-digits or
declining-balance method, the property must meet the requirements
of § 1.167(b)-0 or 1.167(c)-1, as appropriate.
(d) Public utility property. If any item of property
is public utility property within the meaning of former
§ 167(l)(3)(A), the taxpayer must attach to the application a
statement providing that the taxpayer agrees to the following
additional terms and conditions:
(i) a normalization method of accounting within
the meaning of former § 167(l)(3)(G) will be used for the public
utility property subject to the application; and
(ii) within 30 calendar days of filing the federal
income tax return for the year of change, the taxpayer will

-71-
provide a copy of the completed application to any regulatory
body having jurisdiction over the public utility property subject
to the application.
(5) Section 481(a) adjustment. Because the adjusted
basis of the property is not changed as a result of a method
change made under section 2.02 of this APPENDIX, no items are
being duplicated or omitted. Accordingly, the § 481(a)
adjustment is zero.
.03 Sale or lease transactions.
(1) Description of change and scope.
(a) Applicability. This change applies to a taxpayer
that wants to change its method of accounting from:
(i) improperly treating property as sold by the
taxpayer to properly treating property as leased by the taxpayer;
(ii) improperly treating property as leased by the
taxpayer to properly treating property as sold by the taxpayer;
(iii) improperly treating property as purchased by
the taxpayer to properly treating property as leased by the
taxpayer; and
(iv) improperly treating property as leased by the
taxpayer to properly treating property as purchased by the
taxpayer.
(b) Inapplicability. This change does not apply to:
(i) a rent-to-own dealer that wants to change its
method of accounting for rent-to-own contracts described in
section 3 of Rev. Proc. 95-38, 1995-2 C.B. 397; or

-72-
(ii) a taxpayer that holds assets for sale or
lease, if any asset so held is not the subject of a sale or lease
transaction as of the beginning of the year of change.
(2) Manner of making the change.
(a) The change in method of accounting under section
2.03 of this APPENDIX is made using a cut-off method and applies
to transactions entered into on or after the beginning of the
year of change. See section 2.06 of this revenue procedure.
(b) If a taxpayer wants to change its method of
accounting for existing sale or lease transactions, the taxpayer
must file an application with the Commissioner in accordance with
the requirements of § 1.446-1(e)(3)(i) and Rev. Proc. 97-27. A
change involving existing sale or lease transactions will require
a § 481(a) adjustment. Consent to change a method of accounting
for an existing sale or lease transaction is granted only in
unusual and compelling circumstances.
(3) No audit protection. A taxpayer does not receive
audit protection under section 7 of this revenue procedure in
connection with this change.
SECTION 2A. RESEARCH AND EXPERIMENTAL EXPENDITURES (§ 174)
.01 Changes to a different method or different amortization
period.
(1) Description of change.
(a) This change applies to a taxpayer that wants to
change the treatment of expenditures that qualify as research and
experimental expenditures under § 174.

-73-
(b) Section 174 and the regulations thereunder
provide the specific rules for changing a method of accounting
under § 174 for research and experimental expenditures. Under
§ 174, a taxpayer may treat research and experimental
expenditures that are paid or incurred by the taxpayer during the
taxable year in connection with the taxpayer’s trade or business
as expenses under § 174(a) or as deferred expenses amortizable
ratably over a period of not less than 60 months under § 174(b).
Pursuant to § 1.174-1, research and experimental expenditures
that are not treated as expenses or deferred expenses under § 174
must be treated as capital expenditures. Further, § 1.174-1
provides that the expenditures to which § 174 applies may relate
either to a general research program or to a particular project.
(c) If a taxpayer has not treated research and
experimental expenditures as expenses under § 174(a),
§§ 174(a)(2)(B) and 1.174-3(b)(2) provide that the taxpayer may,
with consent, adopt the expense method at any time.
(d) If a taxpayer has treated research and
experimental expenditures as expenses under § 174(a),
§§ 174(a)(3) and 1.174-3(b)(3) provide that the taxpayer may,
with consent, change to a different method of treating research
and experimental expenditures.
(e) If a taxpayer has treated research and
experimental expenditures as deferred expenses under § 174(b),
§§ 174(b)(2) and 1.174-4(b)(2) provide that the taxpayer may,
with consent, change to a different method of treating research

-74-
or experimental expenditures or to a different period of
amortization for deferred expenses.
(2) Scope.
(a) Applicability. This change applies to any
taxpayer that is changing:
(i) from treating research and experimental
expenditures for a particular project or projects as expenses
under § 174(a) to treating such expenditures as deferred expenses
under § 174(b), or vice versa;
(ii) to a different period of amortization for
research and experimental expenditures for a particular project
or projects that are being treated as deferred expenses under
§ 174(b); or
(iii) from treating research and experimental
expenditures for a particular project or projects as expenses
under § 174(a) or deferred expenses under § 174(b) to treating
such expenditures as a capital expenditure under § 263(a), or
vice versa.
(b) Scope limitations clarified. The scope
limitation under section 4.02(6) of this revenue procedure is
applied on a project by project basis.
(c) Inapplicability. This change does not apply to:
(i) a portion of the research and experimental
expenditures paid or incurred for a particular project during the
year of change or in subsequent taxable years (that is, the

-75-
change must apply to all of such expenditures; see §§ 1.174-3(a)
and 1.174-4(a)(5));
(ii) a change in the treatment of computer
software costs under Rev. Proc. 69-21, 1969-2 C.B. 303; or
(iii) a change in the treatment of Year 2000 costs
under Rev. Proc. 97-50, 1997-2 C.B. 525 (but see section 1.02 of
this APPENDIX for making this change).
(3) Manner of making the change.
(a) This change is made using a cut-off method and
applies to all research and experimental expenditures paid or
incurred for a particular project or projects during the year of
change and in subsequent taxable years. See section 2.06 of this
revenue procedure and §§ 174(b)(2), 1.174-3(a), 1.174-3(b)(2),
and 1.174-4(a)(5).
(b) The requirement under §§ 1.174-3(b)(2), 1,174-
3(b)(3), and 1.174-4(b)(2) to file an application no later than
the end of the first taxable year in which the different method
or different amortization period is to be used is waived for this
change. However, see section 6 of this revenue procedure for
filing requirements applicable under this revenue procedure.
(c) The consent granted under this revenue procedure
satisfies the consent required under §§ 174(a)(2)(B), 174(a)(3),
174(b)(2), 1.174-3(b)(2), 1.174-3(b)(3), and 1.174-4(b)(2).
(4) Additional requirement. A taxpayer must attach to
the application a written statement providing:

-76-
(a) the information required in § 1.174-3(b)(2) if
the taxpayer is changing to treating research and experimental
expenditures as expenses under § 174(a);
(b) the information required in § 1.174-3(b)(3) if
the taxpayer is changing from treating research and experimental
expenditures as expenses under § 174(a); or
(c) the information required in § 1.174-4(b)(2) if
the taxpayer is changing from treating research and experimental
expenditures as deferred expenses method under § 174(b) or is
changing to a different period of amortization for research and
experimental expenditures being treated as deferred expenses
under § 174(b).
(5) No audit protection. A taxpayer does not receive
audit protection under section 7 of this revenue procedure in
connection with this change.
.02 Reserved.
SECTION 3. CAPITAL EXPENDITURES (§ 263)
.01 Package design costs.
(1) Description of change and scope.
(a) Applicability. This change applies to a taxpayer
that wants to change its method of accounting for package design
costs that are within the scope of Rev. Proc. 97-35, 1997-2 C.B.
448, to one of the three alternative methods of accounting for
package design costs described in section 5 of Rev. Proc. 97-35.
The three alternative methods of accounting for package design
costs described are: (1) the capitalization method, (2) the

-77-
design-by-design capitalization and 60-month amortization method,
and (3) the pool-of-cost capitalization and 48-month amortization
method.
(b) Inapplicability. This change does not apply to a
taxpayer that wants to change to the capitalization method for
costs of developing (or modifying) any package design that has an
ascertainable useful life.
(2) Additional requirements. If a taxpayer is changing
its method of accounting for package design costs to the
capitalization method or the design-by-design capitalization and
60-month amortization method, the taxpayer must attach a
statement to its timely filed application. The statement must
provide a description of each package design, the date on which
each was placed in service, and the cost basis of each (as
determined under sections 5.01(2) or 5.02(2) of Rev. Proc. 97-
35).
.02 Line pack gas; cushion gas.
(1) Description of change and scope. This change applies
to a taxpayer that wants to change its method of accounting for
line pack gas or cushion gas to a method consistent with the
holding in Rev. Rul. 97-54, 1997-2 C.B. 23. Rev. Rul. 97-54
holds that the cost of line pack gas or cushion gas is a capital
expenditure under § 263, the cost of recoverable line pack gas or
recoverable cushion gas is not depreciable, and the cost of
unrecoverable line pack gas or unrecoverable cushion gas is
depreciable under §§ 167 and 168.

