Internal Revenue Bulletin 1999-52 (PDF rendition): IRS Revenue Rulings

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Internal Revenue
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Bulletin No. 1999–52
December 27, 1999
HIGHLIGHTS
OF THIS ISSUE
These synopses are intended only as aids to the reader in
identifying the subject matter covered. They may not be
relied upon as authoritative interpretations.
Department of the Treasury
Internal Revenue Service
Social Security Contribution and Benefit Base for 2000 on page 763.
Finding Lists begin on page ii.
INCOME TAX
Rev. Rul. 99–58, page 701.
Continuity of interest on repurchase of issuer’s shares.
This ruling holds that an open market repurchase of shares
through a broker, following a potential reorganization, has no
effect on continuity of interest in a potential reorganization.
T.D. 8847, page 701.
Final regulations under section 743, 755, and 1017 of the
Code provide guidance to partnerships and their partners con-
cerning the optional adjustments to the basis of partnership
property, the allocation of basis adjustments among partner-
ship assets, and the computation of a partner’s share of the
adjusted basis of depreciable partnership property.
Rev. Proc. 99–50, page 757.
Combined information reporting. Combined information
reporting by a successor business entity following a merger
or acquisition is permitted in certain situations. Rev. Proc.
90–57 and Rev. Rul. 69-556 modified and superseded.
EMPLOYEE PLANS
Notice 99–61, page 762.
Weighted average interest rate update.The weighted
average interest rate for December 1999 and the resulting
permissible range of interest rates used to calculate current
liabilities for purposes of the full funding limitation of section
412(c)(7) of the Code are set forth.
EXEMPT ORGANIZATIONS
Announcement 99–115, page 763.
A list is given of organizations now classified as private foun-
dations.
ADMINISTRATIVE
T.D. 8848, page 723.
This rule establishes the procedures under which the Ser-
vice may use penalty mail to aid in the location and recovery
of missing children.
Rev. Proc. 99–49, page 725.
Methods of accounting; automatic consent.Procedures
are provided under which a taxpayer may obtain automatic
consent of the Commissioner to change certain methods of
accounting. REv. Proc. 98–60 modified and superseded.
Rev. Proc. 99–51, page 760.
This procedure amplifies section 5 of Rev. Proc. 99–3,
which sets forth areas of the Code under the jurisdiction of
the Associate Chief Counsel (Domestic) in which the Service
will not issue advance rulings or determination letters. The
following issue is added to those listed in section 5: Whether
a state law limited partnership electing under section
301.7701–3 to be classified as an association taxable as a
corporation has more than one class of stock for purposes
of section 1361(b)(1)(D). Rev. Proc. 99–3 amplified.
Notice 99–59, page 761.
Tax avoidance using distributions of encumbered prop-
erty.Taxpayers and their representatives are alerted that the
purported losses arising from certain types of transactions are
not properly allowable for federal income tax purposes. Also,
the Service may impose penalties on participants in these
transactions or, as applicable on persons who participate in
the promotion or reporting of these transactions.
Notice 99–60, page 762.
Information reporting; royalty payments; Indians.Taxpay-
ers are informed that the information reporting requirements
of section 6050N of the Code do no apply to payments of roy-
alties that are not subject to income tax because they are de-
rived directly by a noncompetent Indian from allotted and re-
stricted land under the General Allotment Act of similar acts.
Announcement 99–116, page 763.
This document corrects the Actions on Decisions published
in 1999–35 I.R.B. 314. All 7 footnotes describing the “Ac-
quiescence” or “Nonacquiescence” in each decision in-
cluded the words “in result only,” which were erroneous. The
correct footnotes are printed in this announcement.

The Internal Revenue Bulletin is the authoritative instrument
of the Commissioner of Internal Revenue for announcing offi-
cial rulings and procedures of the Internal Revenue Service
and for publishing Treasury Decisions, Executive Orders, Tax
Conventions, legislation, court decisions, and other items of
general interest. It is published weekly and may be obtained
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It is the policy of the Service to publish in the Bulletin all sub-
stantive rulings necessary to promote a uniform application
of the tax laws, including all rulings that supersede, revoke,
modify, or amend any of those previously published in the
Bulletin. All published rulings apply retroactively unless other-
wise indicated. Procedures relating solely to matters of in-
ternal management are not published; however, statements
of internal practices and procedures that affect the rights
and duties of taxpayers are published.
Revenue rulings represent the conclusions of the Service on
the application of the law to the pivotal facts stated in the
revenue ruling. In those based on positions taken in rulings
to taxpayers or technical advice to Service field offices,
identifying details and information of a confidential nature
are deleted to prevent unwarranted invasions of privacy and
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Rulings and procedures reported in the Bulletin do not have
the force and effect of Treasury Department Regulations,
but they may be used as precedents. Unpublished rulings
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clusions in other cases unless the facts and circumstances
are substantially the same.
The Bulletin is divided into four parts as follows:
Part I.—1986 Code.
This part includes rulings and decisions based on provisions
of the Internal Revenue Code of 1986.
Part II.—Treaties and Tax Legislation.
This part is divided into two subparts as follows: Subpart A,
Tax Conventions, and Subpart B, Legislation and Related
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Part III.—Administrative, Procedural, and Miscellaneous.
To the extent practicable, pertinent cross references to
these subjects are contained in the other Parts and Sub-
parts. Also included in this part are Bank Secrecy Act Admin-
istrative Rulings. Bank Secrecy Act Administrative Rulings
are issued by the Department of the Treasury’s Office of the
Assistant Secretary (Enforcement).
Part IV.—Items of General Interest.
This part includes notices of proposed rulemakings, disbar-
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The first Bulletin for each month includes a cumulative index
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These monthly indexes are cumulated on a semiannual basis,
and are published in the first Bulletin of the succeeding semi-
annual period, respectively.
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Provide America’s taxpayers top quality service by help-
ing them understand and meet their tax responsibilities
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Introduction
The contents of this publication are not copyrighted and may be reprinted freely. A citation of the Internal Revenue Bulletin as the source would be appropriate.
For sale by the Superintendent of Documents, U.S. Government Printing Office, Washington, DC 20402.

1999–52 I.R.B.701December 27, 1999
Section 368.—Definitions Relating
to Corporate Reorganizations
26 CFR 1.368–1(e): Continuity of interest.
Continuity of interest on repurchase
of issuer’s shares.This ruling holds that
an open market repurchase of shares
through a broker has no effect on continu-
ity of interest in a potential reorganiza-
tion.
Rev. Rul. 99-58
ISSUE
What is the effect on continuity of in-
terest when a potential reorganization is
followed by an open market reacquisition
of P’s stock?
FACTS
T merges into P, a corporation whose
stock is widely held, and is publicly and
actively traded. P has one class of com-
mon stock authorized and outstanding. In
the merger, T shareholders receive 50 per-
cent common stock of P and 50 percent
cash. Viewed in isolation, the exchange
would satisfy the continuity of interest re-
quirement of § 1.368-1(e) of the Income
Tax Regulations. However, in an effort to
prevent dilution resulting from the is-
suance of P shares in the merger, P’s pre-
existing stock repurchase program is
modified to enable P to reacquire a num-
ber of its shares equal to the number is-
sued in the acquisition of T. The number
of shares repurchased will not exceed the
total number of P shares issued and out-
standing prior to the merger. The repur-
chases are made following the merger, on
the open market, through a broker for the
prevailing market price. P’s intention to
repurchase shares was announced prior to
the T merger, but the repurchase program
was not a matter negotiated with T or the
T shareholders. There was not an under-
standing between the T shareholders and
P that the T shareholders’ ownership of P
stock would be transitory. Because of the
mechanics of an open market purchase, P
does not know the identity of a seller of P
stock, nor does a former T shareholder
who receives P stock in the merger and
subsequently sells it know whether P is
the buyer. Without regard to the repur-
chase program, a market exists for the
newly-issued P stock held by the former T
shareholders. During the time P under-
takes its repurchase program, there are
sales of P stock on the open market,
which may include sales of P shares by
former T shareholders.
LAW AND ANALYSIS
Requisite to a reorganization under the
Internal Revenue Code is a continuity of
interest as described in § 1.368–1(e).
Section 1.368–1(b). The general purpose
of the continuity of interest requirement is
“to prevent transactions that resemble
sales from qualifying for nonrecognition
of gain or loss available to corporate reor-
ganizations.” Section 1.368–1(e)(1)(i).
To achieve this purpose, the regulation
provides that a proprietary interest in the
target corporation is not preserved to the
extent that, “in connection with the poten-
tial reorganization, . . . stock of the issu-
ing corporation furnished in exchange for
a proprietary interest in the target corpo-
ration in the potential reorganization is re-
deemed.” Id.
However, for purposes of
the continuity requirement, “a mere dis-
position of stock of the issuing corpora-
tion received in the potential reorganiza-
tion to persons not related . . . to the
issuing corporation is disregarded.” Id.
The regulation provides that all facts and
circumstances will be considered in deter-
mining whether, in substance, a propri-
etary interest in the target corporation is
preserved.
Under the facts set forth above, conti-
nuity of interest is satisfied. There was
not an understanding between the T
shareholders and P that the T sharehold-
ers’ ownership of the P shares would be
transitory. Further, because of the me-
chanics of an open market repurchase, the
repurchase program does not favor partic-
ipation by the former T shareholders.
Therefore, even if it could be established
that P has repurchased P shares from for-
mer T shareholders in the repurchase pro-
gram, any such purchase would be coinci-
dental. The merger and the stock
repurchase together in substance would
not resemble a sale of T stock to P by the
former T shareholders and, thus, the re-
purchase would not be treated as “in con-
nection with” the merger. Under the facts
presented, a sale of P stock on the open
market by a former T shareholder during
the repurchase program will have the same
effect on continuity of interest as a mere
disposition to persons not related to P.
HOLDING
Under the facts presented, the open
market repurchase of shares through a
broker has no effect on continuity of in-
terest in the potential reorganization.
DRAFTING INFORMATION
The principal author of this revenue
ruling is Marie C. Milnes-Vasquez of the
Office of Assistant Chief Counsel (Corpo-
rate). For further information regarding
this revenue ruling, contact Ms. Milnes-
Vasquez on (202) 622-7770 (not a toll-
free call).
Section 743.—Optional
Adjustment to Basis of
Partnership Property
26 CFR 1.743-1: Optional adjustment to basis of
partnership property.
T.D. 8847
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Parts 1 and 602
Adjustments Following Sales of Part-
nership Interests
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Final Regulations.
SUMMARY: This document finalizes
regulations relating to the optional adjust-
ments to the basis of partnership property
following certain transfers of partnership
interests under section 743, the calcula-
tion of gain or loss under section 751(a)
following the sale or exchange of a part-
nership interest, the allocation of basis ad-
justments among partnership assets under
section 755, the allocation of a partner’s
basis in its partnership interest to proper-
Part I. Rulings and Decisions Under the Internal Revenue Code of 1986

December 27, 19997021999–52 I.R.B.December 27, 19997021999–52 I.R.B.
ties distributed to the partner by the part-
nership under section 732(c), and the
computation of a partner’s proportionate
share of the adjusted basis of depreciable
property (or depreciable real property)
under section 1017. The changes will af-
fect partnerships and partners where there
are transfers of partnership interests, dis-
tributions of property, or elections under
sections 108(b)(5) or (c). In addition, the
final regulations under section 732(c) re-
flect changes to the law made by the Tax-
payer Relief Act of 1997.
DATES: Effective Dates: These regula-
tions are effective December 15, 1999.
Applicability Date:These regulations
apply to transfers of partnership interests
and distributions occurring on or after De-
cember 15, 1999.
FOR FURTHER INFORMATION CON-
TACT: Matthew Lay, (202) 622-3050.
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collections of information in these
final regulations have been reviewed and
approved by theOffice of Management
and Budgetin accordance with the Pa-
perwork Reduction Act (44 U.S.C. 3507)
under control number 1545-1588. Re-
sponses to these collections of informa-
tion are mandatory for partnerships that
have made an election under section 754
and for which a section 743 transfer has
been made, and for partnerships which
distribute property in a transaction subject
to section 732(d).
An agency may not conduct or sponsor,
and a person is not required to respond to,
a collection of information unless the col-
lection of information displays a valid
control number assigned by the Office of
Management and Budget.
The estimated annual burden per re-
spondent varies from 1 hour to 300 hours,
depending on the individual circum-
stances, with an estimated average of 4
hours.
Comments concerning the accuracy of
this burden estimate and suggestions for
reducing this burden should be sent to the
Internal Revenue Service, Attn: IRS Re-
ports Clearance Officer, OP:FS:FP, Wash-
ington, DC 20224, and to the Office of
Management and Budget, Attn: Desk
Officer for the Department of the Trea-
sury, Office of Information and Regula-
tory Affairs, Washington, DC 20503.
Books or records relating to these col-
lections of information must be retained
as long as their contents may become ma-
terial 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.
Background
This document (a) revises §§1.743-1
and 1.755-1 of the Income Tax Regula-
tions (26 CFR part 1), and (b) amends
§§1.732-1, 1.732-2, 1.734-1, 1.751-1,
1.754-1, and §1.1017-1 of the Income Tax
Regulations.
On January 29, 1998, proposed regula-
tions (REG 209682-94) were published in
the Federal Register(63 FR 4408).
Written comments were received in re-
sponse to the notice of proposed rulemak-
ing. One speaker provided testimony at a
public hearing held on September 10,
1998.
After consideration of all the com-
ments, the proposed regulations under
sections 732, 734, 743, 751, 755, and
1017 are adopted, as revised by this Trea-
sury Decision.
Explanation of Revisions and
Summary of Contents
1.Basis in Distributed Property
(a) Mandatory application of section
732(d). Section 1.732-1(d)(4) of the cur-
rent regulations requires transferees to
apply the special basis rule in certain
cases. In the preamble to the proposed
regulations, the IRS and the Treasury De-
partment requested comments on the
proper scope of section 732(d), and
specifically, under what circumstances, if
any, the Secretary should continue to ex-
ercise his authority to mandate the appli-
cation of section 732(d) to a transferee.
Several commentators suggested that the
mandatory application of section 732(d)
no longer should be required, because the
changes made to section 732(c) by the
Taxpayer Relief Act of 1997, Public Law
105-34, 111 Stat. 788, 945-46 (1997),
make the distortions targeted by the regu-
lations less likely to occur. However,
other commentators noted that distortions
caused by section 732(c) still may occur.
Accordingly, the rule contained in
§1.732-1(d)(4), which requires the
mandatory application of section 732(d)
in certain cases, remains in effect.
(b) Statement required by partnership.
Because partners, rather than partner-
ships, are required to report basis adjust-
ments under section 732(d), the final reg-
ulations require partnerships to provide
transferees with such information as is
necessary for the transferees properly to
compute basis adjustments made under
section 732(d). This information must be
provided if a transferee notifies a partner-
ship that it plans to make the election
under section 732(d) or if a partnership
makes a distribution subject to the manda-
tory application of section 732(d).
(c) Effective date. One commentator
asked for clarification regarding the appli-
cation of the final regulations to section
732(d) adjustments. If section 732(d) ap-
plies to a distribution, it is necessary to
calculate the basis adjustments which
would have been required under section
743(b) if a section 754 election were in
effect for the partnership in the taxable
year in which the partnership interest was
transferred to the partner. In calculating
these basis adjustments, the partnership
should apply the final regulations under
section 743 and 755 if the distribution to
which section 732(d) applies occurs after
December 15, 1999.
2. Basis Adjustments Under Section
743(b)
(a) Coordination with section 704(c).
Where a partnership adopts the remedial
allocation method, the proposed regula-
tions provide that the section 704(c) built-
in gain portion of a basis adjustment
under section 743(b) shall be recovered
over the remaining cost recovery period
for the section 704(c) built-in gain. Some
commentators suggested that the final
regulations should provide this treatment
for the section 704(c) built-in gain portion
of the adjustment regardless of the
method elected by the partnership for al-
locating section 704(c) built-in gain and
loss. The IRS and the Treasury Depart-
ment continue to believe that, except for
partnerships which adopt the remedial al-
location method, it is appropriate for sec-

