rp-06-43.pdf

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Part III

Administrative, Procedural, and Miscellaneous

26 CFR 601.204: Changes in accounting periods and in methods of accounting.
(Also Part 1, §§ 168, 446, 1400L; 1.168(k)-1, 1.1400L(b)-1)

Rev. Proc. 2006-43

SECTION 1. PURPOSE
This revenue procedure provides the exclusive administrative procedures under
which a taxpayer described in section 3 of this revenue procedure may obtain automatic
consent to change its method of accounting to comply with § 1.168(k)-1 or
§ 1.1400L(b)-1 of the Income Tax Regulations (the "final regulations").
SECTION 2. BACKGROUND
.01 On August 31, 2006, the Internal Revenue Service and Treasury Department
published the final regulations in the Federal Register (TD 9283, 71 FR 51727). Section
1.168(k)-1 prescribes the requirements that must be met for depreciable property to
qualify for the additional first year depreciation deduction provided by § 168(k) of the
Internal Revenue Code ("bonus depreciation deduction"). Section 1.1400L(b)-1

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prescribes the requirements that must be met for depreciable property to qualify for the
additional first year depreciation deduction provided by § 1400L(b) ("Liberty Zone bonus
depreciation deduction"). The final regulations under § 1.168(k)-1 generally apply to
qualified property under § 168(k)(2) acquired by a taxpayer after September 10, 2001,
and to 50-percent bonus depreciation property under § 168(k)(4) acquired by a taxpayer
after May 5, 2003. The final regulations under § 1.1400L(b)-1 generally apply to
qualified New York Liberty Zone property acquired by a taxpayer after September 10,
2001.
.02 Because of revisions made to TD 9091 (68 FR 52986) by the final
regulations, taxpayers may need to seek a change in method of accounting to comply
with the final regulations. For example, § 1.1400L(b)-1T(b)(4) and (c)(2)(ii) disallowed
certain depreciable property from qualifying for the Liberty Zone bonus depreciation
deduction. Section 1.1400L(b)-1 amended § 1.1400L(b)-1T(b)(4) and (c)(2)(ii) and, as a
result, more depreciable property may qualify for the Liberty Zone bonus depreciation
deduction. Section 1.1400L(b)-1(g)(4)(iii) provides that if a taxpayer did not claim on a
Federal tax return for a taxable year ending on or after September 11, 2001, and on or
before September 1, 2006, any Liberty Zone bonus depreciation deduction for qualified
New York Liberty Zone property because of the application of § 1.1400L(b)-1T(b)(4) or
because the taxpayer made an election under § 1.168(k)-1T(e)(1) for a class of property
that included such qualified New York Liberty Zone property, the taxpayer may claim the
Liberty Zone bonus depreciation deduction for that qualified New York Liberty Zone
property in accordance with the applicable administrative procedures issued under

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§ 1.446-1(e)(3)(ii) for obtaining the Commissioner of Internal Revenue's consent to a
change in method of accounting.
.03 The preamble to the final regulations states that the Service and Treasury
intend to issue administrative guidance providing procedures for automatic consent for
taxpayers that wish to seek a change in method of accounting to comply with the final
regulations.
.04 Under §§ 446(e) and 1.446-1(e)(2)(i), a taxpayer generally must secure the
consent of the Commissioner before changing a method of accounting for federal
income tax purposes. To obtain the Commissioner's consent to a change in method,
§ 1.446-1(e)(3)(i) generally requires a taxpayer to file Form 3115, Application for
Change in Accounting Method, during the taxable year in which the taxpayer desires to
make the proposed 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.
.05 Rev. Proc. 2002-9, 2002-1 C.B. 327 (as modified and clarified by
Announcement 2002-17, 2002-1 C.B. 561, modified and amplified by Rev. Proc. 2002-
19, 2002-1 C.B. 696, and amplified, clarified and modified by Rev. Proc. 2002-54, 2002-
2 C.B. 432) provides procedures under §§ 446(e) and 1.446-1(e) for obtaining the
automatic consent of the Commissioner to change a method of accounting described in
the APPENDIX of Rev. Proc. 2002-9.
.06 Rev. Rul. 90-38, 1990-1 C.B. 57, provides that, if a taxpayer uses an

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erroneous method of accounting for two or more consecutive taxable years, the
taxpayer has adopted a method of accounting. Rev. Rul. 90-38 further provides that a
taxpayer may not, without the Commissioner's consent, retroactively change from an
erroneous to a permissible method of accounting by filing an amended return.
.07 Section 1.446-1T(e)(2)(ii)(d
) provides the changes in computing depreciation
that are, and are not, a change in method of accounting under § 446(e). Sections
1.446-1T(e)(2)(ii)(d
)(2)(ii), (iii), and (iv) provide the changes in computing depreciation
with respect to the bonus depreciation deduction and the Liberty Zone bonus
depreciation deduction that are a change in method of accounting. Section 1.446-
1T(e)(2)(ii)(d
)(3) provides the changes in computing depreciation that are not a change
in method of accounting. Section 1.446-1T(e)(2)(ii)(d) applies to property placed in
service by the taxpayer in taxable years ending on or after December 30, 2003.
.08 For property placed in service by the taxpayer in taxable years ending before
December 30, 2003, Notice CC-2004-007 (January 28, 2004) provides that the Service
generally will not assert that a change in computing depreciation for such property that
is treated as a capital asset under the taxpayer's present and proposed methods of
accounting is a change in method of accounting under § 446(e). Accordingly, the
taxpayer may effect this change in computing depreciation by filing amended Federal
tax returns or may treat this change in computing depreciation as a change in method of
accounting by filing a Form 3115 in accordance with Rev. Proc. 2002-9.
.09 This revenue procedure applies either for a taxpayer's last taxable year
ending before October 18, 2006 (if the taxpayer timely files its Federal income tax return