-78-
(2) Additional requirements. A taxpayer that changes its
method of accounting for unrecoverable line pack gas or
unrecoverable cushion gas under section 3.02 of this APPENDIX
must change to a permissible method of accounting for
depreciation for the cost of that gas.
SECTION 4. UNIFORM CAPITALIZATION (§ 263A)
.01 Certain uniform capitalization (UNICAP) methods used by
small resellers, formerly small resellers, and reseller-
producers.
(1) Description of change and scope.
(a) Applicability. This change applies to:
(i) a small reseller of personal property changing
from a permissible UNICAP method to a permissible non-UNICAP
inventory capitalization method in any taxable year that it
qualifies as a small reseller;
(ii) a formerly small reseller changing from a
permissible non-UNICAP inventory capitalization method to a
permissible UNICAP method in the first taxable year that it does
not qualify as a small reseller;
(iii) a reseller-producer changing from a
permissible UNICAP method for both its production and resale
activities to a permissible simplified resale method described in
§ 1.263A-3(d)(3) in any taxable year that it qualifies to use a
simplified resale method for both its production and resale
activities under § 1.263A-3(a)(4) (resellers with de minimis
production activities); or

-79-
(iv) a reseller-producer changing from a
permissible simplified resale method described in § 1.263A-
3(d)(3) for both its production and resale activities to a
permissible UNICAP method for both its production and resale
activities in the first taxable year that it does not qualify to
use a simplified resale method for both its production and resale
activities under § 1.263A-3(a)(4).
(b) Scope limitations inapplicable. A taxpayer that
wants to make this change is not subject to the scope limitations
in section 4.02 of this revenue procedure. However, if the
taxpayer is under examination, before an appeals office, or
before a federal court, the taxpayer must provide a copy of the
application to the examining agent(s), appeals officer, or
counsel for the government, as appropriate, at the same time that
it files the copy of the application with the national office.
The application must contain the name(s) and telephone number(s)
of the examining agent(s), appeals officer, or counsel for the
government, as appropriate.
(c) Inapplicability. This change does not apply to a
taxpayer making a historic absorption ratio election under
§ 1.263A-2(b)(4) or 1.263A-3(d)(4).
(2) Definitions.
(a) "Reseller" means a taxpayer that acquires real or
personal property described in § 1221(1) for resale.
(b) "Small reseller" means a reseller whose average
annual gross receipts for the three immediately preceding taxable

-80-
years (or fewer, if the taxpayer has not been in existence during
the three preceding taxable years) do not exceed $10,000,000.
See § 263A(b)(2)(B).
(c) "Formerly small reseller" means a reseller that
no longer qualifies as a small reseller.
(d) "Producer" means a taxpayer that produces real or
tangible personal property.
(e) "Reseller-producer" means a taxpayer that is both
a producer and a reseller.
(f) "Permissible UNICAP method" means a method of
capitalizing costs that is permissible under § 263A.
(g) "Permissible non-UNICAP inventory capitalization
method" means a method of capitalizing inventory costs that is
permissible under § 471.
(3) Section 481(a) adjustment. Beginning with the year
of change, a taxpayer changing its method of accounting for costs
pursuant to section 4.01 of this APPENDIX generally must take any
applicable § 481(a) adjustment into account ratably over the same
number of taxable years, not to exceed four, that the taxpayer
used its former method of accounting. See section 5.04(3) of
this revenue procedure for exceptions to this general rule.
(4) No audit protection. A taxpayer does not receive
audit protection under section 7 of this revenue procedure in
connection with this change.

-81-
(5) Example. The following example illustrates the
principles of section 4.01 of this APPENDIX for small resellers
and formerly small resellers.
Assume X, a corporate reseller of personal property,
incorporated January 2, 1991, adopted a taxable year ending
December 31. X determines that its average annual gross receipts
for the three taxable years (or fewer, if applicable) immediately
preceding taxable years 1991 through 2000 are as shown in the
table below:
AVERAGE Annual Gross
Current Receipts for the Three Taxable
Taxable Years Immediately Preceding the
Year Current Taxable Year
1991 $ 0
1992 5,000,000
1993 6,000,000
1994 7,000,000
1995 11,000,000
1996 11,000,000
1997 9,000,000
1998 8,000,000
1999 11,000,000
2000 12,000,000
Furthermore, X, which adopted the dollar-value LIFO
inventory method, has the following LIFO inventory balances
determined without considering the effects of the UNICAP method:
Beginning Ending
1995 $1,000,000 $1,100,000
1996 1,100,000 1,200,000
1997 1,200,000 1,300,000
1998 1,300,000 1,400,000
1999 1,400,000 1,500,000
2000 1,500,000 1,600,000
X was required by § 263A to change to the UNICAP method for
1995 because its average annual gross receipts for the three

-82-
taxable years immediately preceding 1995 were $11,000,000, which
exceeded the $10,000,000 ceiling permitted by the small reseller
exception. Assume that X was required to capitalize $80,000 of
"additional § 263A costs" to the cost of its 1995 beginning
inventory because of this change in inventory method. In
addition, X was required to include one-fourth of the § 481(a)
adjustment when computing taxable income for each of the four
taxable years beginning with 1995. Thus, X was required to
include a $20,000 positive § 481(a) adjustment in its 1995
taxable income.
X elected to use the simplified resale method without a
historic absorption ratio election under § 1.263A-3(d)(3) for
determining the amount of additional § 263A costs to be
capitalized to each LIFO layer. Assume that X was required to
add $10,000 of additional § 263A costs to the cost of its 1995
ending inventory because of the $100,000 increment for 1995.
X's 1995 Ending Inventory:
Beginning Inventory (Without UNICAP costs) $1,000,000
1995 Increment 100,000
Additional § 263A Costs in Beginning Inventory 80,000
Additional § 263A Costs in 1995 Increment 10,000
Total 1995 Ending Inventory $1,190,000
X's Unamortized 1995 § 481(a) adjustment:
1995 § 481(a) Adjustment $80,000
Amount Included in 1995 Taxable Income <20,000>
Unamortized 1995 § 481(a) Adjustment--12/31/95 $60,000
Because X failed to satisfy the small reseller exception
for 1996, X was required to continue using the UNICAP method for
its inventory costs. Furthermore, X was required to include

-83-
$20,000 of the unamortized 1995 positive § 481(a) adjustment in
1996 taxable income. Assume that X was required to add $10,000
of additional § 263A costs to the cost of its 1996 ending
inventory because of the $100,000 increment for 1996.
X's 1996 Ending Inventory:
Beginning Inventory (With UNICAP costs) $1,190,000
1996 Increment 100,000
Additional § 263A Costs in 1996 Increment 10,000
Total 1996 Ending Inventory $1,300,000
X's Unamortized 1995 § 481(a) Adjustment:
Unamortized 1995 § 481(a) Adjustment--12/31/95 $60,000
Amount Included in 1996 Taxable Income <20,000>
Unamortized 1995 § 481(a) Adjustment--12/31/96 $40,000
Because X satisfies the small reseller exception for 1997,
X may change voluntarily from the UNICAP method to a permissible
non-UNICAP inventory capitalization method under section 4.01 of
this APPENDIX. To reflect the removal of the additional § 263A
costs from the cost of its 1997 beginning inventory, X must
compute a corresponding § 481(a) adjustment, which is a negative
$100,000 ($1,200,000 - $1,300,000). Because X used the UNICAP
method for only two years (that is, 1995 and 1996), X must
include one-half of the § 481(a) adjustment when computing
taxable income for each of the two taxable years beginning with
1997. Thus, X must include a $50,000 negative § 481(a)
adjustment in 1997 taxable income. In addition, X must include
$20,000 of the unamortized 1995 § 481(a) adjustment in 1997
taxable income.
X's 1997 Ending Inventory:
Beginning Inventory (With UNICAP costs) $1,300,000