1999–52 I.R.B.703December 27, 1999
tions 704(c) and 743(b) to operate inde-
pendently. Accordingly, this change has
not been adopted.
In the preamble to the proposed regula-
tions, comments were requested concern-
ing the application of the remedial alloca-
tion method to contributed property
where there are no distortions caused by
the ceiling rule at the time the property
was contributed to the partnership. Even
if it is not clear that the ceiling rule will
apply at the time the property is con-
tributed because the adjusted basis of the
contributed property is sufficient so that
the non-contributing partners will be allo-
cated their appropriate share of deprecia-
tion or amortization attributable to the
property, the partnership’s adoption of the
remedial method still may be relevant due
to allocations resulting from a subsequent
disposition of the property. For instance,
suppose that partners A and B form a part-
nership and agree that each partner will be
allocated a 50 percent share of all partner-
ship items, and that the partnership will
make allocations under section 704(c)
using the traditional method. A con-
tributes depreciable property with an ad-
justed tax basis of $40 and a book value
of $50, and B contributes $50 in cash. At
the time of the contribution, it is not read-
ily apparent that the ceiling rule will have
any application. However, if, before any
federal income tax depreciation accrues
with respect to the contributed property,
the property’s value declines to $40, and
the property is sold for that amount, there
will be no tax gain or loss. The book loss
of $10 would be shared equally between
A and B. In this situation, the ceiling rule
would prevent B from being allocated the
$5 tax loss to which it otherwise would be
entitled. However, if the partnership
elected to use the remedial method with
respect to the contributed property, B
would be allocated a $5 tax loss, and A
would be allocated a corresponding $5 tax
gain. In addition, if a contributing partner
transfers its interest in a partnership dur-
ing a period when a section 754 election
is in effect, the section 704(c) method
adopted by the partnership will determine
the recovery period for the built-in gain
portion of the transferee’s section 743(b)
adjustment. The IRS and the Treasury
Department believe that under the current
regulations under section 704(c), a part-
nership may use the remedial method
under §1.704-3, even where it is not read-
ily apparent at the time the property is
contributed that the ceiling rule will be
applicable.
(b) Previously taxed capital. One com-
mentator suggested that the second sen-
tence in proposed §1.743-1(d)(2), relating
to the correlation between a partner’s in-
terest in previously taxed capital and the
partnership’s capital accounts, is redun-
dant and should be deleted. This sugges-
tion has been adopted; however, no sub-
stantive change is intended by the
deletion.
(c) Common basis election. Some
commentators suggested that the provi-
sion in the proposed regulations that per-
mitted the partners to elect to apply nega-
tive basis adjustments under section
743(b) to the partnership’s common basis
should be deleted. The commentators ar-
gued that the provision was contrary to
the purpose of section 743(b), because it
permitted basis adjustments under section
743(b) to affect nontransferring partners.
The commentators also argued that the
provision would be used by a small num-
ber of partnerships and would add unnec-
essary complexity to the regulations. In
response to these suggestions, the provi-
sion that permitted the partners to elect to
apply negative basis adjustments under
section 743(b) to the partnership’s com-
mon basis has been deleted.
(d) Statements by partners. Some com-
mentators suggested modifying the state-
ments which partners are required to pro-
vide to the partnership in the case of
transfers which result in basis adjustments
under section 743(b). Many of these sug-
gestions have been adopted. For exam-
ple, the regulations specify that the trans-
feree of a partnership interest is required
to provide the name, address, and tax-
payer identification number of the trans-
feror only if that information is ascertain-
able by the transferee. The regulations
also specify that if a partnership interest is
transferred to a nominee which is required
to furnish the statement under §1.6031(c)-
1T to the partnership, the nominee may
satisfy the notice requirements of both the
section 743 and 6031 regulations by pro-
viding a single statement with respect to
that transfer, but only if the statement sat-
isfies all requirements of both regulations.
The regulations require the transferee
to sign the statement under penalties of
perjury, and require the transferee to pro-
vide the amount of any liabilities assumed
or taken subject to by the transferee, and
any other information necessary for the
partnership to compute the transferee’s
basis in the partnership interest. In order
to assist the partnership in properly calcu-
lating depreciation and amortization de-
ductions which may be subject to anti-
churning provisions, the regulations
require the transferee to describe its rela-
tionship, if any, to the transferor. Finally,
the statement required by a transferee that
acquires an interest by death must include
the date of the decedent’s death.
One commentator suggested that the
statement required by a transferee that ac-
quires a partnership interest by sale or ex-
change should be provided within 30 days
of the sale or exchange, regardless of
whether or not the transfer occurs at the
end of the calendar year. This change has
been adopted.
One commentator suggested that refer-
ences to the tax matters partner in §1.743-
1(k) of the proposed regulations (regard-
ing the partnership’s obligations where a
partner’s statement is clearly erroneous,
or a partner fails to notify the partnership
that an interest has been transferred and
the partnership has actual knowledge of
the transfer) should be changed. This
commentator emphasized that while the
tax matters partner has a specialized role
with respect to consolidated administra-
tive and judicial proceedings to determine
the tax treatment of partnership items at
the partnership level, the tax matters part-
ner does not have any special responsibil-
ities with respect to federal income tax re-
porting. The final regulations adopt this
comment. Section 1.743-1(k) now refers
to partners who are responsible for federal
income tax reporting by the partnership.
(e) Oil and gas. One commentator sug-
gested that the example described in
§1.743-1(j)(6) should be changed to de-
scribe a non- oil and gas property. This
change has been made. The commentator
also suggested that in the case of domestic
oil and gas properties that are depleted at
the partner level, the transferee partner
(rather than the partnership) should be re-
quired to make and allocate basis adjust-
ments among such properties. The final
regulations adopt this comment.
The same commentator suggested that
the regulations should specify a method

for adjusting the basis of section
613A(c)(7)(D) properties in order to ac-
count for percentage depletion made by a
partner with respect to such properties.
Under the principles of §1.743-1(j), per-
centage depletion should reduce first any
carryover basis under §1.613A-
3(e)(6)(iv). After the carryover basis has
been recovered, any further percentage
depletion should reduce the section 743
adjustment for the property.
3. Sales of Partnership Interests
One commentator suggested that refer-
ences to fair market value should specify
whether fair market value is determined
taking into account section 7701(g),
which generally provides that fair market
value shall be treated as being not less
than the amount of any nonrecourse in-
debtedness to which the property is sub-
ject. The regulations specify that for pur-
poses of the hypothetical sale employed
to determine the income or loss realized
by a partner upon the sale or exchange of
its interest in section 751 property, fair
market value is determined taking into ac-
count section 7701(g). Basis adjustments
under section 743(b) also are allocated by
reference to a hypothetical transaction.
The IRS and the Treasury Department in-
tend to issue guidance in the near future
which will provide rules for determining
the fair market value of partnership assets
in certain situations, including for pur-
poses of allocating section 743(b) basis
adjustments upon the transfer of a part-
nership interest. The IRS and the Trea-
sury Department anticipate that the guid-
ance will provide that section 7701(g)
will apply in determining the fair market
value of partnership assets for purposes of
allocating section 743(b) basis adjust-
ments.
One commentator suggested that where
a partnership interest is sold or ex-
changed, the transferor and the transferee
of a partnership interest should be permit-
ted jointly to assign values to partnership
assets in a written agreement. Because
this approach is inconsistent with the hy-
pothetical sale approach of the regula-
tions, this suggestion has not been
adopted.
4. Elections Under Section 754
One commentator requested that part-
nerships be granted a one-time right to re-
voke section 754 elections in effect for
such partnerships. Given the significant
changes to the rules made by these final
regulations as compared to the regulations
that were in effect at the time that section
754 elections previously were made, the
IRS and Treasury believe that it is appro-
priate to provide for a one-time revoca-
tion of such elections. Accordingly, a
partnership having an election in effect
under section 754 for its taxable year that
includes December 15, 1999 may revoke
such election by attaching a statement to
the partnership’s return for that year. The
return must be filed on or before the due
date (including extensions) for the return
for that year.
5. Allocation of Basis Adjustments Among
Partnership Assets
(a) Income in respect of a decedent.
One commentator requested that the final
regulations illustrate the allocation of
basis adjustments among partnership as-
sets where one or more of such assets rep-
resents income in respect of a decedent.
Where a partnership interest is transferred
as a result of the death of a partner, under
section 1014(c) the transferee’s basis in
its partnership interest is not adjusted for
that portion of the interest, if any, which is
attributable to items representing income
in respect of a decedent under section
691. Because the transferee’s basis in its
partnership interest does not include the
value of assets which represent income in
respect of a decedent, the section 743(b)
adjustment likewise does not reflect the
value of such assets. George Edward
Quick’s Trust, 54 TC 1336 (1970) (acq.),
aff ’d per curiam, 444 F.2d 90 (8th Cir.
1971); Chrissie H. Woodhall, 28 T.C.M.
1438 (1969), aff ’d, 454 F.2d 226 (9th Cir.
1972); Rev. Rul. 66-325, 1966-2 C.B.
249. Where a partnership holds assets
that represent income in respect of a dece-
dent, the section 743(b) adjustment
should be allocated solely to other assets.
Accordingly, the final regulations provide
that if a partnership interest is transferred
as a result of the death of a partner, and
the partnership holds assets representing
income in respect of a decedent, no part
of the basis adjustment under section
743(b) is allocated to these assets.
(b) Transferred basis transactions. One
commentator called for a revised system
for allocating basis adjustments under
section 743(b) which are triggered by ex-
changes in which the transferee’s basis in
the interest is determined in whole or in
part by reference to the transferor’s basis
in the interest. In many such cases, the
net section 743(b) adjustment will be
zero. However, a positive or negative
section 743(b) adjustment may result, be-
cause the transferee’s basis in the interest
may not be equal to the transferee’s share
of the partnership’s bases in its assets.
The IRS and the Treasury Department
believe that, although these transferred
basis transactions involve transfers which
are subject to section 743(b), the new,
comprehensive basis allocation rules in
the proposed regulations should not be
available. For example, where a partner-
ship interest is contributed to a corpora-
tion in a transaction to which section 351
applies, or to a partnership in a transac-
tion to which section 721(a) applies, the
transferor merely has changed the form of
its investment. If the allocation rules
which apply to other section 743(b) trans-
fers were applied to these exchanges, then
partners could use these exchanges to
shift basis from capital gain assets to ordi-
nary income assets, or vice versa.
Therefore, the final regulations contain
special basis allocation rules for trans-
ferred basis exchanges. The special rules
generally are modeled on the rules for al-
locating basis adjustments under section
734(b). The final regulations do not con-
tain a specific anti-abuse rule regarding
the special basis allocation rules which
are applicable to such transfers. How-
ever, there may be situations where tax-
payers will attempt to undertake abusive
transactions using these special rules. For
instance, a partner could acquire a part-
nership interest during a year in which no
section 754 election is in effect, and then
(in a related transaction) contribute the
property to a wholly-owned corporation
in order to take advantage of the basis al-
location rules applicable to transferred
basis exchanges. In appropriate situa-
tions, the IRS may attack such abusive
transactions under a variety of judicial
doctrines, including substance over form
or step transaction, or under §1.701-2 of
the regulations.
(c) Unrealized receivables under sec-
tion 751(c). One commentator requested
that the final regulations illustrate the ef-
fect of depreciation recapture on the allo-
cation of basis adjustments among part-
nership assets under section 755. For
purposes of this section, the final regula-
December 27, 19997041999–52 I.R.B.