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after October 18, 2006, for that last taxable year), or for the taxpayer's first taxable year
ending on or after October 18, 2006, for changes to methods of accounting provided in
the final regulations. For subsequent taxable years, see the automatic change in
method of accounting procedures in Rev. Proc. 2002-9 (or its successor), if applicable,
or the advance consent change in method of accounting procedures in Rev. Proc. 97-
27, 1997-1 C.B. 680 (as modified and amplified by Rev. Proc. 2002-19, and amplified,
clarified, and modified by Rev. Proc. 2002-54) (or its successor). However, if a taxpayer
is claiming the rehabilitation credit in accordance with § 1.168(k)-1(g)(6) or
§ 1.1400L(b)-1(g)(6), the resulting change in computing depreciation for the qualified
rehabilitated building must be made by filing amended returns for its placed-in-service
year and subsequent taxable years.
SECTION 3. SCOPE
.01 Except as provided in section 3.02, this revenue procedure applies to a
taxpayer that seeks a change in method of accounting under § 1.446-
1T(e)(2)(ii)(d
)(2)(ii), (iii), or (iv) to comply with the final regulations for either: (1) the
taxpayer's last taxable year ending before October 18, 2006, if the taxpayer timely files
(including extensions) its Federal income tax return after October 18, 2006, for that last
taxable year; or (2) the taxpayer's first taxable year ending on or after October 18, 2006.
.02 This revenue procedure does not apply to:
(1) A change in computing depreciation resulting from a taxpayer claiming the
rehabilitation credit in accordance with § 1.168(k)-1(g)(6) or § 1.1400L(b)-1(g)(6);
(2) A change in computing depreciation that is not a change in method of

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accounting under § 1.446-1T(e)(2)(ii)(d)(3). However if, in accordance with
§ 1.1400L(b)-1(g)(4)(iii), a taxpayer is changing its computation of depreciation for
qualified New York Liberty Zone property because of the amendment made to
§ 1.1400L(b)-1T(c)(2)(ii) by the final regulations under § 1400L(b) and the taxpayer
made an election under § 1.168(k)-1T(e)(1) for the class of property that included such
qualified New York Liberty Zone property, § 1.1400L(b)-1(g)(4)(iii) expressly provides
that this change in computing depreciation is a change in method of accounting and,
thus, § 1.446-1T(e)(2)(ii)(d
)(3)(iii) does not apply to such change in computing
depreciation.
(3) A change in computing depreciation that is due to a posting error,
mathematical error, or a change in underlying facts;
(4) A change in computing depreciation for depreciable property that is placed
in service by a taxpayer in a taxable year ending before December 30, 2003, that is a
capital asset under the taxpayer's present and proposed methods of accountings, and
for which the taxpayer wants to effect the change in computing depreciation to comply
with the final regulations by filing amended Federal tax returns in accordance with
Notice CC-2004-007 (January 28, 2004);
(5) A change in the treatment of property from a non-capital asset (for example,
inventory, materials and supplies) to a capital, depreciable asset (or vice versa); or
(6) A change from expensing the cost of depreciable property to capitalizing
and depreciating that cost (or vice versa).

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SECTION 4. APPLICATION
.01 A taxpayer within the scope of this revenue procedure is, in accordance with
section 6.01 of Rev. Proc. 2002-9, granted the consent of the Commissioner to change
to a method of accounting within the scope of this revenue procedure to comply with the
final regulations provided the taxpayer follows the automatic change in method of
accounting procedures in Rev. Proc. 2002-9 (or its successor) with the following
modifications:
(1) The scope limitations in section 4.02 of Rev. Proc. 2002-9 do not apply for
the taxpayer's first taxable year ending on or after October 18, 2006, or, if applicable, for
the taxpayer's last taxable year ending before October 18, 2006, if the taxpayer timely
files its Federal income tax return after October 18, 2006, for that last taxable year; and
(2) For purposes of section 6.02(4)(a) of Rev. Proc. 2002-9, the taxpayer must
include on line 1a of the Form 3115 the designated automatic accounting method
change number 105.
.02 A change in method of accounting within the scope of this revenue procedure
results in a § 481(a) adjustment.
SECTION 5. EFFECT ON OTHER DOCUMENTS
Rev. Proc. 2002-9 is modified and amplified to include the automatic change in
method of accounting provided in section 4 of this revenue procedure in section 2 of the
APPENDIX of Rev. Proc. 2002-9.
SECTION 6. EFFECTIVE DATE
This revenue procedure is effective October 18, 2006.

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SECTION 7. DRAFTING INFORMATION
The principal author of this revenue procedure is Douglas Kim of the Office of
Associate Chief Counsel (Passthroughs & Special Industries). For further information
regarding this revenue procedure contact Douglas Kim at (202) 622-3110 (not a toll free
call).