-84-
1997 Increment 100,000
1997 § 481(a) Adjustment <Negative> <100,000>
Total 1997 Ending Inventory $1,300,000
X's Unamortized 1995 § 481(a) Adjustment:
Unamortized 1995 § 481(a) Adjustment--12/31/96 $40,000
Amount Included in 1997 Taxable Income <20,000>
Unamortized 1995 § 481(a) Adjustment--12/31/97 $20,000
X's Unamortized 1997 § 481(a) Adjustment:
1997 § 481(a) Adjustment <Negative> $<100,000>
Amount Included in 1997 Taxable Income 50,000
Unamortized 1997 § 481(a) Adjustment--12/31/97 $< 50,000>
X also satisfies the small reseller exception for 1998 and,
therefore, is not required to return to the UNICAP method for
1998. X, however, must include $20,000 of the unamortized 1995
positive § 481(a) adjustment and $50,000 of the unamortized 1997
negative § 481(a) adjustment in 1998 taxable income.
X's 1998 Ending Inventory:
Beginning Inventory (Without UNICAP costs) $1,300,000
1998 Increment 100,000
Total 1998 Ending Inventory $1,400,000
X's Unamortized 1995 § 481(a) Adjustment:
Unamortized 1995 § 481(a) Adjustment--12/31/97 $20,000
Amount Included in 1998 Taxable Income <20,000>
Unamortized 1995 § 481(a) Adjustment--12/31/98 $ 0
X's Unamortized 1997 § 481(a) Adjustment:
Unamortized 1997 § 481(a) Adjustment--12/31/97 $<50,000>
Amount Included in 1998 Taxable Income 50,000
Unamortized 1997 § 481(a) Adjustment--12/31/98 $ 0
In 1999, X fails to satisfy the small reseller exception
and, therefore, must return to the UNICAP method as provided
under section 4.01 of this APPENDIX. X changes to the simplified
resale method without a historic absorption ratio election under

-85-
§ 1.263A-3(d)(3). Assume that X must capitalize $120,000 of
additional § 263A costs to the cost of its 1999 beginning
inventory because of this change in inventory method. In
addition, X must determine the appropriate adjustment period for
the corresponding positive § 481(a) adjustment. Because X used
its former inventory method for two taxable years before 1999
(that is, 1997 and 1998), X must include one-half of the § 481(a)
adjustment when computing taxable income for each of the two
taxable years beginning with 1999. Thus, X must include a
$60,000 positive § 481(a) adjustment in its 1999 taxable income.
Assume that X must add $10,000 of additional § 263A costs to the
cost of its 1999 ending inventory because of the $100,000
increment for 1999.
X's 1999 Ending Inventory:
Beginning Inventory (Without UNICAP costs) $1,400,000
1999 Increment 100,000
Additional § 263A costs in Beginning Inventory 120,000
Additional § 263A costs in 1999 Increment 10,000
Total 1999 Ending Inventory $1,630,000
X's Unamortized 1999 § 481(a) adjustment:
1999 § 481(a) Adjustment $120,000
Amount Included in 1999 Taxable Income < 60,000>
Unamortized 1999 § 481(a) Adjustment--12/31/99 $ 60,000
Because X fails to satisfy the small reseller exception for
2000, X must continue using the UNICAP method for its inventory
costs. Furthermore, X is required to include $60,000 of the
unamortized 1999 positive § 481(a) adjustment in 2000 taxable
income. Assume that X is required to add $10,000 of additional

-86-
§ 263A costs to the cost of its 2000 ending inventory because of
the $100,000 increment for 2000.
X's 2000 Ending Inventory:
Beginning Inventory (With UNICAP costs) $1,630,000
2000 Increment 100,000
Additional § 263A Costs in 2000 Increment 10,000
Total 2000 Ending Inventory $1,740,000
X's Unamortized 1999 § 481(a) Adjustment:
Unamortized 1999 § 481(a) Adjustment--12/31/99 $60,000
Amount Included in 2000 Taxable Income <60,000>
Unamortized 1999 § 481(a) Adjustment--12/31/00 $ 0
.02 Reserved.
SECTION 5. METHODS OF ACCOUNTING (§ 446)
.01 Cash or hybrid method to accrual method.
(1) Description of change and scope.
(a) Applicability. This change applies to:
(i) a taxpayer that wants to change to an overall
accrual method, or to an overall accrual method in conjunction
with the recurring item exception under § 461(h)(3), from the
cash receipts and disbursements method (cash method), or from a
hybrid method (the use of a combination of accounting methods
under which an item or items of income or expense are reported on
the cash method and another item or other items of income or
expense are reported on an accrual method); or
(ii) a taxpayer that is required to change to an
overall accrual method under § 448, but is ineligible to make the
change under § 1.448-1(h)(2) (relating to the "first § 448
year").
(b) Inapplicability. This change does not apply to:

-87-
(i) a financial institution described in § 581 or
591;
(ii) a farmer;
(iii) a cooperative organization described in
§ 501(c)(12), 521, or 1381;
(iv) an individual taxpayer, except for activities
conducted as a sole proprietorship;
(v) a taxpayer required to use an inventory method
of accounting, unless:
(A) the taxpayer adopts a proper inventory
method under § 471 and the regulations thereunder, the taxpayer
is a small reseller within the meaning of § 1.263A-3(a), and, if
the taxpayer has production activities, the taxpayer's production
activities qualify under the de minimis presumption of § 1.263A-
3(a)(2)(iii); or
(B) the taxpayer adopts a proper inventory
method under § 471 and the regulations thereunder, the taxpayer
is a reseller eligible to use the simplified resale method under
§ 1.263A-3(d), and the taxpayer adopts a proper method under that
section for the year of change;
(vi) a taxpayer required to use a long-term
contract method in accordance with § 460, if the taxpayer is not
in compliance with that section and any related administrative
guidance;
(vii) a taxpayer required or wanting to use a
special method of accounting, unless the taxpayer is permitted to

-88-
change automatically to the special method under this revenue
procedure. A special method of accounting is a method that
deviates from the normal tax accounting rules, such as the method
of accounting for advance payments pursuant to either Rev. Proc.
71-21, 1971-2 C.B. 549, or § 1.451-5, the installment method of
accounting under § 453, or a long-term contract method under
§ 460; or
(viii) a taxpayer required to change to an overall
accrual method under § 448 and eligible to make the change under
§ 1.448-1(h)(2). See § 1.448-1(h)(2), which provides an
automatic consent procedure for a taxpayer changing for the first
taxable year that it is subject to § 448. See also § 1.448-
1(h)(1), which provides that § 1.448-1(h) does not apply to a
change required under any Code section (or regulations
thereunder) other than § 448 (for example, a taxpayer with
inventories).
(2) Section 481(a) adjustment.
(a) In general. The § 481(a) adjustment takes into
account the accounts receivable, accounts payable, inventory, and
any other item determined to be necessary in order to prevent
items from being duplicated or omitted. The § 481(a) adjustment
does not include any item of income accrued but not received that
was worthless or partially worthless (within the meaning of
§ 166(a)) on the last day of the year preceding the year of
change.

-89-
(b) Recurring item exception. As part of the change
to an overall accrual method, a taxpayer may adopt the recurring
item exception for the year of change if the taxpayer is eligible
and follows the procedures of § 1.461-5(d). If the taxpayer is
eligible and wants to adopt this method as specified in
§ 461(h)(3), the amount of the § 481(a) adjustment must be
modified to account for the amount of any additional deduction.
(3) Change to a special method of accounting. If a
taxpayer that wants to change to an accrual method in conjunction
with a change to a special method of accounting is not permitted
to make the change under this revenue procedure, the taxpayer may
request to make both changes only by filing one application under
the provisions of Rev. Proc. 97-27, 1997-1 C.B. 680. Only one
user fee will be required for these changes.
.02 Multi-year service warranty contracts.
(1) Description of change and scope.
(a) Applicability. This change applies to an
eligible accrual method manufacturer, wholesaler, or retailer of
motor vehicles or other durable consumer goods that wants to
change to the service warranty income method described in section
5 of Rev. Proc. 97-38, 1997-2 C.B. 479. Under the service
warranty income method, a qualifying taxpayer may, in certain
specified and limited circumstances, include a portion of an
advance payment related to the sale of a multi-year service
warranty contract in gross income generally over the life of the
service warranty obligation.

-90-
(b) Inapplicability. This change does not apply to a
taxpayer outside the scope of Rev. Proc. 97-38.
(2) Manner of making the change.
(a) This change is made using a cut-off method, under
which the taxpayer begins the use of the service warranty income
method for all qualified advance payment amounts received in the
year of change and thereafter. See section 2.06 of this revenue
procedure.
(b) In accordance with § 1.446-1(e)(3)(ii), the
requirement of § 1.446-1(e)(3)(i) to file an application on Form
3115 is waived and a statement in lieu of the Form 3115 is
authorized for this change. The statement must be identified at
the top as follows: "CHANGE TO THE SERVICE WARRANTY INCOME
METHOD UNDER SECTION 5.02 OF THE APPENDIX OF REV. PROC. 98-60."
The statement must set forth the information required under
section 6.03 of Rev. Proc. 97-38, except that the statement under
section 6.03(2) (that the taxpayer agrees to all of the terms and
conditions of the revenue procedure) also should refer to Rev.
Proc. 98-60.
(c) A taxpayer changing to the service warranty
income method of accounting under section 5.02 of this APPENDIX
must satisfy the annual reporting requirement set forth in
section 6.04 of Rev. Proc. 97-38.
.03 Multi-year insurance policies for multi-year service
warranty contracts -- Description of change and scope.