tions treat depreciation recapture, and any
other properties or potential gain treated
as unrealized receivables under section
751(c) and the regulations thereunder, as
separate assets that are ordinary income
property.
(d) Special rules for securities partner-
ships and tiered partnerships. One com-
mentator suggested that the regulations
permit securities partnerships to allocate
basis adjustments among partnership as-
sets using an aggregation method. An-
other commentator requested that the reg-
ulations clarify how the regulations would
apply to tiered partnerships. The IRS and
the Treasury Department believe that a
method for allocating basis adjustments
among partnership assets on an aggregate
basis is not consistent with the hypotheti-
cal sale of individual assets, which is re-
quired by the regulations. In addition, the
IRS and Treasury Department believe that
special rules for tiered partnerships would
make the regulations more complex.
Therefore, these changes have not been
adopted.
6. Other Comments
One commentator suggested that for
purposes of allocating basis adjustments
among partnership assets, the values of all
partnership assets should be determined
by reference to the basis of the transferee
or distributee partner in its partnership in-
terest. This suggestion is being consid-
ered in connection with a separate project
currently under review by the IRS and the
Treasury Department.
One commentator suggested that the
language of section 743 does not autho-
rize regulations that permit both positive
and negative adjustments as part of the
same transaction. The IRS and the Trea-
sury Department continue to believe that
this aspect of the regulations is within the
IRS’s authority to administer sections 743
and 755.
Special Analyses
It has been determined that these final
regulations are not a significant regula-
tory action as defined in Executive Order
12866. Therefore, a regulatory assess-
ment is not required. It has been deter-
mined that a final regulatory flexibility
analysis is required for the collection of
information in this Treasury decision
under 5 U.S.C. 604. This analysis is set
forth below under the heading “Final
Regulatory Flexibility Act Analysis.”
Pursuant to section 7805(f) of the Internal
Revenue Code, the notice of proposed
rulemaking preceding these regulations
was submitted to the Chief Counsel for
Advocacy of the Small Business Admin-
istration for comment on their impact on
small business. No comments were re-
ceived regarding the impact of the regula-
tions on small business.
Final Regulatory Flexibility Act
Analysis
This analysis is required under the Reg-
ulatory Flexibility Act (5 U.S.C. chapter
6). In general, the regulations require a
transferee that acquires an interest in a
partnership with an election under section
754 in effect to notify the partnership of
the transfer. This notification must in-
clude the name and taxpayer identifica-
tion number of the transferee and the
transferee’s basis in the acquired partner-
ship interest. The partnership is required
to include a statement with its Form 1065,
U.S. Partnership Return of Income, for
the taxable year in which the partnership
acquires knowledge of the transfer. This
statement must identify the name and tax-
payer identification number of the trans-
feree, the computation of the basis adjust-
ment, and the allocation of that
adjustment to partnership properties.
These requirements will ensure that the
partnership has notice that a transfer has
occurred and that the proper basis adjust-
ments are computed. The legal basis for
these requirements is contained in sec-
tions 743(b), 6001, and 7805(a).
If an interest is transferred in a partner-
ship holding domestic oil and gas proper-
ties that are depleted at the partner level
under 613A(c)(7)(D), the regulations re-
quire the transferee partner (rather than
the partnership) to make and allocate
basis adjustments under section 743(b)
among such properties.
There were approximately 1,494,000
partnerships in 1994. However, these
regulations apply only to partnerships that
have made an election under section 754.
The election under section 754 is gener-
ally not made unless there has been a
transfer of a partnership interest or a dis-
tribution by the partnership. Moreover,
the effects of the election attach to spe-
cific items of partnership property and
may provide only temporary benefits for
the partners. Except for the one-time re-
vocation which is allowed in connection
with the promulgation of these final regu-
lations, the election cannot be revoked
without the consent of the Secretary. The
IRS and the Treasury Department believe
that most partnerships do not make the
election under section 754. Therefore,
most partnerships will not be affected by
the regulations in any given year.
After a partner conveys information to
the partnership concerning a transfer of a
partnership interest, the partnership must
adjust the partner’s interest in the basis of
partnership property. Because these basis
adjustments will affect the partner’s share
of depreciation or amortization deduc-
tions and amounts of gain or loss on the
disposition of certain items of partnership
property, the partnership must prepare
and maintain special entries on its books.
However, in many cases, partnership re-
turns are prepared using computer soft-
ware that can prepare and maintain these
special entries after the initial year.
The IRS and the Treasury Department
are not aware of any federal rules that
may duplicate, overlap, or conflict with
the rule.
As an alternative to the disclosure de-
scribed above, the IRS and the Treasury
Department considered, but rejected, a
rule that would have required the part-
ners, and not the partnerships, to make the
basis adjustments and to determine the ef-
fects of the basis adjustments on the part-
ners’ distributive shares. This alternative
was rejected because the IRS and the
Treasury Department believe that partner-
ships generally have better access to the
information necessary to report section
743 basis adjustments properly. To re-
quire the partners rather than the partner-
ships to bear the burden of reporting
would require the partnerships to provide
the partners with significant amounts of
information not otherwise needed by the
partners. There are no known alternative
rules that are less burdensome to the part-
nerships and their partners but that ac-
complish the purpose of the statute.
Finally, because partners, rather than
partnerships, are required to report basis
adjustments under section 732(d), the
final regulations require partnerships to
provide transferees with such information
1999–52 I.R.B.705December 27, 1999

as is necessary for the transferees prop-
erly to compute basis adjustments made
under section 732(d). This information
must be provided if a transferee notifies a
partnership that it plans to make the elec-
tion under section 732(d) or if a partner-
ship makes a distribution subject to the
mandatory application of section 732(d).
The IRS and the Treasury Department be-
lieve that this requirement will apply
under limited circumstances to a small
percentage of partnerships.
Drafting Information
The principal author of these regulations
is Matthew Lay of the Office of the Assis-
tant Chief Counsel (Passthroughs and Spe-
cial Industries). However, other personnel
from the IRS and the Treasury Department
participated in their development.
* * * * *
Adoption of Amendments to the
Regulations
Accordingly, 26 CFR parts 1 and 602
are ammended as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation for
part 1 is amended by adding entries in nu-
merical order to read as follows:
Authority: 26 U.S.C. 7805 * * *
Section 1.732-1 also issued under 26
U.S.C. 732.
Section 1.732-2 also issued under 26
U.S.C. 732.
Section 1.734-1 also issued under 26
U.S.C. 734.
Section 1.743-1 also issued under 26
U.S.C. 743.
Section 1.751-1 also issued under 26
U.S.C. 751.
Section 1.755-1 also issued under 26
U.S.C. 755. * * *
Section 1.1017-1 also issued under 26
U.S.C. 1017. * * *
Par. 2. Section 1.732-1 is amended as
follows:
1. Revise paragraph (c).
2. Revise paragraph (d)(1)(ii).
3. Revise the last sentence of paragraph
(d)(1)(v).
4. Revise paragraph (d)(1)(vi).
5. Revise paragraph (d)(4)(iii).
6. Remove the flush text and Examples
1and 2following paragraph (d)(4)(iii).
7. Add paragraph (d)(5).
The additions and revisions read as fol-
lows:
§1.732-1 Basis of distributed property
other than money.
* * * * *
(c) Allocation of basis among prop-
erties distributed to a partner—(1)
General rule—(i) Unrealized receiv-
ables and inventory items. The basis to
be allocated to properties distributed to
a partner under section 732(a)(2) or (b)
is allocated first to any unrealized re-
ceivables (as defined in section 751(c))
and inventory items (as defined in sec-
tion 751(d)(2)) in an amount equal to
the adjusted basis of each such property
to the partnership immediately before
the distribution. If the basis to be allo-
cated is less than the sum of the ad-
justed bases to the partnership of the
distributed unrealized receivables and
inventory items, the adjusted basis of
the distributed property must be de-
creased in the manner provided in para-
graph (c)(2)(i) of this section.
(ii) Other distributed property. Any
basis not allocated to unrealized receiv-
ables or inventory items under para-
graph (c)(1)(i) of this section is allo-
cated to any other property distributed
to the partner in the same transaction
by assigning to each distributed prop-
erty an amount equal to the adjusted
basis of the property to the partnership
immediately before the distribution.
However, if the sum of the adjusted
bases to the partnership of such other
distributed property does not equal the
basis to be allocated among the distrib-
uted property, any increase or decrease
required to make the amounts equal is
allocated among the distributed prop-
erty as provided in paragraph (c)(2) of
this section.
(2) Adjustment to basis allocation—
(i) Decrease in basis. Any decrease to
the basis of distributed property re-
quired under paragraph (c)(1) of this
section is allocated first to distributed
property with unrealized depreciation
in proportion to each property’s respec-
tive amount of unrealized depreciation
before any decrease (but only to the ex-
tent of each property’s unrealized de-
preciation). If the required decrease
exceeds the amount of unrealized de-
preciation in the distributed property,
the excess is allocated to the distributed
property in proportion to the adjusted
bases of the distributed property, as ad-
justed pursuant to the immediately pre-
ceding sentence.
(ii) Increase in basis. Any increase
to the basis of distributed property re-
quired under paragraph (c)(1)(ii) of this
section is allocated first to distributed
property (other than unrealized receiv-
ables and inventory items) with unreal-
ized appreciation in proportion to each
property’s respective amount of unreal-
ized appreciation before any increase
(but only to the extent of each prop-
erty’s unrealized appreciation). If the
required increase exceeds the amount
of unrealized appreciation in the dis-
tributed property, the excess is allo-
cated to the distributed property (other
than unrealized receivables or inven-
tory items) in proportion to the fair
market value of the distributed prop-
erty.
(3) Unrealized receivables and in-
ventory items. If the basis to be allo-
cated upon a distribution in liquidation
of the partner’s entire interest in the
partnership is greater than the adjusted
basis to the partnership of the unreal-
ized receivables and inventory items
distributed to the partner, and if there is
no other property distributed to which
the excess can be allocated, the distrib-
utee partner sustains a capital loss
under section 731(a)(2) to the extent of
the unallocated basis of the partnership
interest.
(4) Examples. The provisions of this
paragraph (c) are illustrated by the fol-
lowing examples:
Example 1. A is a one-fourth partner in partner-
ship PRS and has an adjusted basis in its partnership
interest of $650. PRS distributes inventory items
and Assets X and Y to A in liquidation of A’s entire
partnership interest. The distributed inventory items
have a basis to the partnership of $100 and a fair
market value of $200. Asset X has an adjusted basis
to the partnership of $50 and a fair market value of
$400. Asset Y has an adjusted basis to the partner-
ship and a fair market value of $100. Neither Asset
X nor Asset Y consists of inventory items or unreal-
ized receivables. Under this paragraph (c), A’s basis
in its partnership interest is allocated first to the in-
ventory items in an amount equal to their adjusted
basis to the partnership. A, therefore, has an ad-
justed basis in the inventory items of $100. The re-
maining basis, $550, is allocated to the distributed
December 27, 19997061999–52 I.R.B.

property first in an amount equal to the property’s
adjusted basis to the partnership. Thus, Asset X is
allocated $50 and Asset Y is allocated $100. Asset
X is then allocated $350, the amount of unrealized
appreciation in Asset X. Finally, the remaining
basis, $50, is allocated to Assets X and Y in propor-
tion to their fair market values: $40 to Asset X
(400/500 x $50), and $10 to Asset Y (100/500 x
$50). Therefore, after the distribution, A has an ad-
justed basis of $440 in Asset X and $110 in Asset Y.
Example 2. B is a one-fourth partner in partner-
ship PRS and has an adjusted basis in its partnership
interest of $200. PRS distributes Asset X and Asset
Y to B in liquidation of its entire partnership inter-
est. Asset X has an adjusted basis to the partnership
and fair market value of $150. Asset Y has an ad-
justed basis to the partnership of $150 and a fair
market value of $50. Neither of the assets consists
of inventory items or unrealized receivables. Under
this paragraph (c), B’s basis is first assigned to the
distributed property to the extent of the partnership’s
basis in each distributed property. Thus, Asset X
and Asset Y are each assigned $150. Because the
aggregate adjusted basis of the distributed property,
$300, exceeds the basis to be allocated, $200, a de-
crease of $100 in the basis of the distributed prop-
erty is required. Assets X and Y have unrealized de-
preciation of zero and $100, respectively. Thus, the
entire decrease is allocated to Asset Y. After the dis-
tribution, B has an adjusted basis of $150 in Asset X
and $50 in Asset Y.
Example 3. C, a partner in partnership PRS, re-
ceives a distribution in liquidation of its entire part-
nership interest of $6,000 cash, inventory items hav-
ing an adjusted basis to the partnership of $6,000,
and real property having an adjusted basis to the
partnership of $4,000. C’s basis in its partnership
interest is $9,000. The cash distribution reduces C’s
basis to $3,000, which is allocated entirely to the in-
ventory items. The real property has a zero basis in
C’s hands. The partnership bases not carried over to
C for the distributed properties are lost unless an
election under section 754 is in effect requiring the
partnership to adjust the bases of remaining partner-
ship properties under section 734(b).
Example 4. Assume the same facts as in Exam-
ple 3of this paragraph except C receives a distrib-
ution in liquidation of its entire partnership inter-
est of $1,000 cash and inventory items having a
basis to the partnership of $6,000. The cash distri-
bution reduces C’s basis to $8,000, which can be
allocated only to the extent of $6,000 to the inven-
tory items. The remaining $2,000 basis, not allo-
cable to the distributed property, constitutes a cap-
ital loss to partner C under section 731(a)(2). If
the election under section 754 is in effect, see sec-
tion 734(b) for adjustment of the basis of undis-
tributed partnership property.
(5) Effective date. This paragraph
(c) applies to distributions of property
from a partnership that occur on or
after December 15, 1999.
(d) * * * (1) * * *
(ii) Where an election under section
754 is in effect, see section 743(b) and
§§1.743-1 and 1.732-2.
* * * * *
(v) * * * (For a shift of transferee’s
basis adjustment under section 743(b)
to like property, see §1.743-1(g).)
(vi) The provisions of this paragraph
(d)(1) may be illustrated by the follow-
ing example:
Example. (i) Transferee partner, T, purchased
a one-fourth interest in partnership PRS for
$17,000. At the time T purchased the partnership
interest, the election under section 754 was not in
effect and the partnership inventory had a basis to
the partnership of $14,000 and a fair market
value of $16,000. T’s purchase price reflected
$500 of this difference. Thus, $4,000 of the
$17,000 paid by T for the partnership interest was
attributable to T’s share of partnership inventory
with a basis of $3,500. Within 2 years after T ac-
quired the partnership interest, T retired from the
partnership and received in liquidation of its en-
tire partnership interest the following property:
1999–52 I.R.B.707December 27, 1999
Assets
Adjusted Fair
Basis to Market
PRSValue
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$1,500 . . . . . . . . . . . . . . . . . . . $1,500
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$3,500 . . . . . . . . . . . . . . . . . . . . $4,000
Asset X . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$2,000 . . . . . . . . . . . . . . . . . . . . $4,000
Asset Y . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$4,000 . . . . . . . . . . . . . . . . . . . . $5,000
(ii) The fair market value of the in-
ventory received by T was one-fourth of
the fair market value of all partnership
inventory and was T’s share of such
property. It is immaterial whether the
inventory T received was on hand when
T acquired the interest. In accordance
with T’s election under section 732(d),
the amount of T’s share of partnership
basis that is attributable to partnership
inventory is increased by $500 (one-
fourth of the $2,000 difference between
the fair market value of the property,
$16,000, and its $14,000 basis to the
partnership at the time T purchased its
interest). This adjustment under section
732(d) applies only for purposes of dis-
tributions to T, and not for purposes of
partnership depreciation, depletion, or
gain or loss on disposition. Thus, the
amount to be allocated among the prop-
erties received by T in the liquidating
distribution is $15,500 ($17,000, T’s
basis for the partnership interest, re-
duced by the amount of cash received,
$1,500). This amount is allocated as
follows: The basis of the inventory
items received is $4,000, consisting of
the $3,500 common partnership basis,
plus the basis adjustment of $500 which
T would have had under section 743(b).
The remaining basis of $11,500
($15,500 minus $4,000) is allocated
among the remaining property distrib-
uted to T by assigning to each property
the adjusted basis to the partnership of
such property and adjusting that basis
by any required increase or decrease.
Thus, the adjusted basis to T of Asset X
is $5,111 ($2,000, the adjusted basis of
Asset X to the partnership, plus $2,000,
the amount of unrealized appreciation
in Asset X, plus $1,111 ($4,000/$9,000
multiplied by $2,500)). Similarly, the
adjusted basis of Asset Y to T is $6,389
($4,000, the adjusted basis of Asset Y to
the partnership, plus $1,000, the amount
of unrealized appreciation in Asset Y,

plus, $1,389 ($5,000/$9,000 multiplied
by $2,500)).
* * * * *
(4) * * *
(iii) A basis adjustment under section
743(b) would change the basis to the
transferee partner of the property actually
distributed.
(5) Required statements. If a transferee
partner notifies a partnership that it plans
to make the election under section 732(d)
under paragraph (d)(3) of this section, or
if a partnership makes a distribution to
which paragraph (d)(4) of this section ap-
plies, the partnership must provide the
transferee with such information as is
necessary for the transferee properly to
compute the transferee’s basis adjust-
ments under section 732(d).
* * * * *
Par. 3. Section 1.732-2 is amended by
revising the sentence at the end of the Ex-
amplein paragraph (b) to read as follows:
§1.732-2 Special partnership basis of dis-
tributed property.
* * * * *
(b) * * *
Example.* * * See §1.743-1(g).
* * * * *
Par. 4. In §1.734-1, paragraph (e) is
added to read as follows:
§1.734-1 Optional adjustment to basis of
undistributed partnership property.
* * * * *
(e) Recovery of adjustments to basis of
partnership property—(1) Increases in
basis. For purposes of section 168, if the
basis of a partnership’s recovery property
is increased as a result of the distribution
of property to a partner, then the increased
portion of the basis must be taken into ac-
count as if it were newly-purchased re-
covery property placed in service when
the distribution occurs. Consequently,
any applicable recovery period and
method may be used to determine the re-
covery allowance with respect to the in-
creased portion of the basis. However, no
change is made for purposes of determin-
ing the recovery allowance under section
168 for the portion of the basis for which
there is no increase.
(2) Decreases in basis. For purposes of
section 168, if the basis of a partnership’s
recovery property is decreased as a result
of the distribution of property to a partner,
then the decrease in basis must be ac-
counted for over the remaining recovery
period of the property beginning with
the recovery period in which the basis is
decreased.
(3) Effective date. This paragraph (e)
applies to distributions of property from
a partnership that occur on or after De-
cember 15, 1999.
Par. 5. Section 1.743-1 is revised to
read as follows:
§1.743-1 Optional adjustment to basis
of partnership property.
(a) Generally. The basis of partner-
ship property is adjusted as a result of
the transfer of an interest in a partner-
ship by sale or exchange or on the death
of a partner only if the election provided
by section 754 (relating to optional ad-
justments to the basis of partnership
property) is in effect with respect to the
partnership. Whether or not the election
provided in section 754 is in effect, the
basis of partnership property is not ad-
justed as the result of a contribution of
property, including money, to the part-
nership.
(b) Determination of adjustment. In
the case of the transfer of an interest in a
partnership, either by sale or exchange
or as a result of the death of a partner, a
partnership that has an election under
section 754 in effect—
(1) Increases the adjusted basis of
partnership property by the excess of the
transferee’s basis for the transferred
partnership interest over the transferee’s
share of the adjusted basis to the part-
nership of the partnership’s property; or
(2) Decreases the adjusted basis of
partnership property by the excess of the
transferee’s share of the adjusted basis
to the partnership of the partnership’s
property over the transferee’s basis for
the transferred partnership interest.
(c) Determination of transferee’s
basis in the transferred partnership in-
terest. In the case of the transfer of a
partnership interest by sale or exchange
or as a result of the death of a partner,
the transferee’s basis in the transferred
partnership interest is determined under
section 742 and §1.742-1. See also sec-
tion 752 and §§1.752-1 through 1.752-5.
(d) Determination of transferee’s
share of the adjusted basis to the part-
nership of the partnership’s property—
(1) Generally. A transferee’s share of
the adjusted basis to the partnership of
partnership property is equal to the sum
of the transferee’s interest as a partner in
the partnership’s previously taxed capi-
tal, plus the transferee’s share of part-
nership liabilities. Generally, a trans-
feree’s interest as a partner in the
partnership’s previously taxed capital is
equal to—
(i) The amount of cash that the trans-
feree would receive on a liquidation of
the partnership following the hypotheti-
cal transaction, as defined in paragraph
(d)(2) of this section (to the extent at-
tributable to the acquired partnership in-
terest); increased by
(ii) The amount of tax loss (including
any remedial allocations under §1.704-
3(d)), that would be allocated to the
transferee from the hypothetical transac-
tion (to the extent attributable to the ac-
quired partnership interest); and de-
creased by
(iii) The amount of tax gain (includ-
ing any remedial allocations under
§1.704-3(d)), that would be allocated to
the transferee from the hypothetical
transaction (to the extent attributable to
the acquired partnership interest).
(2) Hypothetical transaction defined.
For purposes of paragraph (d)(1) of this
section, the hypothetical transaction
means the disposition by the partnership
of all of the partnership’s assets, immedi-
ately after the transfer of the partnership
interest, in a fully taxable transaction for
cash equal to the fair market value of the
assets.
(3) Examples. The provisions of this
paragraph (d) are illustrated by the fol-
lowing examples:
Example 1. (i) A is a member of partnership PRS
in which the partners have equal interests in capital
and profits. The partnership has made an election
under section 754, relating to the optional adjust-
ment to the basis of partnership property. A sells its
interest to T for $22,000. The balance sheet of the
partnership at the date of sale shows the following:
December 27, 19997081999–52 I.R.B.

Liabilities and Capital
Fair
AdjustedMarket
Per BooksValue
Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$10,000$10,000
Capital:
A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15,00022,000
B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15,00022,000
C . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15,000
22,000
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$55,000$76,000
1999–52 I.R.B.709December 27, 1999
Assets
Fair
AdjustedMarket
BasisValue
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$5,000$5,000
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .10,00010,000
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .20,00021,000
Depreciable assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .20,00040,000
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$55,000$76,000
(ii) The amount of the basis adjust-
ment under section 743(b) is the differ-
ence between the basis of T’s interest in
the partnership and T’s share of the ad-
justed basis to the partnership of the
partnership’s property. Under section
742, the basis of T’s interest is $25,333
(the cash paid for A’s interest, $22,000,
plus $3,333, T’s share of partnership lia-
bilities). T’s interest in the partnership’s
previously taxed capital is $15,000
($22,000, the amount of cash T would
receive if PRS liquidated immediately
after the hypothetical transaction, de-
creased by $7,000, the amount of tax
gain allocated to T from the hypothetical
transaction). T’s share of the adjusted
basis to the partnership of the partner-
ship’s property is $18,333 ($15,000
share of previously taxed capital, plus
$3,333 share of the partnership’s liabili-
ties). The amount of the basis adjust-
ment under section 743(b) to partnership
property therefore, is $7,000, the differ-
ence between $25,333 and $18,333.
Example 2. A, B, and C form partnership PRS,
to which A contributes land (Asset 1) with a fair
market value of $1,000 and an adjusted basis to A
of $400, and B and C each contribute $1,000 cash.
Each partner has $1,000 credited to it on the books
of the partnership as its capital contribution. The
partners share in profits equally. During the part-
nership’s first taxable year, Asset 1 appreciates in
value to $1,300. A sells its one-third interest in the
partnership to T for $1,100, when an election under
section 754 is in effect. The amount of tax gain
that would be allocated to T from the hypothetical
transaction is $700 ($600 section 704(c) built-in
gain, plus one-third of the additional gain). Thus,
T’s interest in the partnership’s previously taxed
capital is $400 ($1,100, the amount of cash T
would receive if PRS liquidated immediately after
the hypothetical transaction, decreased by $700,
T’s share of gain from the hypothetical transac-
tion). The amount of T’s basis adjustment under
section 743(b) to partnership property is $700 (the
excess of $1,100, T’s cost basis for its interest, over
$400, T’s share of the adjusted basis to the partner-
ship of partnership property).
(e) Allocation of basis adjustment. For
the allocation of the basis adjustment
under this section among the individual
items of partnership property, see section
755 and the regulations thereunder.
(f) Subsequent transfers. Where there
has been more than one transfer of a part-
nership interest, a transferee’s basis ad-
justment is determined without regard to
any prior transferee’s basis adjustment.
In the case of a gift of an interest in a part-
nership, the donor is treated as transfer-
ring, and the donee as receiving, that por-
tion of the basis adjustment attributable to
the gifted partnership interest. The provi-
sions of this paragraph (f) are illustrated
by the following example:
Example. (i) A, B, and C form partnership PRS.
A and B each contribute $1,000 cash, and C con-
tributes land with a basis and fair market value of
$1,000. When the land has appreciated in value to
$1,300, A sells its interest to T1 for $1,100 (one-
third of $3,300, the fair market value of the partner-
ship property). An election under section 754 is in
effect; therefore, T1 has a basis adjustment under
section 743(b) of $100.
(ii) After the land has further appreci-
ated in value to $1,600, T1 sells its inter-
est to T2 for $1,200 (one-third of $3,600,
the fair market value of the partnership
property). T2 has a basis adjustment
under section 743(b) of $200. This
amount is determined without regard to
any basis adjustment under section 743(b)
that T1 may have had in the partnership
assets.
(iii) During the following year, T2
makes a gift to T3 of fifty percent of
T2’s interest in PRS. At the time of the
transfer, T2 has a $200 basis adjustment
under section 743(b). T2 is treated as
transferring $100 of the basis adjust-
ment to T3 with the gift of the partner-
ship interest.
(g) Distributions—(1) Distribution of
adjusted property to the transferee—(i)
Coordination with section 732. If a part-
nership distributes property to a transferee
and the transferee has a basis adjustment
for the property, the basis adjustment is
taken into account under section 732. See
§1.732-2(b).

(ii) Coordination with section 734. For
certain adjustments to the common basis
of remaining partnership property after
the distribution of adjusted property to a
transferee, see §1.734-2(b).
(2) Distribution of adjusted property to
another partner— (i) Coordination with
section 732. If a partner receives a distri-
bution of property with respect to which
another partner has a basis adjustment,
the distributee does not take the basis ad-
justment into account under section 732.
(ii) Reallocation of basis.A transferee
with a basis adjustment in property that is
distributed to another partner reallocates
the basis adjustment among the remaining
items of partnership property under
§1.755-1(c).
(3) Distributions in complete liquida-
tion of a partner’s interest. If a transferee
receives a distribution of property
(whether or not the transferee has a basis
adjustment in such property) in liquida-
tion of its interest in the partnership, the
adjusted basis to the partnership of the
distributed property immediately before
the distribution includes the transferee’s
basis adjustment for the property in which
the transferee relinquished an interest (ei-
ther because it remained in the partner-
ship or was distributed to another part-
ner). Any basis adjustment for property
in which the transferee is deemed to relin-
quish its interest is reallocated among the
properties distributed to the transferee
under §1.755-1(c).
(4) Coordination with other provisions.
The rules of sections 704(c)(1)(B), 731,
737, and 751 apply before the rules of this
paragraph (g).
(5) Example. The provisions of this
paragraph (g) are illustrated by the fol-
lowing example:
Example. (i) A, B, and C are equal partners in
partnership PRS. Each partner originally con-
tributed $10,000 in cash, and PRS used the contribu-
tions to purchase five nondepreciable capital assets.
PRS has no liabilities. After five years, PRS’s bal-
ance sheet appears as follows:
December 27, 19997101999–52 I.R.B.
Assets
Fair
AdjustedMarket
BasisValue
Asset 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$10,000$10,000
Asset 2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4,0006,000
Asset 3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6,0006,000
Asset 4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7,0004,000
Asset 5 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,000
13,000
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$30,000$39,000
Capital
Fair
AdjustedMarket
Per BooksValue
Partner A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$10,000$13,000
Partner B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .10,00013,000
Partner C . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,000 13,000
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$30,000$39,000
(ii) A sells its interest to T for $13,000
when PRS has an election in effect under
section 754. T receives a basis adjust-
ment under section 743(b) in the partner-
ship property that is equal to $3,000 (the
excess of T’s basis in the partnership in-
terest, $13,000, over T’s share of the ad-
justed basis to the partnership of partner-
ship property, $10,000). The basis adjust-
ment is allocated under section 755, and
the partnership’s balance sheet appears as
follows:
Assets
Fair
AdjustedMarketBasis
BasisValueAdjustment
Asset 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$10,000$10,000$ 0.00
Asset 2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4,0006,000666.67
Asset 3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6,0006,0000.00
Asset 4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7,0004,000(1,000.00)
Asset 5 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,000
13,0003,333.33
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$30,000$39,000$3,000.00

Capital
Fair
AdjustedMarketSpecial
Per BooksValueBasis
Partner T . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$10,000$13,000$3,000
Partner B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .10,00013,0000
Partner C . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,00013,000 0
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$30,000$39,000$3,000
1999–52 I.R.B.711December 27, 1999
(iii) Assume that PRS distributes Asset 2 to T in
partial liquidation of T’s interest in the partnership.
T has a basis adjustment under section 743(b) of
$666.67 in Asset 2. Under paragraph (g)(1)(i) of
this section, T takes the basis adjustment into ac-
count under section 732. Therefore, T will have a
basis in Asset 2 of $4,666.67 following the distribu-
tion.
(iv) Assume instead that PRS distributes Asset 5
to C in complete liquidation of C’s interest in PRS.
T has a basis adjustment under section 743(b) of
$3,333.33 in Asset 5. Under paragraph (g)(2)(i) of
this section, C does not take T’s basis adjustment
into account under section 732. Therefore, the part-
nership’s basis for purposes of sections 732 and 734
is $3,000. Under paragraph (g)(2)(ii) of this section,
T’s $3,333.33 basis adjustment is reallocated among
the remaining partnership assets under §1.755-1(c).
(v) Assume instead that PRS distributes Asset 5
to T in complete liquidation of its interest in PRS.
Under paragraph (g)(3) of this section, immediately
prior to the distribution of Asset 5 to T, PRS must
adjust the basis of Asset 5. Therefore, immediately
prior to the distribution, PRS’s basis in Asset 5 is
equal to $6,000, which is the sum of (A) $3,000,
PRS’s common basis in Asset 5, plus (B) $3,333.33,
T’s basis adjustment to Asset 5, plus (C) ($333.33),
the sum of T’s basis adjustments in Assets 2 and 4.
For purposes of sections 732 and 734, therefore,
PRS will be treated as having a basis in Asset 5
equal to $6,000.
(h) Contributions of adjusted prop-
erty—(1) Section 721(a) transactions. If,
in a transaction described in section
721(a), a partnership (the upper tier) con-
tributes to another partnership (the lower
tier) property with respect to which a
basis adjustment has been made, the basis
adjustment is treated as contributed to the
lower-tier partnership, regardless of
whether the lower-tier partnership makes
a section 754 election. The lower tier’s
basis in the contributed assets and the
upper tier’s basis in the partnership inter-
est received in the transaction are deter-
mined with reference to the basis adjust-
ment. However, that portion of the basis
of the upper tier’s interest in the lower tier
attributable to the basis adjustment must
be segregated and allocated solely to the
transferee partner for whom the basis ad-
justment was made. Similarly, that por-
tion of the lower tier’s basis in its assets
attributable to the basis adjustment must
be segregated and allocated solely to the
upper tier and the transferee. A partner
with a basis adjustment in property held
by a partnership that terminates under
section 708(b)(1)(B) will continue to have
the same basis adjustment with respect to
property deemed contributed by the ter-
minated partnership to the new partner-
ship under §1.708-1(b)(1)(iv), regardless
of whether the new partnership makes a
section 754 election.
(2) Section 351 transactions—(i) Basis
in transferred property. A corporation’s
adjusted tax basis in property transferred
to the corporation by a partnership in a
transaction described in section 351 is de-
termined with reference to any basis ad-
justments to the property under section
743(b) (other than any basis adjustment
that reduces a partner’s gain under para-
graph (h)(2)(ii) of this section).
(ii) Partnership gain. The amount of
gain, if any, recognized by the partnership
on a transfer of property by the partner-
ship to a corporation in a transfer de-
scribed in section 351 is determined with-
out reference to any basis adjustment to
the transferred property under section
743(b). The amount of gain, if any, rec-
ognized by the partnership on the transfer
that is allocated to a partner with a basis
adjustment in the transferred property is
adjusted to reflect the partner’s basis ad-
justment in the transferred property.
(iii) Basis in stock. The partnership’s
adjusted tax basis in stock received from a
corporation in a transfer described in sec-
tion 351 is determined without reference
to the basis adjustment in property trans-
ferred to the corporation in the section
351 exchange. A partner with a basis ad-
justment in property transferred to the
corporation, however, has a basis adjust-
ment in the stock received by the partner-
ship in the section 351 exchange in an
amount equal to the partner’s basis adjust-
ment in the transferred property, reduced
by any basis adjustment that reduced the
partner’s gain under paragraph (h)(2)(ii)
of this section.
(iv) Example. The following example
illustrates the principles of this paragraph
(h):
Example. (i) A, B, and C are equal partners in
partnership PRS. The partnership’s only asset, Asset
1, has an adjusted tax basis of $60 and a fair market
value of $120. Asset 1 is a nondepreciable capital
asset and is not section 704(c) property. A has a
basis in its partnership interest of $40, and a positive
section 743(b) adjustment of $20 in Asset 1. In a
transaction to which section 351 applies, PRS con-
tributes Asset 1 to X, a corporation, in exchange for
$15 in cash and X stock with a fair market value of
$105.
(ii) Under paragraph (h)(2)(ii) of this section,
PRS realizes $60 of gain on the transfer of Asset 1 to
X ($120, its amount realized, minus $60, its adjusted
basis), but recognizes only $15 of that gain under
section 351(b)(1). Of this amount, $5 is allocated to
each partner. A must use $5 of its basis adjustment
in Asset 1 to offset A’s share of PRS’s gain. Under
paragraph (h)(2)(iii) of this section, PRS’s basis in
the stock received from X is $60. However, A has a
basis adjustment in the stock received by PRS equal
to $15 (its basis adjustment in Asset 1, $20, reduced
by the portion of the adjustment which reduced A’s
gain, $5). Under paragraph (h)(2)(i) of this section,
X’s basis in Asset 1 equals $75 (PRS’s common
basis in the asset, $60, plus A’s basis adjustment
under section 743(b), $20, less the portion of the ad-
justment which reduced A’s gain, $5).
(i) [Reserved].
(j) Effect of basis adjustment—(1) In
general. The basis adjustment constitutes