-91-
(1) Applicability. This change applies to a
manufacturer, wholesaler, or retailer of motor vehicles or other
durable consumer goods that wants to change its method of
accounting for insurance costs paid or incurred to insure its
risks under multi-year service warranty contracts to the method
described in section 5.03(3) of this APPENDIX. Multi-year
service warranty contracts to which this change applies include
only those separately priced contracts sold by a manufacturer,
wholesaler, or retailer also selling the motor vehicles or other
durable consumer goods (to the ultimate customer or to an
intermediary) underlying the contracts. The classification of
goods as "durable consumer goods" for purposes of this change
depends on the common usage of the goods, rather than the
purchaser’s actual intended use of the goods.
(2) Inapplicability. This change does not apply to a
taxpayer that covers its risks under its multi-year service
warranty contracts through arrangements not constituting
insurance.
(3) Description of method. If a taxpayer purchases a
multi-year service warranty insurance policy (in connection with
its sale of multi-year service warranty contracts to customers)
by paying a lump-sum premium in advance, the taxpayer must
capitalize the amount paid or incurred and may only obtain
deductions for that amount by prorating (or amortizing) it over
the life of the insurance policy (whether the cash method or an

-92-
accrual method of accounting is used to account for service
warranty transactions).
.04 Interest accruals on short-term consumer loans -- Rule
of 78s method.
(1) Description of change and scope.
(a) Applicability. This change applies to a taxpayer
that wants to change its method of accounting from the Rule of
78s method to the constant yield method for stated interest
(including stated interest that is original issue discount) on
short-term consumer loans described in Rev. Proc. 83-40, 1983-1
C.B. 774, which was obsoleted by Rev. Proc. 97-37, 1997-2 C.B.
455.
(b) Scope limitations inapplicable. A taxpayer that
wants to make this change for its first or second taxable year
beginning on or after January 1, 1998, is not subject to the
scope limitations in section 4.02 of this revenue procedure.
However, if the taxpayer is under examination, before an appeals
office, or before a federal court, the taxpayer must provide a
copy of the application to the examining agent(s), appeals
officer, or counsel for the government, as appropriate, at the
same time that it files the copy of the application with the
national office. The application must contain the name(s) and
telephone number(s) of the examining agent(s), appeals officer,
or counsel for the government, as appropriate.
(2) Background.

-93-
(a) A short-term consumer loan is described in Rev.
Proc. 83-40, provided:
(i) the loan is a self-amortizing loan that
requires level payments, at regular intervals at least annually,
over a period not in excess of five years (with no balloon
payment at the end of the loan term); and
(ii) the loan agreement between the borrower and
the lender provides that interest is earned, or upon the
prepayment of the loan interest is treated as earned, in
accordance with the Rule of 78s method.
(b) In general, the Rule of 78s method allocates
interest over the term of a loan based, in part, on the sum of
the periods’ digits for the term of the loan. See Rev. Rul.
83-84, 1983-1 C.B. 97, for a description of the Rule of 78s
method.
(c) In general, the constant yield method allocates
interest and original issue discount over the term of a loan
based on a constant yield. See § 1.1272-1(c) for a description
of the constant yield method. The Rule of 78s method generally
front-loads interest as compared to the constant yield method.
(d) Rev. Proc. 83-40 was obsoleted because, under
§§ 1.446-2 and 1.1272-1 (which were effective for debt
instruments issued on or after April 4, 1994), taxpayers
generally must account for stated interest and original issue
discount on a debt instrument (loan) by using a constant yield

-94-
method. As a result, the Rule of 78s method is no longer an
acceptable method of accounting for federal income tax purposes.
(e) Notwithstanding §§ 1.446-2 and 1.1272-1, as a
matter of administrative convenience, the Service will allow a
taxpayer to use the Rule of 78s method for stated interest on
short-term consumer loans described in Rev. Proc. 83-40 if the
loans were issued prior to the first day of the taxpayer’s first
taxable year that begins on or after January 1, 1999.
(3) Manner of making the change.
(a) This change is made using a cut-off method and
applies only to loans issued on or after the first day of the
year of change. See section 2.06 of this revenue procedure.
(b) The taxpayer must maintain books and records
sufficient to satisfy the district director that loans issued
before the year of change and loans issued on or after the first
day of the year of change have been adequately accounted for
separately.
SECTION 6. OBLIGATIONS ISSUED AT DISCOUNT (§ 454)
.01 Series E or EE U.S. savings bonds.
(1) Description of change and scope. This change applies
to a cash method taxpayer that wants to change its method of
accounting for interest income on Series E or EE U.S. savings
bonds. However, this change only applies to a taxpayer that has
previously made an election under § 454 to report as interest
income the increase in redemption price on a bond occurring in a
taxable year, and that now wants to report this income in the

-95-
taxable year in which the bond is redeemed, disposed of, or
finally matures, whichever is earliest.
(2) Manner of making the change.
(a) This change is made using a cut-off method and is
effective for any increase in redemption price occurring after
the beginning of the year of change for all Series E and EE U.S.
savings bonds held by the taxpayer on or after the beginning of
the year of change. See section 2.06 of this revenue procedure.
(b) In accordance with § 1.446-1(e)(3)(ii), the
requirement of § 1.446-1(e)(3)(i) to file an application on Form
3115 is waived and a statement in lieu of the Form 3115 is
authorized for this change. The statement must be identified at
the top as follows: "CHANGE IN METHOD OF ACCOUNTING UNDER
SECTION 6.01 OF THE APPENDIX OF REV. PROC. 98-60." The statement
must set forth:
(i) the Series E or EE U.S. savings bonds for
which this change in accounting method is requested;
(ii) an agreement to report all interest on any
bonds acquired during or after the year of change when the
interest is realized upon disposition, redemption, or final
maturity, whichever is earliest; and
(iii) an agreement to report all interest on the
bonds acquired before the year of change when the interest is
realized upon disposition, redemption, or final maturity,
whichever is earliest, with the exception of any interest income
previously reported in prior taxable years.

-96-
.02 Reserved.
SECTION 7. PREPAID SUBSCRIPTION INCOME (§ 455)
.01 Prepaid subscription income.
(1) Description of change and scope. This change applies
to an accrual method taxpayer that wants to change its method of
accounting for prepaid subscription income to the method
described in § 455 and the regulations thereunder, including an
eligible taxpayer that wants to make the "within 12 months"
election under § 1.455-2.
(2) Manner of making the change.
(a) This change is made using a cut-off method and
does not apply to any prepaid subscription income received before
the first taxable year to which the change applies. Any prepaid
subscription income arising prior to the year of change is
accounted for under the taxpayer's former method of accounting.
See section 2.06 of this revenue procedure.
(b) In accordance with § 1.446-1(e)(3)(ii), the
requirement of § 1.446-1(e)(3)(i) to file an application on Form
3115 is waived and a statement in lieu of the Form 3115 is
authorized for this change. The statement must be identified at
the top as follows: "CHANGE IN METHOD OF ACCOUNTING FOR PREPAID
SUBSCRIPTION INCOME UNDER SECTION 7.01 OF THE APPENDIX OF REV.
PROC. 98-60." The statement must set forth the information
required under § 1.455-6(b).
(c) The consent granted under this revenue procedure
satisfies the consent required under §§ 455(c)(3) and 1.455-6(b).