an adjustment to the basis of partnership
property with respect to the transferee
only. No adjustment is made to the com-
mon basis of partnership property. Thus,
for purposes of calculating income, de-
duction, gain, and loss, the transferee will
have a special basis for those partnership
properties the bases of which are adjusted
under section 743(b) and this section.
The adjustment to the basis of partnership
property under section 743(b) has no ef-
fect on the partnership’s computation of
any item under section 703.
(2) Computation of partner’s distribu-
tive share of partnership items. The part-
nership first computes its items of in-
come, deduction, gain, or loss at the
partnership level under section 703. The
partnership then allocates the partnership
items among the partners, including the
transferee, in accordance with section
704, and adjusts the partners’ capital ac-
counts accordingly. The partnership then
adjusts the transferee’s distributive share
of the items of partnership income, de-
duction, gain, or loss, in accordance with
paragraphs (j)(3) and (4) of this section,
to reflect the effects of the transferee’s
basis adjustment under section 743(b).
These adjustments to the transferee’s dis-
tributive shares must be reflected on
Schedules K and K-1 of the partnership’s
return (Form 1065). These adjustments to
the transferee’s distributive shares do not
affect the transferee’s capital account.
(3) Effect of basis adjustment in deter-
mining items of income, gain, or loss—(i)
In general. The amount of a transferee’s
income, gain, or loss from the sale or ex-
change of a partnership asset in which the
transferee has a basis adjustment is equal
to the transferee’s share of the partner-
ship’s gain or loss from the sale of the
asset (including any remedial allocations
under §1.704-3(d)), minus the amount of
the transferee’s positive basis adjustment
for the partnership asset (determined by
taking into account the recovery of the
basis adjustment under paragraph
(j)(4)(i)(B) of this section) or plus the
amount of the transferee’s negative basis
adjustment for the partnership asset (de-
termined by taking into the account the
recovery of the basis adjustment under
paragraph (j)(4)(ii)(B) of this section).
(ii) Examples. The following examples
illustrate the principles of this paragraph
(j)(3):
Example 1. A and B form equal partnership PRS.
A contributes nondepreciable property with a fair
market value of $50 and an adjusted tax basis of
$100. PRS will use the traditional allocation method
under §1.704-3(b). B contributes $50 cash. A sells
its interest to T for $50. PRS has an election in ef-
fect to adjust the basis of partnership property under
section 754. T receives a negative $50 basis adjust-
ment under section 743(b) that, under section 755, is
allocated to the nondepreciable property. PRS then
sells the property for $60. PRS recognizes a book
gain of $10 (allocated equally between T and B) and
a tax loss of $40. T will receive an allocation of $40
of tax loss under the principles of section 704(c).
However, because T has a negative $50 basis adjust-
ment in the nondepreciable property, T recognizes a
$10 gain from the partnership’s sale of the property.
Example 2. A and B form equal partnership PRS.
A contributes nondepreciable property with a fair
market value of $100 and an adjusted tax basis of
$50. B contributes $100 cash. PRS will use the tra-
ditional allocation method under §1.704-3(b). A
sells its interest to T for $100. PRS has an election
in effect to adjust the basis of partnership property
under section 754. Therefore, T receives a $50 basis
adjustment under section 743(b) that, under section
755, is allocated to the nondepreciable property.
PRS then sells the nondepreciable property for $90.
PRS recognizes a book loss of $10 (allocated
equally between T and B) and a tax gain of $40. T
will receive an allocation of the entire $40 of tax
gain under the principles of section 704(c). How-
ever, because T has a $50 basis adjustment in the
property, T recognizes a $10 loss from the partner-
ship’s sale of the property.
Example 3. A and B form equal partnership PRS.
PRS will make allocations under section 704(c)
using the remedial allocation method described in
§1.704-3(d). A contributes nondepreciable property
with a fair market value of $100 and an adjusted tax
basis of $150. B contributes $100 cash. A sells its
partnership interest to T for $100. PRS has an elec-
tion in effect to adjust the basis of partnership prop-
erty under section 754. T receives a negative $50
basis adjustment under section 743(b) that, under
section 755, is allocated to the property. The part-
nership then sells the property for $120. The part-
nership recognizes a $20 book gain and a $30 tax
loss. The book gain will be allocated equally be-
tween the partners. The entire $30 tax loss will be
allocated to T under the principles of section 704(c).
To match its $10 share of book gain, B will be allo-
cated $10 of remedial gain, and T will be allocated
an offsetting $10 of remedial loss. T was allocated a
total of $40 of tax loss with respect to the property.
However, because T has a negative $50 basis adjust-
ment to the property, T recognizes a $10 gain from
the partnership’s sale of the property.
(4) Effect of basis adjustment in deter-
mining items of deduction—(i)
Increases—(A) Additional deduction.
The amount of any positive basis adjust-
ment that is recovered by the transferee in
any year is added to the transferee’s dis-
tributive share of the partnership’s depre-
ciation or amortization deductions for the
year. The basis adjustment is adjusted
under section 1016(a)(2) to reflect the re-
covery of the basis adjustment.
(B) Recovery period—(1) In general.
Except as provided in paragraph
(j)(4)(i)(B)(2) of this section, for pur-
poses of section 168, if the basis of a
partnership’s recovery property is in-
creased as a result of the transfer of a
partnership interest, then the increased
portion of the basis is taken into account
as if it were newly-purchased recovery
property placed in service when the
transfer occurs. Consequently, any ap-
plicable recovery period and method
may be used to determine the recovery
allowance with respect to the increased
portion of the basis. However, no
change is made for purposes of deter-
mining the recovery allowance under
section 168 for the portion of the basis
for which there is no increase.
(2) Remedial allocation method. If a
partnership elects to use the remedial
allocation method described in §1.704-
3(d) with respect to an item of the part-
nership’s recovery property, then the
portion of any increase in the basis of
the item of the partnership’s recovery
property under section 743(b) that is at-
tributable to section 704(c) built-in
gain is recovered over the remaining
recovery period for the partnership’s
excess book basis in the property as de-
termined in the final sentence of
§1.704-3(d)(2). Any remaining portion
of the basis increase is recovered under
paragraph (j)(4)(i)(B)(1) of this sec-
tion.
(C) Examples. The provisions of this
paragraph (j)(4)(i) are illustrated by the
following examples:
Example 1. (i) A, B, and C are equal partners in
partnership PRS, which owns Asset 1, an item of de-
preciable property that has a fair market value in ex-
cess of its adjusted tax basis. C sells its interest in
PRS to T while PRS has an election in effect under
section 754. PRS, therefore, increases the basis of
Asset 1 with respect to T.
(ii) Assume that in the year following the transfer
December 27, 19997121999–52 I.R.B.

of the partnership interest to T, T’s distributive share
of the partnership’s common basis depreciation de-
ductions from Asset 1 is $1,000. Also assume that,
under paragraph (j)(4)(i)(B) of this section, the
amount of the basis adjustment under section 743(b)
that T recovers during the year is $500. The total
amount of depreciation deductions from Asset 1 re-
ported by T is equal to $1,500.
Example 2. (i) A and B form equal partnership
PRS. A contributes property with an adjusted
basis of $100,000 and a fair market value of
$500,000. B contributes $500,000 cash. When
PRS is formed, the property has five years re-
maining in its recovery period. The partnership’s
adjusted basis of $100,000 will, therefore, be re-
covered over the five years remaining in the
property’s recovery period. PRS elects to use the
remedial allocation method under §1.704-3(d)
with respect to the property. If PRS had pur-
chased the property at the time of the partner-
ship’s formation, the basis of the property would
have been recovered over a 10-year period. The
$400,000 of section 704(c) built-in gain will,
therefore, be amortized under §1.704-3(d) over a
10-year period beginning at the time of the part-
nership’s formation.
(ii)(A)Except for the depreciation deductions,
PRS’s expenses equal its income in each year of
the first two years commencing with the year the
partnership is formed. After two years, A’s share
of the adjusted basis of partnership property is
$120,000, while B’s is $440,000:
1999–52 I.R.B.713December 27, 1999
Capital Accounts
AB
BookTaxBookTax
Initial
Contribution$500,000$100,000$500,000$500,000
Depreciation
Year 1(30,000)(30,000)(20,000)
Remedial10,000(10,000)
470,000110,000470,000470,000
Depreciation
Year 2(30,000)(30,000)(20,000)
Remedial 10,000(10,000)
$440,000$120,000$440,000$440,000
(B) A sells its interest in PRS to T for its fair mar-
ket value of $440,000. A valid election under sec-
tion 754 is in effect with respect to the sale of the
partnership interest. Accordingly, PRS makes an ad-
justment, pursuant to section 743(b), to increase the
basis of partnership property. Under section 743(b),
the amount of the basis adjustment is equal to
$320,000. Under section 755, the entire basis ad-
justment is allocated to the property.
(iii) At the time of the transfer, $320,000 of sec-
tion 704(c) built-in gain from the property was still
reflected on the partnership’s books, and all of the
basis adjustment is attributable to section 704(c)
built-in gain. Therefore, the basis adjustment will be
recovered over the remaining recovery period for
the section 704(c) built-in gain under §1.704-3(d).
(ii) Decreases—(A) Reduced deduc-
tion. The amount of any negative basis
adjustment allocated to an item of depre-
ciable or amortizable property that is re-
covered in any year first decreases the
transferee’s distributive share of the part-
nership’s depreciation or amortization de-
ductions from that item of property for the
year. If the amount of the basis adjust-
ment recovered in any year exceeds the
transferee’s distributive share of the part-
nership’s depreciation or amortization de-
ductions from the item of property, then
the transferee’s distributive share of the
partnership’s depreciation or amortization
deductions from other items of partner-
ship property is decreased. The transferee
then recognizes ordinary income to the
extent of the excess, if any, of the amount
of the basis adjustment recovered in any
year over the transferee’s distributive
share of the partnership’s depreciation or
amortization deductions from all items of
property.
(B) Recovery period. For purposes of
section 168, if the basis of an item of a
partnership’s recovery property is de-
creased as the result of the transfer of an
interest in the partnership, then the de-
crease is recovered over the remaining
useful life of the item of the partnership’s
recovery property. The portion of the de-
crease that is recovered in any year during
the recovery period is equal to the product
of—
(1
) The amount of the decrease to the
item’s adjusted basis (determined as of
the date of the transfer); multiplied by
(2) A fraction, the numerator of which
is the portion of the adjusted basis of the
item recovered by the partnership in that
year, and the denominator of which is the
adjusted basis of the item on the date of
the transfer (determined prior to any basis
adjustments).
(C) Examples. The provisions of this
paragraph (j)(4)(ii) are illustrated by the
following examples:
Example 1. (i) A, B, and C are equal partners in
partnership PRS, which owns Asset 2, an item of de-
preciable property that has a fair market value that is
less than its adjusted tax basis. C sells its interest in
PRS to T while PRS has an election in effect under
section 754. PRS, therefore, decreases the basis of
Asset 2 with respect to T.
(ii) Assume that in the year following the transfer
of the partnership interest to T, T’s distributive share
of the partnership’s common basis depreciation de-
ductions from Asset 2 is $1,000. Also assume that,
under paragraph (j)(4)(ii)(B) of this section, the
amount of the basis adjustment under section 743(b)
that T recovers during the year is $500. The total
amount of depreciation deductions from Asset 2 re-
ported by T is equal to $500.
Example 2. (i) A and B form equal partnership
PRS. A contributes property with an adjusted basis
of $100,000 and a fair market value of $50,000. B
contributes $50,000 cash. When PRS is formed, the
property has five years remaining in its recovery pe-
riod. The partnership’s adjusted basis of $100,000
will, therefore, be recovered over the five years re-
maining in the property’s recovery period. PRS uses
the traditional allocation method under §1.704-3(b)
with respect to the property. As a result, B will re-