-97-
.02 Reserved.
SECTION 8. TAXABLE YEAR OF DEDUCTION (§ 461)
.01 Timing of incurring liabilities for employee
compensation.
(1) Description of change and scope.
(a) Applicability. This change applies to an accrual
method taxpayer that wants to change its method of accounting to
treat bonuses or self-insured medical benefits as follows:
(i) Bonuses. If the obligation to pay a bonus
becomes fixed and certain by the end of the taxable year (see
Rev. Rul. 61-127, 1961-2 C.B. 36), and the bonus is otherwise
deductible, but the bonus is paid after the 15th day of the third
calendar month after the end of that taxable year, to treat the
bonus as deductible in the taxable year of the employer in which
or with which ends the taxable year of the employee in which the
bonus is includible in the gross income of the employee; or
(ii) Self-insured medical benefits. If the
obligation to pay an employee's medical expenses is neither
insured nor paid from a welfare benefit fund within the meaning
of § 419(e), to treat the liability as incurred in the taxable
year in which the employee files the claim with the employer.
See United States v. General Dynamics Corp., 481 U.S. 239 (1987),
1987-2 C.B. 134.
(b) Inapplicability. This change does not apply to a
taxpayer that is subject to § 263A and that is required to
capitalize the costs with respect to which the taxpayer wants to

-98-
change its method of accounting under section 8.01 of this
APPENDIX, if the taxpayer is not capitalizing the costs as
required.
(2) Amounts taken into account. Applicable provisions of
the Code, regulations, and other published guidance prescribe the
manner in which a liability that has been incurred is taken into
account. For example, for a taxpayer with inventories, direct
labor costs must be included in inventory costs and may be
recovered through cost of goods sold. See
§ 1.263A-1(e)(2)(i)(B). A taxpayer may not rely on the
provisions of section 8.01 of this APPENDIX to take a current
year deduction.
.02 Timing of incurring liabilities for real property taxes.
(1) Description of change. An accrual method taxpayer
generally incurs a liability in the taxable year that all the
events have occurred that establish the fact of the liability,
the amount of the liability can be determined with reasonable
accuracy, and economic performance has occurred with respect to
the liability. See § 1.446-1(c)(1)(ii). Under § 1.461-4(g)(6),
if the liability of the taxpayer is to pay a tax, economic
performance occurs as the tax is paid to the government authority
that imposed the tax.
(2) Scope.
(a) Applicability. This change applies to an accrual
method taxpayer that wants to change its method of accounting to:

-99-
(i) treat a liability for real property taxes (for
which the all events test of § 461(h)(4) is otherwise met) as
incurred in the taxable year in which the taxes are paid, under
§§ 461 and 1.461-4(g)(6);
(ii) account for real property taxes under the
recurring item exception to the economic performance rules under
§§ 461(h)(3) and 1.461-5(b)(1); or
(iii) revoke an election under § 461(c) (ratable
accrual election).
(b) Inapplicability. This change does not apply to a
taxpayer that is subject to § 263A and that is required to
capitalize the costs with respect to which the taxpayer wants to
change its method of accounting under section 8.02 of this
APPENDIX, if the taxpayer is not capitalizing the costs as
required.
(3) Amounts taken into account. Applicable provisions of
the Code, regulations, and other published guidance prescribe the
manner in which a liability that has been incurred is taken into
account. For example, for a taxpayer with inventories, certain
real property taxes must be included in inventory costs and may
be recovered through cost of goods sold. See
§ 1.263A-1(e)(3)(ii)(L). A taxpayer may not rely on the
provisions of section 8.02 of this APPENDIX to take a current
year deduction.
.03 Timing of incurring liabilities under a workers'
compensation act, tort, breach of contract, or violation of law.

-100-
(1) Description of change and scope.
(a) Applicability. This change applies to an accrual
method taxpayer that wants to change its method of accounting for
self-insured liabilities (including any amounts not covered by
insurance, such as a "deductible" amount under an insurance
policy) arising under any workers’ compensation act or out of any
tort, breach of contract, or violation of law, to treating the
liability for the workers’ compensation, tort, breach of
contract, or violation of law as being incurred in the taxable
year in which all the events have occurred which establish the
fact of the liability, the amount of the liability can be
determined with reasonable accuracy, and payment is made to the
person to which the liability is owed. See §§ 461 and 1.461-
4(g)(2).
(b) Inapplicability. This change does not apply:
(i) to a taxpayer that is subject to § 263A and
that is required to capitalize the costs with respect to which
the taxpayer wants to change its method of accounting under
section 8.03 of this APPENDIX, if the taxpayer is not
capitalizing the costs as required;
(ii) if payment is made to a third party rather
than to the person to which the liability is owed. See § 1.461-
4(g)(1); or
(iii) if payment is made by a third party.
(2) Amounts taken into account. Applicable provisions of
the Code, regulations, and other published guidance prescribe the

-101-
manner in which a liability that has been incurred is taken into
account. For example, for a taxpayer with inventories, certain
employee benefit costs (including workers’ compensation) must be
included in inventory costs and may be recovered through costs of
goods sold. See § 1.263A-1(e)(3)(ii)(D). A taxpayer may not
rely on the provisions of section 8.03 of this APPENDIX to take a
current year deduction.
.04 Timing of incurring liabilities for payroll taxes.
(1) Description of change and scope.
(a) Applicability. This change applies to an accrual
method employer that wants to change its method of accounting for
FICA and FUTA taxes to a method consistent with the holding in
Rev. Rul. 96-51, 1996-2 C.B. 36. Rev. Rul. 96-51 holds that,
under the all events test of § 461, an accrual method employer
may deduct in Year 1 its otherwise deductible FICA and FUTA taxes
imposed with respect to year-end wages properly accrued in Year
1, but paid in Year 2, if the requirements of the recurring item
exception are met.
(b) Inapplicability. This change does not apply
to a taxpayer that is subject to § 263A and that is required to
capitalize the costs with respect to which the taxpayer wants to
change its method of accounting under section 8.04 of this
APPENDIX, if the taxpayer is not capitalizing the costs as
required.
(2) Recurring item exception. A taxpayer that previously
has not changed to or adopted the recurring item exception for

-102-
FICA and FUTA taxes must change to the recurring item exception
method for FICA and FUTA taxes as specified in § 461(h)(3) as
part of this change.
(3) Amounts taken into account. Applicable provisions of
the Code, regulations, and other published guidance prescribe the
manner in which a liability that has been incurred is taken into
account. For example, for a taxpayer with inventories, certain
taxes must be included in inventory costs and may be recovered
through cost of goods sold. See § 1.263A-1(e)(3)(ii)(L). A
taxpayer may not rely on the provisions of section 8.04 of this
APPENDIX to take a current year deduction.
.05 Cooperative advertising.
(1) Description of change and scope. This change applies
to a taxpayer that wants to change its method of accounting for
cooperative advertising costs to a method consistent with the
holding in Rev. Rul. 98-39, 1998-33 I.R.B. 4. Rev. Rul. 98-39
generally provides that, under the all events test of § 461, an
accrual method manufacturer’s liability to pay a retailer for
cooperative advertising services is incurred in the year in which
the services are performed, provided the manufacturer is able to
reasonably estimate this liability, and even though the retailer
does not submit the required claim form until the following year.
(2) Scope limitations inapplicable. A taxpayer that
wants to make this change for its first or second taxable year
ending on or after August 17, 1998, is not subject to the scope
limitations in section 4.02 of this revenue procedure. However,

-103-
if the taxpayer is under examination, before an appeals office,
or before a federal court, the taxpayer must provide a copy of
the application to the examining agent(s), appeals officer, or
counsel for the government, as appropriate, at the same time that
it files the copy of the application with the national office.
The application must contain the name(s) and telephone number(s)
of the examining agent(s), appeals officer, or counsel for the
government, as appropriate.
SECTION 9. INVENTORIES (§ 471)
.01 Cash discounts -- Description of change and scope. This
change applies to a taxpayer that wants to change its method of
accounting for cash discounts (discounts granted for timely
payment) when they approximate a fair interest rate, from a
method of consistently including the price of the goods before
discount in the cost of the goods and including in gross income
any discounts taken (the "gross invoice method"), to a method of
reducing the cost of the goods by the cash discounts and
deducting as an expense any discounts not taken (the "net invoice
method"), or vice versa. See Rev. Rul. 73-65, 1973-1 C.B. 216.
.02 Estimating inventory "shrinkage".
(1) Description of change and scope. This change applies
to a taxpayer that wants to change to a method of accounting for
estimating inventory shrinkage in computing ending inventory,
using:
(a) the "retail safe harbor method" described in
section 4 of Rev. Proc. 98-29, 1998-15 I.R.B. 22; or

-104-
(b) a method other than the retail safe harbor
method, provided (i) the taxpayer’s present method of accounting
does not estimate inventory shrinkage, and (ii) the taxpayer’s
new method of accounting (that estimates inventory shrinkage)
clearly reflects income under § 446(b).
(2) Scope limitations inapplicable. A taxpayer that
wants to make this change is not subject to the scope limitations
in section 4.02 of this revenue procedure. However, if the
taxpayer is under examination, before an appeals office, or
before a federal court, the taxpayer must provide a copy of the
application to the examining agent(s), appeals officer, or
counsel for the government, as appropriate, at the same time that
it files the copy of the application with the national office.
The application must contain the name(s) and telephone number(s)
of the examining agent(s), appeals officer, or counsel for the
government, as appropriate.
(3) Additional requirements. If the taxpayer wants to
change to a method of accounting for inventory shrinkage other
than the retail safe harbor method, the taxpayer must attach to
the application a statement setting forth a detailed description
of all aspects of the new method of estimating inventory
shrinkage (including, for LIFO taxpayers, the method of
determining inventory shrinkage for, or allocating inventory
shrinkage to, each LIFO pool).
(4) Audit protection. A taxpayer, whose present method
of accounting estimates inventory shrinkage, does not receive

-105-
audit protection under section 7 of this revenue procedure in
connection with a change to the retail safe harbor method if, on
the date the taxpayer files a copy of the Form 3115 with the
national office, the taxpayer’s present method of estimating
inventory shrinkage is an issue under consideration within the
meaning of section 3.09 of this revenue procedure.
(5) Future change. A taxpayer that changes to the retail
safe harbor method described in this revenue procedure will not
be precluded, solely by reason of such change, from changing to
another safe harbor method for estimating inventory shrinkage in
computing ending inventory in the first year that such other safe
harbor method is available.
SECTION 10. LAST-IN, FIRST-OUT (LIFO) INVENTORIES (§ 472)
.01 Change from the LIFO inventory method.
(1) Description of change and scope.
(a) In general. This change applies to any taxpayer
that wants to:
(i) change from the LIFO inventory method for all
its LIFO inventory; and
(ii) change to the permitted method as determined
in section 10.01(1)(b) of this APPENDIX.
(b) Method to be used.
(i) Determining method to be used. The inventory
method to be used by a taxpayer is determined as follows:
(A) If the taxpayer has inventoriable goods
not included in its LIFO inventory computations (non-LIFO

-106-
inventory) and, for all the taxpayer’s non-LIFO inventory, the
taxpayer uses an inventory method that is a permitted method,
then the taxpayer must use that same inventory method for its
entire inventory.
(B) If the LIFO inventory method is used by
the taxpayer with respect to all its inventoriable goods, then
the taxpayer must use the same inventory method it used prior to
the adoption of the LIFO inventory method, if that prior method
is a permitted method.
(C) If the taxpayer has only LIFO inventory
and the method used by the taxpayer prior to the adoption of the
LIFO inventory method is not a permitted method, then the
taxpayer must use a permitted method.
(D) If the taxpayer did not use an inventory
method prior to the adoption of the LIFO inventory method and has
no inventoriable goods other than its LIFO inventory, then the
taxpayer must use a permitted method.
(ii) Permitted method defined. For purposes of
section 10.01 of this APPENDIX, a permitted method is a method
under which:
(A) the identification method is either the
first-in, first-out (FIFO) inventory method or the specific
identification inventory method; and
(B) the valuation method is cost; cost or
market, whichever is lower; market (but only if the taxpayer is a
dealer in securities, as defined in § 1.471-5); the "farm price

-107-
method" or the "unit-livestock-price method" (but only if the
taxpayer is a farmer permitted to use such methods); or the
retail method, reduced to either approximate cost or approximate
cost or market, whichever is lower (but only if the taxpayer is a
retail merchant).
(iii) Method not to be used. The average cost
method (sometimes also referred to as "the rolling average
method") described in Rev. Rul. 71-234, 1971-1 C.B. 148, is not a
permitted method.
(iv) Determining permitted method. Whether an
inventory method is a permitted method is determined by the
taxpayer’s method of inventory identification and valuation, and
not by which types and amounts of costs are capitalized under the
taxpayer’s method of computing inventory cost. See § 263A and
the regulations thereunder, which govern the types and amounts of
costs required to be included in inventory cost for taxpayers
subject to those provisions.
(2) Limitation on LIFO election. The taxpayer may not
re-elect the LIFO inventory method for a period of at least five
taxable years beginning with the year of change, unless based on
a showing of unusual and compelling circumstances, consent is
specifically granted by the Commissioner to change the method of
accounting at an earlier time. A taxpayer that wants to re-elect
the LIFO inventory method within a period of five taxable years
(beginning with the year of change) must file a Form 3115 in
accordance with Rev. Proc. 97-27, 1997-1 C.B. 680. A taxpayer

-108-
that wants to re-elect the LIFO inventory method after a period
of five taxable years (beginning with the year of change) is not
required to file a Form 3115 in accordance with Rev. Proc. 97-27,
but must file a Form 970, Application to Use LIFO Inventory
Method, in accordance with § 1.472-3.
(3) Effect of subchapter S election by corporation.
(a) 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 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.
(b) 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

-109-
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
5.02(3)(c) of this revenue procedure.
(4) Additional requirements. The taxpayer must complete
the following statements and attach them to the application:
(a) "The new method of identifying inventory goods is
the [insert method; that is, specific identification; FIFO;
retail; etc.] method."
(b) "The new method of valuing inventory goods is
[insert method; that is, cost; cost or market, whichever is
lower; etc.]."
(c) "The new method conforms to the requirements of
section 10.01(1)(b)(i) [insert either (A), (B), (C), or (D)] of
the APPENDIX of Rev. Proc. 98-60 because [explain in detail how
the new method conforms to the specific subdivision]."
.02 Determining the cost of used vehicles purchased or taken
as a trade-in.
(1) Description of change and scope. This change applies
to a LIFO taxpayer that wants to:

-110-
(a) determine the cost of used vehicles acquired by
trade-in using the average wholesale price listed by an official
used car guide on the date of the trade-in. See Rev. Rul. 67-
107, 1967-1 C.B. 115. The official used car guide selected must
be consistently used;
(b) determine the cost of used vehicles purchased for
cash using the actual purchase price of the vehicle; or
(c) reconstruct the beginning-of-the-year cost of
used vehicles purchased for cash using values computed by
national auto auction companies based on vehicles purchased for
cash. The national auto auction company selected must be
consistently used.
(2) Manner of making the change. This change is made
using a cut-off method and applies to used vehicles acquired
during the year of change and all subsequent years. See section
2.06 of this revenue procedure.
.03 Alternative LIFO inventory method for retail automobile
dealers.
(1) Description of change and scope.
(a) Applicability. This change applies to a taxpayer
engaged in the trade or business of retail sales of new
automobiles or new light-duty trucks ("automobile dealer") that
wants to change to the "Alternative LIFO Method" described in
section 4 of Rev. Proc. 97-36, 1997-2 C.B. 450, for its LIFO
inventories of new automobiles and new light-duty trucks. Light-
duty trucks are trucks with a gross vehicle weight of 14,000

-111-
pounds or less, which also are referred to as class 1, 2, or 3
trucks.
(b) Inapplicability. This change does not apply to
an automobile dealer that uses the inventory price index
computation (IPIC) method for goods other than new automobiles,
new light-duty trucks, parts and accessories, used automobiles,
and used trucks.
(2) Manner of making the change.
(a) Cut-off method. This change is made using a cut-
off method. See section 2.06 of this revenue procedure and
section 5.03(6) of Rev. Proc. 97-36.
(b) IPIC method changes. An automobile dealer that
uses the IPIC method also must change from the IPIC method under
section 10.03 of this APPENDIX to another acceptable method for
its goods other than new automobiles and new light-duty trucks.
For parts and accessories, the automobile dealer must change to
the dollar-value, index method, with all parts and accessories
within each separate trade or business in a separate LIFO pool.
For used vehicles, the automobile dealer must change to the
dollar-value, link-chain method, with all used automobiles within
each separate trade or business in one LIFO pool and all used
trucks within each separate trade or business in another separate
LIFO pool.
(c) Additional requirements. An automobile dealer
also must comply with the following:

-112-
(i) the conditions in section 5.03 of Rev. Proc.
97-36; and
(ii) for an automobile dealer changing from the
IPIC method, the automobile dealer also must attach to the
application a schedule setting forth the classes of goods for
which the automobile dealer has elected to use the LIFO method
and the accounting method changes being made under section 10.03
of this APPENDIX for each class of goods.
.04 Inventory price index computation (IPIC) method under
the LIFO inventory method.
(1) Description of change and scope.
(a) This change applies to an eligible taxpayer that
wants to change its LIFO inventory method to use the IPIC method
for its entire LIFO inventory in accordance with all the
provisions of § 1.472-8(e)(3) and Rev. Proc. 84-57, 1984-2 C. B.
496. The taxpayer must:
(i) in the case of the CPI Detailed Report, select
an index from Table 3 (Consumer Price Index for All Urban
Consumers (CPI-U): U.S. city average, detailed expenditure
categories); and
(ii) in the case of the Producer Price Indexes,
select an index from Table 6 (Producer price indexes and percent
changes for commodity groupings and individual items).
(b) A taxpayer using the IPIC method must apply the
inventory price index to its ending inventory valued at current-
year cost, under the taxpayer's method of determining current-