ceive $5,000 of depreciation deductions from the
property in each of years 1-5, and A, as the con-
tributing partner, will receive $15,000 of deprecia-
tion deductions in each of these years.
(ii) Except for the depreciation deductions,
PRS’s expenses equal its income in each of the first
two years commencing with the year the partnership
is formed. After two years, A’s share of the adjusted
basis of partnership property is $70,000, while B’s is
$40,000. A sells its interest in PRS to T for its fair
market value of $40,000. A valid election under sec-
tion 754 is in effect with respect to the sale of the
partnership interest. Accordingly, PRS makes an ad-
justment, pursuant to section 743(b), to decrease the
basis of partnership property. Under section 743(b),
the amount of the adjustment is equal to ($30,000).
Under section 755, the entire adjustment is allocated
to the property.
(iii) The basis of the property at the time of the
transfer of the partnership interest was $60,000. In
each of years 3 through 5, the partnership will real-
ize depreciation deductions of $20,000 from the
property. Thus, one third of the negative basis ad-
justment ($10,000) will be recovered in each of
years 3 through 5. Consequently, T will be allo-
cated, for tax purposes, depreciation of $15,000 each
year from the partnership and will recover $10,000
of its negative basis adjustment. Thus, T’s net de-
preciation deduction from the partnership in each
year is $5,000.
Example 3. (i) A, B, and C are equal partners in
partnership PRS, which owns Asset 2, an item of de-
preciable property that has a fair market value that is
less than its adjusted tax basis. C sells its interest in
PRS to T while PRS has an election in effect under
section 754. PRS, therefore, decreases the basis of
Asset 2 with respect to T.
(ii) Assume that in the year following the transfer
of the partnership interest to T, T’s distributive share
of the partnership’s common basis depreciation de-
ductions from Asset 2 is $500. PRS allocates no
other depreciation to T. Also assume that, under
paragraph (j)(4)(ii)(B) of this section, the amount of
the negative basis adjustment that T recovers during
the year is $1,000. T will report $500 of ordinary in-
come because the amount of the negative basis ad-
justment recovered during the year exceeds T’s dis-
tributive share of the partnership’s common basis
depreciation deductions from Asset 2.
(5) Depletion. Where an adjustment is
made under section 743(b) to the basis of
partnership property subject to depletion,
any depletion allowance is determined
separately for each partner, including the
transferee partner, based on the partner’s
interest in such property. See §1.702-
1(a)(8). For partnerships that hold oil and
gas properties that are depleted at the
partner level under section
613A(c)(7)(D), the transferee partner
(and not the partnership) must make the
basis adjustments, if any, required under
section 743(b) with respect to such prop-
erties. See §1.613A-3(e)(6)(iv).
(6) Example. The provisions of para-
graph (j)(5) of this section are illustrated
by the following example:
Example. A, B, and C each contributes $5,000
cash to form partnership PRS, which purchases a
coal property for $15,000. A, B, and C have equal
interests in capital and profits. C subsequently sells
its partnership interest to T for $100,000 when the
election under section 754 is in effect. T has a basis
adjustment under section 743(b) for the coal prop-
erty of $95,000 (the difference between T’s basis,
$100,000, and its share of the basis of partnership
property, $5,000). Assume that the depletion al-
lowance computed under the percentage method
would be $21,000 for the taxable year so that each
partner would be entitled to $7,000 as its share of the
deduction for depletion. However, under the cost
depletion method, at an assumed rate of 10 percent,
the allowance with respect to T’s one-third interest
which has a basis to him of $100,000 ($5,000, plus
its basis adjustment of $95,000) is $10,000, although
the cost depletion allowance with respect to the one-
third interest of A and B in the coal property, each of
which has a basis of $5,000, is only $500. For part-
ners A and B, the percentage depletion is greater
than cost depletion and each will deduct $7,000
based on the percentage depletion method. How-
ever, as to T, the transferee partner, the cost deple-
tion method results in a greater allowance and T
will, therefore, deduct $10,000 based on cost deple-
tion. See section 613(a).
(k) Returns—(1) Statement of adjust-
ments—(i) In general. A partnership that
must adjust the bases of partnership prop-
erties under section 743(b) must attach a
statement to the partnership return for the
year of the transfer setting forth the name
and taxpayer identification number of the
transferee as well as the computation of
the adjustment and the partnership prop-
erties to which the adjustment has been
allocated.
(ii) Special rule. Where an interest is
transferred in a partnership which holds
oil and gas properties that are depleted at
the partner level under section
613A(c)(7)(D), the transferee must attach
a statement to the transferee’s return for
the year of the transfer, setting forth the
computation of the basis adjustment
under section 743(b) which is allocable to
such properties and the specific properties
to which the adjustment has been allo-
cated.
(iii) Example. The provisions of para-
graph (k)(1)(ii) of this section are illus-
trated by the following example:
Example. (i) Partnership XYZ owns a single sec-
tion 613A(c)(7)(D) domestic oil and gas property
(Property) and other non-depletable assets. A, a
partner in XYZ with an adjusted tax basis in Prop-
erty of $100 (excluding any prior adjustments under
section 743(b)), sells its partnership interest to B for
$800 cash. Under §1.613A-3(e)(6)(iv), A’s adjusted
basis of $100 in Property carries over to B.
(ii) Under section 755, XYZ determines that
Property accounts for 50% of the fair market value
of all partnership assets. The remaining 50% of B’s
purchase price ($400) is attributable to non-de-
pletable property. XYZ must provide a statement to
B containing the portion of B’s adjusted basis attrib-
utable to non-depletable property ($400). Under this
paragraph (k)(1), XYZ must report basis adjust-
ments under section 743(b) to non-depletable prop-
erty. B must report basis adjustments under section
743(b) to Property.
(2) Requirement that transferee notify
partnership—(i) Sale or exchange. A
transferee that acquires, by sale or ex-
change, an interest in a partnership with
an election under section 754 in effect for
the taxable year of the transfer, must no-
tify the partnership, in writing, within 30
days of the sale or exchange. The written
notice to the partnership must be signed
under penalties of perjury and must in-
clude the names and addresses of the
transferee and (if ascertainable) of the
transferor, the taxpayer identification
numbers of the transferee and (if ascer-
tainable) of the transferor, the relationship
(if any) between the transferee and the
transferor, the date of the transfer, the
amount of any liabilities assumed or taken
subject to by the transferee, and the
amount of any money, the fair market
value of any other property delivered or to
be delivered for the transferred interest in
the partnership, and any other information
necessary for the partnership to compute
the transferee’s basis.
(ii) Transfer on death. A transferee that
acquires, on the death of a partner, an in-
terest in a partnership with an election
under section 754 in effect for the taxable
year of the transfer, must notify the part-
nership, in writing, within one year of the
death of the deceased partner. The written
notice to the partnership must be signed
under penalties of perjury and must in-
December 27, 19997141999–52 I.R.B.

clude the names and addresses of the de-
ceased partner and the transferee, the tax-
payer identification numbers of the de-
ceased partner and the transferee, the
relationship (if any) between the trans-
feree and the transferor, the deceased
partner’s date of death, the date on which
the transferee became the owner of the
partnership interest, the fair market value
of the partnership interest on the applica-
ble date of valuation set forth in section
1014, and the manner in which the fair
market value of the partnership interest
was determined.
(iii) Nominee reporting. If a partner-
ship interest is transferred to a nominee
which is required to furnish the statement
under section 6031(c)(1) to the partner-
ship, the nominee may satisfy the notice
requirement contained in this paragraph
(k)(2) by providing the statement required
under §1.6031(c)-1T, provided that the
statement satisfies all requirements of
§1.6031(c)-1T and this paragraph (k)(2).
(3) Reliance. In making the adjust-
ments under section 743(b) and any state-
ment or return relating to such adjust-
ments under this section, a partnership
may rely on the written notice provided
by a transferee pursuant to paragraph
(k)(2) of this section to determine the
transferee’s basis in a partnership interest.
The previous sentence shall not apply if
any partner who has responsibility for
federal income tax reporting by the part-
nership has knowledge of facts indicating
that the statement is clearly erroneous.
(4) Partnership not required to make or
report adjustments under section 743(b)
until it has notice of the transfer. A part-
nership is not required to make the adjust-
ments under section 743(b) (or any state-
ment or return relating to those
adjustments) with respect to any transfer
until it has been notified of the transfer.
For purposes of this section, a partnership
is notified of a transfer when either—
(i) The partnership receives the written
notice from the transferee required under
paragraph (k)(2) of this section; or
(ii) Any partner who has responsibility
for federal income tax reporting by the
partnership has knowledge that there has
been a transfer of a partnership interest.
(5) Effect on partnership of the failure
of the transferee to comply. If the trans-
feree fails to provide the partnership
with the written notice required by para-
graph (k)(2) of this section, the partner-
ship must attach a statement to its return
in the year that the partnership is other-
wise notified of the transfer. This state-
ment must set forth the name and tax-
payer identification number (if
ascertainable) of the transferee. In addi-
tion, the following statement must be
prominently displayed in capital letters
on the first page of the partnership’s re-
turn for such year, and on the first page
of any schedule or information state-
ment relating to such transferee’s share
of income, credits, deductions, etc.:
“RETURN FILED PURSUANT TO
§1.743-1(k)(5).” The partnership will
then be entitled to report the transferee’s
share of partnership items without ad-
justment to reflect the transferee’s basis
adjustment in partnership property. If,
following the filing of a return pursuant
to this paragraph (k)(5), the transferee
provides the applicable written notice to
the partnership, the partnership must
make such adjustments as are necessary
to adjust the basis of partnership prop-
erty (as of the date of the transfer) in any
amended return otherwise to be filed by
the partnership or in the next annual
partnership return of income to be regu-
larly filed by the partnership. At such
time, the partnership must also provide
the transferee with such information as
is necessary for the transferee to amend
its prior returns to properly reflect the
adjustment under section 743(b).
(l) Effective date. This section applies
to transfers of partnership interests that
occur on or after December 15, 1999.
Par. 6. Section 1.751-1 is amended by:
1. Revising paragraphs (a)(2) and
(a)(3).
2. Revising paragraph (c)(3).
3. Removing paragraph (c)(4)(x).
4. Adding a sentence at the end of para-
graph (f).
5. Revising Example 1of paragraph
(g).
The addition and revisions read as
follows:
§1.751-1 Unrealized receivables and
inventory items.
* * * * *
(a) * * *
(2) Determination of gain or loss. The
income or loss realized by a partner upon
the sale or exchange of its interest in sec-
tion 751 property is the amount of income
or loss from section 751 property (includ-
ing any remedial allocations under
§1.704-3(d)) that would have been allo-
cated to the partner (to the extent attribut-
able to the partnership interest sold or ex-
changed) if the partnership had sold all of
its property in a fully taxable transaction
for cash in an amount equal to the fair
market value of such property (taking into
account section 7701(g)) immediately
prior to the partner’s transfer of the inter-
est in the partnership. Any gain or loss
recognized that is attributable to section
751 property will be ordinary gain or loss.
The difference between the amount of
capital gain or loss that the partner would
realize in the absence of section 751 and
the amount of ordinary income or loss de-
termined under this paragraph (a)(2) is the
transferor’s capital gain or loss on the sale
of its partnership interest.
(3) Statement required. A partner sell-
ing or exchanging any part of an interest
in a partnership that has any section 751
property at the time of sale or exchange
must submit with its income tax return for
the taxable year in which the sale or ex-
change occurs a statement setting forth
separately the following information—
(i) The date of the sale or exchange;
(ii) The amount of any gain or loss at-
tributable to the section 751 property; and
(iii) The amount of any gain or loss at-
tributable to capital gain or loss on the
sale of the partnership interest.
* * * * *
(c) Unrealized receivables. * * *
(3) In determining the amount of the
sale price attributable to such unrealized
receivables, or their value in a distribution
treated as a sale or exchange, full account
shall be taken not only of the estimated
cost of completing performance of the
contract or agreement, but also of the time
between the sale or distribution and the
time of payment.
* * * * *
(f) * * * The rules contained in para-
graphs (a)(2) and (a)(3) of this section
apply to transfers of partnership interests
that occur on or after December 15, 1999.
(g) * * *
Example 1. (i)(A) A and B are equal partners in
personal service partnership PRS. B transfers its in-
terest in PRS to T for $15,000 when PRS’s balance
sheet (reflecting a cash receipts and disbursements
method of accounting) is as follows:
1999–52 I.R.B.715December 27, 1999

Assets
Fair
AdjustedMarket
BasisValue
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$ 3,000$ 3,000
Loans Receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .10,00010,000
Capital Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7,0005,000
Unrealized Receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0 14,000
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,00032,000
December 27, 19997161999–52 I.R.B.
(B) None of the assets owned by PRS is section
704(c) property, and the capital assets are nondepre-
ciable. The total amount realized by B is $16,000,
consisting of the cash received, $15,000, plus
$1,000, B’s share of the partnership liabilities as-
sumed by T. See section 752. B’s undivided half-in-
terest in the partnership property includes a half-in-
terest in the partnership’s unrealized receivables
items. B’s basis for its partnership interest is
$10,000 ($9,000, plus $1,000, B’s share of partner-
ship liabilities). If section 751(a) did not apply to
the sale, B would recognize $6,000 of capital gain
from the sale of the interest in PRS. However, sec-
tion 751(a) does apply to the sale.
(ii) If PRS sold all of its section 751 property in a
fully taxable transaction immediately prior to the
transfer of B’s partnership interest to T, B would
have been allocated $7,000 of ordinary income from
the sale of PRS’s unrealized receivables. Therefore,
B will recognize $7,000 of ordinary income with re-
spect to the unrealized receivables. The difference
between the amount of capital gain or loss that the
partner would realize in the absence of section 751
($6,000) and the amount of ordinary income or loss
determined under paragraph (a)(2) of this section
($7,000) is the transferor’s capital gain or loss on the
sale of its partnership interest. In this case, B will
recognize a $1,000 capital loss.
* * * * *
Par. 7. Section 1.754-1 is amended as
follows:
1. Designate the text following the head-
ing of paragraph (c) as paragraph (c)(1).
2. Add a heading to newly designated
paragraph (c)(1).
3. Add paragraph (c)(2).
The additions read as follows:
§1.754-1 Time and manner of making
election to adjust basis of partnership
property.
* * * * *
(c) Revocation of election—(1) In gen-
eral. * * *
(2) Revocations made for first taxable
year ending after December 15, 1999.
Notwithstanding paragraph (c)(1) of this
section, any partnership having an elec-
tion in effect under this section for its tax-
able year that includes December 15,
1999 may revoke such election by attach-
ing a statement to the partnership’s return
for such year. For the revocation to be
valid, the statement must be filed not later
than the time prescribed by §1.6031(a)-
1(e) (including extensions thereof) for fil-
ing the return for such taxable year, and
must set forth the name and address of the
partnership revoking the election, be
signed by any one of the partners who is
authorized to sign the partnership’s fed-
eral income tax return, and contain a dec-
laration that the partnership revokes its
election under section 754 to apply the
provisions of section 734(b) and 743(b).
In addition, the following statement must
be prominently displayed in capital letters
on the first page of the partnership’s re-
turn for such year: “RETURN FILED
PURSUANT TO §1.754-1(c)(2).”
Par. 8. Section 1.755-1 is revised to
read as follows:
§1.755-1 Rules for allocation of basis.
(a) Generally. A partnership that has
an election in effect under section 754
must adjust the basis of partnership prop-
erty under the provisions of section
734(b) and section 743(b) pursuant to the
provisions of this section. The basis ad-
justment is first allocated between the two
classes of property described in section
755(b). These classes of property consist
of capital assets and section 1231(b) prop-
erty (capital gain property), and any other
property of the partnership (ordinary in-
come property). For purposes of this sec-
tion, properties and potential gain treated
as unrealized receivables under section
751(c) and the regulations thereunder
shall be treated as separate assets that are
ordinary income property. The portion of
the basis adjustment allocated to each
class is then allocated among the items
within the class. Adjustments under sec-
tion 743(b) are allocated under paragraph
(b) of this section. Adjustments under
section 734(b) are allocated under para-
graph (c) of this section.
(b) Adjustments under section
743(b)—(1) Generally. (i) For ex-
Liabilities and Capital
Fair
AdjustedMarket
Per BooksValue
Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$ 2,000$ 2,000
Capital:
A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9,00015,000
B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,000
15,000
Total20,00032,000