-113-
year cost. See § 1.472-8(e)(2)(ii). Furthermore, there must be
a nexus between the taxpayer's method of determining current-year
costs and the month to be used in selecting indexes. See
§ 1.472-8(e)(3)(iii)(C) and Rev. Rul. 89-29, 1989-1 C.B. 168.
For example, if a taxpayer determines current-year cost by
reference to the actual cost of goods purchased or produced
during the taxable year in the order of acquisition (earliest
acquisitions cost), then the inventory price index must be
applied to the earliest acquisitions cost of ending inventory.
In computing the inventory price index, such a taxpayer must
select indexes from a month toward the beginning of its taxable
year.
(c) A taxpayer may not change its method of pooling
as part of a change made under section 10.04 of this APPENDIX,
except to a method specifically authorized by § 1.472-8(e)(3)(iv)
or section 3.04(1)(b) of Rev. Proc. 84-57. These special pooling
rules do not apply to goods manufactured by the taxpayer. See
§ 1.472-8(b) for principles for establishing pools of
manufacturers and processors.
(d) A taxpayer may change its method of determining
current-year cost as part of a change made under section 10.04 of
this APPENDIX by also following the provisions of section 10.05
of this APPENDIX. These changes may be made using a single
application, provided the application is labeled as being filed
under both sections 10.04 and 10.05 of this APPENDIX. See
section 6.02(3) of this revenue procedure.

-114-
(2) Manner of making the change. This change is made
using a cut-off method. See section 2.06 of this revenue
procedure.
(3) Bargain purchase. If the taxpayer has previously
improperly accounted for a bulk bargain purchase, the taxpayer
must, as part of this change, first change its method of
accounting to comply with Hamilton Industries, Inc. v.
Commissioner, 97 T.C. 120 (1991), and compute a § 481(a)
adjustment for that part of the change. See Announcement 91-173,
1991-47 I.R.B. 29. Upon examination, if a taxpayer has properly
changed under section 10.04 of this APPENDIX except for complying
with section 10.04(3) of this APPENDIX, an examining agent may
not deny the taxpayer the change. However, the taxpayer does not
receive audit protection under section 7 of this revenue
procedure with respect to the improper method of accounting for
the bargain purchase. Accordingly, the examining agent may make
any necessary adjustments in any open year to effect compliance
with Hamilton Industries, Inc.
.05 Determining current-year cost under the LIFO inventory
method.
(1) Description of change and scope. This change applies
to a LIFO taxpayer that wants to change to a method of
determining current year cost:
(a) by reference to the actual cost of the goods most
recently purchased or produced;

-115-
(b) by reference to the actual cost of the goods
purchased or produced during the taxable year in the order of
acquisition; or
(c) by application of an average unit cost equal to
the aggregate actual cost of all the goods purchased or produced
throughout the taxable year divided by the total number of units
so purchased or produced. See § 1.472-8(e)(2)(ii).
(2) Manner of making the change. This change is made
using a cut-off method. See section 2.06 of this revenue
procedure.
SECTION 10A. MARK-TO-MARKET ACCOUNTING METHOD FOR DEALERS IN
SECURITIES (§ 475)
.01 Discontinuing the mark-to-market method of accounting
for nonfinancial customer paper.
(1) Description of change and scope.
(a) Applicability. This change applies to:
(i) a taxpayer that must discontinue the use of
the mark-to-market method of accounting for nonfinancial customer
paper to comply with § 475(c)(4), enacted by § 7003 of the IRS
Restructuring and Reform Act of 1998, Pub. L. No. 105-206, 112
Stat. 833 (July 22, 1998), provided the change is made for the
taxpayer’s first taxable year ending after July 22, 1998. The
taxpayer must change to a method other than the lower of cost or
market method; and
(ii) a taxpayer that was a dealer in securities
solely because of its dealings in nonfinancial customer paper,

-116-
that, in conjunction with the change under section
10A.01(1)(a)(i) of this APPENDIX, wants to discontinue the use of
the mark-to-market method of accounting for all securities
(including nonfinancial customer paper).
(b) Scope limitations inapplicable. A taxpayer that
wants to make this change is not subject to the scope limitations
in section 4.02 of this revenue procedure. However, if the
taxpayer is under examination, before an appeals office, or
before a federal court, the taxpayer must provide a copy of the
application to the examining agent(s), appeals officer, or
counsel for the government, as appropriate, at the same time that
it files the copy of the application with the national office.
The application must contain the name(s) and telephone number(s)
of the examining agent(s), appeals officer, or counsel for the
government, as appropriate.
(2) Additional Requirements.
(a) On a statement attached to the application, the
taxpayer must describe all items that were marked to market and
that will no longer be marked to market.
(b) When complying with section 6.02(3) of this
revenue procedure, the taxpayer should indicate whether the
taxpayer is changing under section 10A.01(1)(a)(i) or sections
10A.01(1)(a)(i) and (ii) of this APPENDIX.
(3) No audit protection. A taxpayer does not receive
audit protection under section 7 of this revenue procedure in
connection with this change.

-117-
.02 Reserved.
SECTION 11. BANK RESERVES FOR BAD DEBTS (§ 585)
.01 Changing from the § 585 reserve method to the § 166
specific charge-off method.
(1) Description of change and scope.
(a) Applicability. This change applies to a bank (as
defined in § 581, including a bank for which a qualified
subchapter S subsidiary (QSSS) election is filed) that wants to
change its method of accounting for bad debts from the § 585
reserve method to the § 166 specific charge-off method.
(b) Certain scope limitations inapplicable. A bank
that changed from the § 593 reserve method under § 593(g) to the
§ 585 reserve method will not be prohibited under section 4.02(6)
of this revenue procedure from changing its method of accounting
for bad debts under section 11.01 of this APPENDIX solely because
of the § 593(g) change. A bank for which a QSSS election is
filed will not be prohibited under section 4.02(7) of this
revenue procedure from changing its method of accounting for bad
debts under section 11.01 of this APPENDIX solely because of the
deemed liquidation of the bank arising from a QSSS election.
(c) Inapplicability. This change does not apply to:
(i) a large bank as defined in § 585(c)(2); or
(ii) any bank within the scope of Rev. Proc. 97-
18, 1997-1 C.B. 642, which applies to banks making this change in
method of accounting in 1997 to become eligible to elect S
corporation status for 1997. A bank is not outside the scope of

-118-
Rev. Proc. 97-18 solely because it is a qualified subchapter S
subsidiary. In that event, the S corporation (the parent) should
follow the application procedures required by Rev. Proc. 97-18 on
behalf of the bank.
(2) Section 481(a) adjustment. Generally, the amount of
the § 481(a) adjustment for a change in method of accounting
under section 11.01 of this APPENDIX is the amount of the bank's
reserve for bad debts as of the close of the taxable year
immediately before the year of change. However, the amount of
the § 481(a) adjustment does not include the amount of a bank's
pre-1988 reserves (as described in § 593(g)(2)(A)(ii), without
taking into account § 593(g)(2)(B)) if the bank changed in a
prior year from the § 593 reserve method to the § 585 reserve
method and § 593(g) applied to that change. The deemed
liquidation of a bank occurring solely because its parent makes a
QSSS election does not accelerate the § 481(a) adjustment. In
accordance with section 5.04(3)(c) of this revenue procedure, a
bank that ceases to be a bank under § 581 must accelerate its
§ 481(a) adjustment.
(3) Change from § 585 required when electing S
corporation status. A bank electing S corporation status (or a
bank for which a QSSS election is filed) cannot use the § 585
reserve method. The filing by a bank of a Form 2553 (Election by
a Small Business Corporation) or the filing by a bank's parent of
a QSSS election with respect to the bank will constitute an
agreement by the bank to change its method of accounting for bad

-119-
debts from the § 585 reserve method to the § 166 specific charge-
off method effective as of the taxable year for which the S
corporation election or QSSS election is effective (year of
change) in accordance with all of the applicable provisions of
this revenue procedure. The § 481(a) adjustment is recognized
built-in gain under § 1374. See § 1.1374-4(d).
.02 Reserved.
SECTION 12. ORIGINAL ISSUE DISCOUNT (§§ 1272; 1273)
.01 De minimis original issue discount (OID).
(1) Description of change and scope.
(a) Applicability. This change applies to a taxpayer
that wants to change to the principal-reduction method of
accounting described in section 5 of Rev. Proc. 97-39, 1997-2
C.B. 485. The principal-reduction method of accounting is an
aggregate method of accounting for de minimis OID (discount) on
certain loans originated by the taxpayer.
(b) Scope limitations inapplicable. A taxpayer that
wants to make this change is not subject to the scope limitations
in section 4.02 of this revenue procedure. However, if the
taxpayer is under examination, before an appeals office, or
before a federal court, the taxpayer must provide a copy of the
application to the examining agent(s), appeals officer, or
counsel for the government, as appropriate, at the same time that
it files the copy of the application with the national office.
The application must contain the name(s) and telephone number(s)