changes in which the transferee’s basis in
the interest is determined in whole or in
part by reference to the transferor’s basis
in the interest, paragraph (b)(5) of this
section shall apply. For all other trans-
fers which result in a basis adjustment
under section 743(b), paragraphs (b)(2)
through (b)(4) of this section shall apply.
Except as provided in paragraph (b)(5) of
this section, the portion of the basis ad-
justment allocated to one class of prop-
erty may be an increase while the portion
allocated to the other class is a decrease.
This would be the case even though the
total amount of the basis adjustment is
zero. Except as provided in paragraph
(b)(5) of this section, the portion of the
basis adjustment allocated to one item of
property within a class may be an in-
crease while the portion allocated to an-
other is a decrease. This would be the
case even though the basis adjustment al-
located to the class is zero.
(ii) Hypothetical transaction. For pur-
poses of paragraphs (b)(2) through (b)(4)
of this section, the allocation of the basis
adjustment under section 743(b) between
the classes of property and among the
items of property within each class are
made based on the allocations of income,
gain, or loss (including remedial alloca-
tions under §1.704-3(d)) that the trans-
feree partner would receive (to the extent
attributable to the acquired partnership in-
terest) if, immediately after the transfer of
the partnership interest, all of the partner-
ship’s property were disposed of in a fully
taxable transaction for cash in an amount
equal to the fair market value of such
property (the hypothetical transaction).
(2) Allocations between classes of
property—(i) In general. The amount of
the basis adjustment allocated to the class
of ordinary income property is equal to
the total amount of income, gain, or loss
(including any remedial allocations under
§1.704-3(d)) that would be allocated to
the transferee (to the extent attributable to
the acquired partnership interest) from the
sale of all ordinary income property in the
hypothetical transaction. The amount of
the basis adjustment to capital gain prop-
erty is equal to—
(A) The total amount of the basis ad-
justment under section 743(b); less
(B) The amount of the basis adjustment
allocated to ordinary income property
under the preceding sentence; provided,
however, that in no event may the amount
of any decrease in basis allocated to capi-
tal gain property exceed the partnership’s
basis (or in the case of property subject to
the remedial allocation method, the trans-
feree’s share of any remedial loss under
§1.704-3(d) from the hypothetical transac-
tion) in capital gain property. In the event
that a decrease in basis allocated to capital
gain property would otherwise exceed the
partnership’s basis in capital gain prop-
erty, the excess must be applied to reduce
the basis of ordinary income property.
(ii) Examples. The provisions of this
paragraph (b)(2) are illustrated by the fol-
lowing examples:
Example 1. (i) A and B form equal partnership
PRS. A contributes $50,000 and Asset 1, a nonde-
preciable capital asset with a fair market value of
$50,000 and an adjusted tax basis of $25,000. B
contributes $100,000. PRS uses the cash to pur-
chase Assets 2, 3, and 4. After a year, A sells its in-
terest in PRS to T for $120,000. At the time of the
transfer, A’s share of the partnership’s basis in part-
nership assets is $75,000. Therefore, T receives a
$45,000 basis adjustment.
(ii) Immediately after the transfer of the partner-
ship interest to T, the adjusted basis and fair market
value of PRS’s assets are as follows:
1999–52 I.R.B.717December 27, 1999
Assets
Fair
AdjustedMarket
BasisValue
Capital Gain Property:
Asset 1$ 25,000$ 75,000
Asset 2100,000117,500
Ordinary Income Property:
Asset 3 $ 40,000$ 45,000
Asset 4 10,000 2,500
Total$175,000$240,000
(iii) If PRS sold all of its assets in a fully tax-
able transaction at fair market value immediately
after the transfer of the partnership interest to T,
the total amount of capital gain that would be allo-
cated to T is equal to $46,250 ($25,000 section
704(c) built-in gain from Asset 1, plus fifty per-
cent of the $42,500 appreciation in capital gain
property). T would also be allocated a $1,250 or-
dinary loss from the sale of the ordinary income
property.
(iv) The amount of the basis adjustment that is
allocated to ordinary income property is equal to
($1,250) (the amount of the loss allocated to T
from the hypothetical sale of the ordinary income
property).
(v) The amount of the basis adjustment that is
allocated to capital gain property is equal to
$46,250 (the amount of the basis adjustment,
$45,000, less ($1,250), the amount of loss allo-
cated to T from the hypothetical sale of the ordi-
nary income property).
Example 2. (i) A and B form equal partnership
PRS. A and B each contribute $1,000 cash which
the partnership uses to purchase Assets 1, 2, 3, and
4. After a year, A sells its partnership interest to T
for $1,000. T’s basis adjustment under section
743(b) is zero.
(ii) Immediately after the transfer of the partner-
ship interest to T, the adjusted basis and fair market
value of PRS’s assets are as follows:

Assets
Fair
AdjustedMarket
BasisValue
Capital Gain Property:
Asset 1$ 500$ 750
Asset 2500500
Ordinary Income Property:
Asset 3$ 500$ 250
Asset 4 500 500
Total$2,000$2,000
December 27, 19997181999–52 I.R.B.
(iii) If, immediately after the transfer of the part-
nership interest to T, PRS sold all of its assets in a
fully taxable transaction at fair market value, T
would be allocated a loss of $125 from the sale of
the ordinary income property. Thus, the amount of
the basis adjustment to ordinary income property is
($125). The amount of the basis adjustment to capi-
tal gain property is $125 (zero, the amount of the
basis adjustment under section 743(b), less ($125),
amount of the basis adjustment allocated to ordinary
income property).
(3) Allocation within the class—(i)
Ordinary income property. The amount
of the basis adjustment to each item of
property within the class of ordinary in-
come property is equal to—
(A) The amount of income, gain, or
loss (including any remedial allocations
under §1.704-3(d)) that would be allo-
cated to the transferee (to the extent at-
tributable to the acquired partnership in-
terest) from the hypothetical sale of the
item; reduced by
(B) The product of—
(1
) Any decrease to the amount of the
basis adjustment to ordinary income prop-
erty required pursuant to the last sentence
of paragraph (b)(2)(i) of this section; mul-
tiplied by
(2) A fraction, the numerator of which
is the fair market value of the item of
property to the partnership and the de-
nominator of which is the total fair market
value of all of the partnership’s items of
ordinary income property.
(ii) Capital gain property. The amount
of the basis adjustment to each item of
property within the class of capital gain
property is equal to—
(A) The amount of income, gain, or
loss (including any remedial allocations
under §1.704-3(d)) that would be allo-
cated to the transferee (to the extent at-
tributable to the acquired partnership in-
terest) from the hypothetical sale of the
item; minus
(B) The product of—
(1) The total amount of gain or loss (in-
cluding any remedial allocations under
§1.704-3(d)) that would be allocated to
the transferee (to the extent attributable to
the acquired partnership interest) from the
hypothetical sale of all items of capital
gain property, minus the amount of the
positive basis adjustment to all items of
capital gain property or plus the amount
of the negative basis adjustment to capital
gain property; multiplied by
(2) A fraction, the numerator of which
is the fair market value of the item of
property to the partnership, and the de-
nominator of which is the fair market
value of all of the partnership’s items of
capital gain property.
(iii) Examples.The provisions of this
paragraph (b)(3) are illustrated by the fol-
lowing examples:
Example 1. (i) Assume the same facts as Exam-
ple 1 in paragraph (b)(2)(ii) of this section. Of the
$45,000 basis adjustment, $46,250 was allocated to
capital gain property. The amount allocated to ordi-
nary income property was ($1,250).
(ii) Asset 1 is a capital gain asset, and T would be
allocated $37,500 from the sale of Asset 1 in the hy-
pothetical transaction. Therefore, the amount of the
adjustment to Asset 1 is $37,500.
(iii) Asset 2 is a capital gain asset, and T would
be allocated $8,750 from the sale of Asset 2 in the
hypothetical transaction. Therefore, the amount of
the adjustment to Asset 2 is $8,750.
(iv) Asset 3 is ordinary income property, and T
would be allocated $2,500 from the sale of Asset 3
in the hypothetical transaction. Therefore, the
amount of the adjustment to Asset 3 is $2,500.
(v) Asset 4 is ordinary income property, and T
would be allocated ($3,750) from the sale of Asset 4
in the hypothetical transaction. Therefore, the
amount of the adjustment to Asset 4 is ($3,750).
Example 2. (i) Assume the same facts as Exam-
ple 1 in paragraph (b)(2)(ii) of this section, except
that A sold its interest in PRS to T for $110,000
rather than $120,000. T, therefore, receives a basis
adjustment under section 743(b) of $35,000. Of the
$35,000 basis adjustment, ($1,250) is allocated to
ordinary income property, and $36,250 is allocated
to capital gain property.
(ii) Asset 3 is ordinary income property, and T
would be allocated $2,500 from the sale of Asset 3
in the hypothetical transaction. Therefore, the
amount of the adjustment to Asset 3 is $2,500.
(iii) Asset 4 is ordinary income property, and T
would be allocated ($3,750) from the sale of Asset 4
in the hypothetical transaction. Therefore, the
amount of the adjustment to Asset 4 is ($3,750).
(iv) Asset 1 is a capital gain asset, and T would
be allocated $37,500 from the sale of Asset 1 in the
hypothetical transaction. Asset 2 is a capital gain
asset, and T would be allocated $8,750 from the sale
of Asset 2 in the hypothetical transaction. The total
amount of gain that would be allocated to T from the
sale of the capital gain assets in the hypothetical
transaction is $46,250, which exceeds the amount of
the basis adjustment allocated to capital gain prop-
erty by $10,000. The amount of the adjustment to
Asset 1 is $33,604 ($37,500 minus $3,896 ($10,000
x $75,000/192,500)). The amount of the basis ad-
justment to Asset 2 is $2,646 ($8,750 minus $6,104
($10,000 x $117,500/192,500)).
(4) Income in respect of a decedent—
(i) In general. Where a partnership in-
terest is transferred as a result of the
death of a partner, under section 1014(c)
the transferee’s basis in its partnership
interest is not adjusted for that portion
of the interest, if any, which is attribut-
able to items representing income in re-
spect of a decedent under section 691.
See §1.742-1. Accordingly, if a partner-
ship interest is transferred as a result of
the death of a partner, and the partner-
ship holds assets representing income in
respect of a decedent, no part of the

basis adjustment under section 743(b) is
allocated to these assets. See §1.743-
1(b).
(ii) The provisions of this paragraph
(b)(4) are illustrated by the following ex-
ample:
Example. (i) A and B are equal partners in per-
sonal service partnership PRS. As a result of B’s
death, B’s partnership interest is transferred to T
when PRS’s balance sheet (reflecting a cash re-
ceipts and disbursements method of accounting) is
as follows:
1999–52 I.R.B.719December 27, 1999
Assets
Fair
AdjustedMarket
BasisValue
Capital Asset . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$ 2,000$ 5,000
Unrealized Receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0 15,000
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2,00020,000
Liabilities and Capital
Fair
AdjustedMarket
Per BooksValue
Capital:
A1,00010,000
B 1,000 10,000
Total2,00020,000
(ii) None of the assets owned by PRS is section
704(c) property, and the capital asset is nondeprecia-
ble. The fair market value of T’s partnership interest
on the applicable date of valuation set forth in sec-
tion 1014 is $10,000. Of this amount, $2,500 is at-
tributable to T’s share of the partnership’s capital
asset, and $7,500 is attributable to T’s 50% share of
the partnership’s unrealized receivables. The part-
nership’s unrealized receivables represent income in
respect of a decedent. Accordingly, under section
1014(c), T’s basis in its partnership interest is not
adjusted for that portion of the interest which is at-
tributable to the unrealized receivables. Therefore,
T’s basis in its partnership interest is $2,500.
(iii) At the time of the transfer, B’s share of the
partnership’s basis in partnership assets is $1,000.
Accordingly, T receives a $1,500 basis adjustment
under section 743(b). Under this paragraph (b)(4),
the entire basis adjustment is allocated to the part-
nership’s capital asset.
(5) Transferred basis exchanges—(i) In
general. This paragraph (b)(5) applies to
basis adjustments under section 743(b)
which result from exchanges in which the
transferee’s basis in the interest is deter-
mined in whole or in part by reference to
the transferor’s basis in the interest. For
example, this paragraph applies if a part-
nership interest is contributed to a corpo-
ration in a transaction to which section
351 applies or to a partnership in a trans-
action to which section 721(a) applies.
(ii) Allocations between classes of prop-
erty. If the total amount of the basis adjust-
ment under section 743(b) is zero, then no
adjustment to the basis of partnership prop-
erty will be made under this paragraph
(b)(5). If there is an increase in basis to be
allocated to partnership assets, such in-
crease must be allocated to capital gain
property or ordinary income property, re-
spectively, only if the total amount of gain
or loss (including any remedial allocations
under §1.704-3(d)) that would be allocated
to the transferee (to the extent attributable
to the acquired partnership interest) from
the hypothetical sale of all such property
would result in a net gain or net income, as
the case may be, to the transferee. Where,
under the preceding sentence, an increase
in basis may be allocated to both capital
gain assets and ordinary income assets, the
increase shall be allocated to each class in
proportion to the net gain or net income, re-
spectively, which would be allocated to the
transferee from the sale of all assets in each
class. If there is a decrease in basis to be al-
located to partnership assets, such decrease
must be allocated to capital gain property or
ordinary income property, respectively,
only if the total amount of gain or loss (in-
cluding any remedial allocations under
§1.704-3(d)) that would be allocated to the
transferee (to the extent attributable to the
acquired partnership interest) from the hy-
pothetical sale of all such property would
result in a net loss to the transferee. Where,
under the preceding sentence, a decrease in
basis may be allocated to both capital gain
assets and ordinary income assets, the de-
crease shall be allocated to each class in
proportion to the net loss which would be
allocated to the transferee from the sale of
all assets in each class.
(iii) Allocations within the classes—(A)
Increases. If there is an increase in basis to
be allocated within a class, the increase
must be allocated first to properties with
unrealized appreciation in proportion to the
transferee’s share of the respective amounts
of unrealized appreciation before such in-
crease (but only to the extent of the trans-
feree’s share of each property’s unrealized
appreciation). Any remaining increase
must be allocated among the properties
within the class in proportion to the trans-
feree’s share of the amount that would be
realized by the partnership upon the hypo-
thetical sale of each asset in the class.
(B) Decreases. If there is a decrease