-120-
of the examining agent(s), appeals officer, or counsel for the
government, as appropriate.
(c) Description. The principal-reduction method of
accounting is a permissible method for use by taxpayers to
account for discount on one or more categories of loans described
in section 4.02 or 4.03 of Rev. Proc. 97-39. If the
principal-reduction method is used to account for any loans in a
category of loans, the method must be used for the entire
category of loans. The principal-reduction method applies only
to loans described in section 3 of Rev. Proc. 97-39.
(2) Manner of making the change.
(a) This change is made using a cut-off method and
applies only to loans described in section 3 of Rev. Proc. 97-39
that were acquired on or after the first day of the year of
change. See section 2.06 of this revenue procedure.
(b) The taxpayer must maintain books and records
sufficient to satisfy the district director that old and new
loans have been adequately segregated.
(3) Additional requirements. On a statement attached to
the application, the taxpayer must:
(a) identify the categories of loans to which the new
method will apply; and
(b) describe any "additional categories" permitted
under section 4.03 of Rev. Proc. 97-39.

-121-
(4) No audit protection. A taxpayer does not receive
audit protection under section 7 of this revenue procedure in
connection with this change.
.02 Pool of debt instruments.
(1) Description of change and scope.
(a) Applicability. This change applies to a taxpayer
that must change its method of accounting for a pool of debt
instruments to comply with § 1272(a)(6) (as required by § 1004 of
the Taxpayer Relief Act of 1997, Pub. L. No. 105-34, 111 Stat.
788, 911), provided the change is for the taxpayer’s first
taxable year beginning after August 5, 1997.
(b) Scope limitations inapplicable. A taxpayer that
must make this change is not subject to the scope limitations in
section 4.02 of this revenue procedure. However, if the taxpayer
is under examination, before an appeals office, or before a
federal court, the taxpayer must provide a copy of the
application to the examining agent(s), appeals officer, or
counsel for the government, as appropriate, at the same time that
it files the copy of the application with the national office.
The application must contain the name(s) and telephone number(s)
of the examining agent(s), appeals officer, or counsel for the
government, as appropriate.
(c) Description.
(i) Under § 1272, the holder of a debt instrument
with original issue discount (OID) must include in income the sum
of the daily portions of the OID for each day during the taxable

-122-
year on which the holder held the instrument. Section 1272(a)(6)
provides special rules to determine the daily portions of OID for
certain debt instruments subject to prepayments. Under these
rules, the daily portions of OID are determined, in part, by
taking into account an assumption regarding the prepayment of
principal on the debt instruments.
(ii) Section 1004 of the Taxpayer Relief Act of
1997, which is effective for taxable years beginning after August
5, 1997, extended the rules in § 1272(a)(6) to any pool of debt
instruments the yield on which may be affected by reason of
prepayments. In particular, § 1272(a)(6) now applies to a pool
of credit card receivables subject to a grace period provision
(under which, for example, a credit card issuer does not charge
interest for a billing cycle if the credit card obligor pays off
its account balance by a specified date, even though the balance
is not due on that date). See H.R. Conf. Rep. No. 220, 105th
Cong., 1st Sess. 522 (1997). (A credit card receivable subject to
a grace period provision has OID because none of the stated
interest on the receivable is qualified stated interest under
§ 1.1273-1(c)).
(iii) The holder of a pool of credit card
receivables subject to a grace period provision must accrue OID
on the pool based on a reasonable assumption regarding the timing
of the payments by the obligors of the receivables in the pool.
Under §1272(a)(6), it is not reasonable for a holder to assume
that all of the obligors will pay their balances by the specified

-123-
grace period date and, based on this assumption, defer the
inclusion of OID until the end of the grace period. If the
payments in the pool occur soon after year end and before the
holder files its tax return for the taxable year that includes
such year end, the holder may accrue OID based on its actual
experience rather than based upon a reasonable assumption. If
the holder does not accrue OID based on its actual experience,
the holder must make an adjustment to its income for the
following taxable year to account for any difference between its
accrual based on a reasonable assumption and its actual
experience.
(2) Additional requirements.
(a) On a statement attached to the application, the
taxpayer must provide a detailed description of the pool(s) of
debt instruments and the proposed method (including the
prepayment assumption used for each pool).
(b) A taxpayer that, on or before March 1, 1999,
files its original federal income tax return for its first
taxable year beginning after August 5, 1997, may comply with the
filing requirement in section 6.02(2)(a) of this revenue
procedure or with the following filing requirement. The taxpayer
must complete and file an application in duplicate. The original
application must be attached to the taxpayer’s timely filed
amended federal income tax return for the taxpayer’s first
taxable year beginning after August 5, 1997. This amended return
must be filed no later than April 30, 1999. A copy of the

-124-
application must be filed with the national office (see section
6.02(6) of this revenue procedure for the address) no later than
when the taxpayer’s amended return is filed.
SECTION 13. SHORT-TERM OBLIGATIONS (§ 1281)
.01 Interest income on short-term obligations.
(1) Description of change and scope.
(a) This change applies to a taxpayer that wants to
change its method of accounting to comply with § 1281 for
interest income on short-term obligations.
(b) Under § 1281, a holder of certain short-term
obligations, including a bank as defined in § 581, must include
in gross income any accrued interest income on such obligations,
regardless of the holder's overall method of accounting. Section
1281 applies to all types of interest income, including
acquisition discount, original issue discount (OID), and stated
interest. See S. Rep. No. 99-313, 99th Cong., 2d Sess. 903
(1986), 1986-3 (Vol. 3) C.B. 903.
(c) Section 1283(a)(1) generally defines a short-term
obligation as any bond, debenture, note, certificate, or other
evidence of indebtedness that matures in one year or less from
its issue date. A short-term loan, including a short-term loan
made in the ordinary course of the taxpayer's business, is a
short-term obligation.
(d) Under §§ 1281(a) and 1283(c), a holder of a
short-term obligation subject to § 1281 must include in gross
income an amount equal to the sum of the daily portions of the

-125-
acquisition discount or OID, whichever is applicable, on the
obligation for each day during the taxable year that the
obligation is held by the holder. See § 1283(b), as modified by
§ 1283(c), to determine the daily portions of acquisition
discount or OID. In addition, § 1281(a) requires the holder to
include in gross income any stated interest that is payable on
the short-term obligation (other than stated interest taken into
account to determine the amount of the acquisition discount or
OID) as it accrues.
(2) Section 481(a) adjustment period. A taxpayer must
take the entire § 481(a) adjustment into account in computing
taxable income for the year of change.
.02 Stated interest on short-term loans of cash method banks
in the Eighth Circuit.
(1) Description of change and scope.
(a) This change applies to a cash method bank in the
Eighth Circuit that wants to change its method of accounting from
accruing stated interest on short-term loans made in the ordinary
course of business to using the cash method for that interest.
(b) In Security Bank Minnesota v. Commissioner, 994
F.2d 432 (8th Cir. 1993), aff'g 98 T.C. 33 (1992), the U.S.
Circuit Court of Appeals for the Eighth Circuit held that § 1281
does not require a cash method bank to include in gross income
stated interest on short-term loans made in the ordinary course
of business as that interest accrues. The Service disagrees with
the interpretation of § 1281 in Security Bank Minnesota and

-126-
intends to pursue this issue in other circuits. In light of
Security Bank Minnesota, however, cash method banks in the Eighth
Circuit will be granted permission to change to the cash method
of accounting for stated interest on short-term loans made in the
ordinary course of business. If this change was made on or
before November 6, 1995, the Service will not seek to deny cash
method banks in the Eighth Circuit the use of the cash method on
the ground that there was an unauthorized change in method of
accounting.
(2) Section 481(a) adjustment period. A taxpayer must
take the entire § 481(a) adjustment into account in computing
taxable income for the year of change.
(3) No ruling protection. If the Service is later
successful in further litigation on this issue in other circuits,
or there is a change in law, then cash method banks in the Eighth
Circuit may be required to use an accrual method of accounting
for any taxable year not barred by the statute of limitations.