in basis to be allocated within a class,
the decrease must be allocated first to
properties with unrealized depreciation
in proportion to the transferee’s shares
of the respective amounts of unrealized
depreciation before such decrease (but
only to the extent of the transferee’s
share of each property’s unrealized de-
preciation). Any remaining decrease
must be allocated among the properties
within the class in proportion to the
transferee’s shares of their adjusted
bases (as adjusted under the preceding
sentence).
(C) Limitation in decrease of basis.
Where, as the result of a transaction to
which this paragraph (b)(5) applies, a
decrease in basis must be allocated to
capital gain assets, ordinary income as-
sets, or both, and the amount of the de-
crease otherwise allocable to a particular
class exceeds the transferee’s share of
the adjusted basis to the partnership of
all depreciated assets in that class, the
transferee’s negative basis adjustment is
limited to the transferee’s share of the
partnership’s adjusted basis in all depre-
ciated assets in that class.
(D) Carryover adjustment. Where a
transferee’s negative basis adjustment
under section 743(b) cannot be allocated
to any asset, because the adjustment ex-
ceeds the transferee’s share of the ad-
justed basis to the partnership of all de-
preciated assets in a particular class, the
adjustment is made when the partner-
ship subsequently acquires property of a
like character to which an adjustment
can be made.
(iv) Examples. The provisions of this
paragraph (b)(5) are illustrated by the fol-
lowing examples:
Example 1. A is a member of partnership LTP,
which has made an election under section 754. The
three partners in LTP have equal interests in capital
and profits. Solely in exchange for a partnership in-
terest in UTP, A contributes its interest in LTP to
UTP in a transaction described in section 721. At
the time of the transfer, A’s basis in its partnership
interest ($5,000) equals its share of inside basis
(also $5,000). Under section 723, UTP’s basis in its
interest in LTP is $5,000. LTP’s only two assets on
the date of contribution are inventory with a basis
of $5,000 and a fair market value of $7,500, and a
nondepreciable capital asset with a basis of $10,000
and a fair market value of $7,500. The amount of
the basis adjustment under section 743(b) to part-
nership property is $0 ($5,000, UTP’s basis in its
interest in LTP, minus $5,000, UTP’s share of LTP’s
basis in partnership assets). Because UTP acquired
its interest in LTP in a transferred basis exchange,
and the total amount of the basis adjustment under
section 743(b) is zero, UTP receives no special
basis adjustments under section 743(b) with respect
to the partnership property of LTP.
Example 2. (i) A purchases a partnership interest
in LTP at a time when an election under section 754
is not in effect. The three partners in LTP have equal
interests in capital and profits. During a later year
for which LTP has an election under section 754 in
effect, and in a transaction that is unrelated to A’s
purchase of the LTP interest, A contributes its inter-
est in LTP to UTP in a transaction described in sec-
tion 721 (solely in exchange for a partnership inter-
est in UTP). At the time of the transfer, A’s adjusted
basis in its interest in LTP is $20,433. Under section
721, A recognizes no gain or loss as a result of the
contribution of its partnership interest to UTP.
Under section 723, UTP’s basis in its partnership in-
terest in LTP is $20,433. The balance sheet of LTP
on the date of the contribution shows the following:
December 27, 19997201999–52 I.R.B.
Assets
Fair
AdjustedMarket
BasisValue
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$ 5,000$5,000
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .10,00010,000
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .20,00021,000
Nondepreciable capital asset . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .20,00040,000
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$55,000$76,000
Liabilities and Capital
Fair
AdjustedMarket
Per BooksValue
Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$10,000$10,000
Capital:
A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15,00022,000
B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15,00022,000
C . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15,00022,000
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$55,000$76,000
(ii) The amount of the basis adjustment under
section 743(b) is the difference between the basis of
UTP’s interest in LTP and UTP’s share of the ad-
justed basis to LTP of partnership property. UTP’s
interest in the previously taxed capital of LTP is
$15,000 ($22,000, the amount of cash UTP would
receive if LTP liquidated immediately after the hy-
pothetical transaction, decreased by $7,000, the
amount of tax gain allocated to UTP from the hypo-
thetical transaction). UTP’s share of the adjusted
basis to LTP of partnership property is $18,333
($15,000 share of previously taxed capital, plus

$3,333 share of LTP’s liabilities). The amount of the
basis adjustment under section 743(b) to partnership
property therefore, is $2,100 ($20,433 minus
$18,333).
(iii) The total amount of gain that would be allo-
cated to UTP from the hypothetical sale of capital
gain property is $6,666.67 (one-third of the excess
of the fair market value of LTP’s nondepreciable
capital asset, $40,000, over its basis, $20,000). The
total amount of gain that would be allocated to UTP
from the hypothetical sale of ordinary income prop-
erty is $333.33 (one-third of the excess of the fair
market value of LTP’s inventory, $21,000, over its
basis, $20,000). Under paragraph (b)(5), LTP must
allocate $2,000 ($6,666.67 divided by $7,000 times
$2,100) of UTP’s basis adjustment to the nondepre-
ciable capital asset. LTP must allocate $100
($333.33 divided by $7,000 times $2,100) of UTP’s
basis adjustment to the inventory.
(c) Adjustments under section 734(b)—
(1) Allocations between classes of prop-
erty—(i) General rule. Where there is a
distribution of partnership property result-
ing in an adjustment to the basis of undis-
tributed partnership property under sec-
tion 734(b)(1)(B) or (b)(2)(B), the
adjustment must be allocated to remain-
ing partnership property of a character
similar to that of the distributed property
with respect to which the adjustment
arose. Thus, when the partnership’s ad-
justed basis of distributed capital gain
property immediately prior to distribution
exceeds the basis of the property to the
distributee partner (as determined under
section 732), the basis of the undistrib-
uted capital gain property remaining in
the partnership is increased by an amount
equal to the excess. Conversely, when the
basis to the distributee partner (as deter-
mined under section 732) of distributed
capital gain property exceeds the partner-
ship’s adjusted basis of such property im-
mediately prior to the distribution, the
basis of the undistributed capital gain
property remaining in the partnership is
decreased by an amount equal to such ex-
cess. Similarly, where there is a distribu-
tion of ordinary income property, and the
basis of the property to the distributee
partner (as determined under section 732)
is not the same as the partnership’s ad-
justed basis of the property immediately
prior to distribution, the adjustment is
made only to undistributed property of the
same class remaining in the partnership.
(ii) Special rule. Where there is a dis-
tribution resulting in an adjustment under
section 734(b)(1)(A) or (b)(2)(A) to the
basis of undistributed partnership prop-
erty, the adjustment is allocated only to
capital gain property.
(2) Allocations within the classes—(i)
Increases. If there is an increase in basis
to be allocated within a class, the increase
must be allocated first to properties with
unrealized appreciation in proportion to
their respective amounts of unrealized ap-
preciation before such increase (but only
to the extent of each property’s unrealized
appreciation). Any remaining increase
must be allocated among the properties
within the class in proportion to their fair
market values.
(ii) Decreases. If there is a decrease in
basis to be allocated within a class, the
decrease must be allocated first to proper-
ties with unrealized depreciation in pro-
portion to their respective amounts of un-
realized depreciation before such
decrease (but only to the extent of each
property’s unrealized depreciation). Any
remaining decrease must be allocated
among the properties within the class in
proportion to their adjusted bases (as ad-
justed under the preceding sentence).
(3) Limitation in decrease of basis.
Where a decrease in the basis of partner-
ship assets is required under section
734(b)(2) and the amount of the decrease
exceeds the adjusted basis to the partner-
ship of property of the required character,
the basis of such property is reduced to
zero (but not below zero).
(4) Carryover adjustment. Where, in
the case of a distribution, an increase or a
decrease in the basis of undistributed
property cannot be made because the part-
nership owns no property of the character
required to be adjusted, or because the
basis of all the property of a like character
has been reduced to zero, the adjustment
is made when the partnership subse-
quently acquires property of a like charac-
ter to which an adjustment can be made.
(5) Example. The following example il-
lustrates this paragraph (c):
Example. (i) A, B, and C form equal partnership
PRS. A contributes $50,000 and Asset 1, capital
gain property with a fair market value of $50,000
and an adjusted tax basis of $25,000. B and C each
contributes $100,000. PRS uses the cash to pur-
chase Assets 2, 3, 4, 5, and 6. Assets 4, 5, and 6 are
the only assets held by the partnership which are
subject to section 751. The partnership has an elec-
tion in effect under section 754. After seven years,
the adjusted basis and fair market value of PRS’s as-
sets are as follows:
1999–52 I.R.B.721December 27, 1999
Assets
Fair
AdjustedMarket
BasisValue
Capital Gain Property:
Asset 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$ 25,000$ 75,000
Asset 2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .100,000117,500
Asset 3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .50,00060,000
Ordinary Income Property:
Asset 4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$ 40,000$ 45,000
Asset 5 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .50,00060,000
Asset 6 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,000
2,500
Total$275,000$360,000

(ii) Allocation between classes. Assume that
PRS distributes Assets 3 and 5 to A in complete liq-
uidation of A’s interest in the partnership. A’s basis
in the partnership interest was $75,000. The partner-
ship’s basis in Assets 3 and 5 was $50,000 each. A’s
$75,000 basis in its partnership interest is allocated
between Assets 3 and 5 under sections 732(b) and
(c). A will, therefore, have a basis of $25,000 in
Asset 3 (capital gain property), and a basis of
$50,000 in Asset 5 (section 751 property). The dis-
tribution results in a $25,000 increase in the basis of
capital gain property. There is no change in the
basis of ordinary income property.
(iii) Allocation within class. The amount of the
basis increase to capital gain property is $25,000 and
must be allocated among the remaining capital gain
assets in proportion to the difference between the
fair market value and basis of each. The fair market
value of Asset 1 exceeds its basis by $50,000. The
fair market value of Asset 2 exceeds its basis by
$17,500. Therefore, the basis of Asset 1 will be in-
creased by $18,519 ($25,000, multiplied by
$50,000, divided by $67,500), and the basis of Asset
2 will be increased by $6,481 ($25,000 multiplied
by $17,500, divided by $67,500).
(d) Effective date. This section applies to
transfers of partnership interests and distri-
butions of property from a partnership that
occur on or after December 15, 1999.
Par. 9. Section 1.1017-1 is amended by:
1. Revising paragraph (g)(2)(iv).
2. Adding paragraph (g)(2)(v).
The addition and revision read as follows:
§1.1017-1 Basis reductions following a
discharge of indebtedness.
* * * * *
(g) * * *
(2) * * *
(iv) Partner’s share of partnership
basis—(A) In general. For purposes of
this paragraph (g), a partner’s proportion-
ate share of the partnership’s basis in de-
preciable property (or depreciable real
property) is equal to the sum of—
(1) The partner’s section 743(b) basis
adjustments to items of partnership depre-
ciable property (or depreciable real prop-
erty); and
(2
) The common basis depreciation de-
ductions (but not including remedial allo-
cations of depreciation deductions under
§1.704-3(d)) that, under the terms of the
partnership agreement effective for the
taxable year in which the discharge of in-
debtedness occurs, are reasonably ex-
pected to be allocated to the partner over
the property’s remaining useful life. The
assumptions made by a partnership in de-
termining the reasonably expected alloca-
tion of depreciation deductions must be
consistent for each partner. For example,
a partnership may not treat the same de-
preciation deductions as being reasonably
expected by more than one partner.
(B) Effective date. This paragraph
(g)(2)(iv) applies to elections made under
sections 108(b)(5) and 108(c) on or after
December 15, 1999.
(v) Treatment of basis reduction—(A)
Basis adjustment. The amount of the re-
duction to the basis of depreciable part-
nership property constitutes an adjust-
ment to the basis of partnership property
with respect to the partner only. No ad-
justment is made to the common basis of
partnership property. Thus, for purposes
of income, deduction, gain, loss, and dis-
tribution, the partner will have a special
basis for those partnership properties the
bases of which are adjusted under section
1017 and this section.
(B) Recovery of adjustments to basis of
partnership property. Adjustments to the
basis of partnership property under this
section are recovered in the manner de-
scribed in §1.743-1.
(C) Effect of basis reduction. Adjust-
ments to the basis of partnership property
under this section are treated in the same
manner and have the same effect as an ad-
justment to the basis of partnership prop-
erty under section 743(b). The following
example illustrates this paragraph (g)(2)(v):
Example. (i) A, B, and C are equal partners in part-
nership PRS, which owns (among other things) Asset
1, an item of depreciable property with a basis of
$30,000. A’s basis in its partnership interest is $20,000.
Under the terms of the partnership agreement, A’s share
of the depreciation deductions from Asset 1 over its re-
maining useful life will be $10,000. Under section
1017, A requests, and PRS agrees, to decrease the basis
of Asset 1 with respect to A by $10,000.
(ii) In the year following the reduction of basis
under section 1017, PRS amends its partnership agree-
ment to provide that items of depreciation and loss
from Asset 1 will be allocated equally between B and
C. In that year, A’s distributive share of the partner-
ship’s common basis depreciation deductions from
Asset 1 is now $0. Under §1.743-1(j)(4)(ii)(B), the
amount of the section 1017 basis adjustment that A re-
covers during the year is $1,000. A will report $1,000
of ordinary income because A’s distributive share of the
partnership’s common basis depreciation deductions
from Asset 1 ($0) is insufficient to offset the amount of
the section 1017 basis adjustment recovered by A dur-
ing the year ($1,000).
(iii) In the following year, PRS sells Asset 1 for
$15,000 and recognizes a $12,000 loss. This loss is
allocated equally between B and C, and A’s share of
the loss is $0. Upon the sale of Asset 1, A recovers
its entire remaining section 1017 basis adjustment
($9,000). A will report $9,000 of ordinary income.
(D) Effective date. This paragraph
(g)(2)(v) applies to elections made under
sections 108(b)(5) and 108(c) on or after
December 15, 1999.
PART 602—OMB CONTROL NUM-
BERS UNDER THE PAPERWORK RE-
DUCTION ACT
Par. 10. The authority citation
for part 602 continues to read as follows:
Authority: 26 U.S.C. 7805.
Par. 11. In §602.101, paragraph (b) is
amended by
revising the entries for 1.732-1 and
1.743-1 in the table to read as follows:
§602.101 OMB Control numbers.
* * * * *
David A. Mader,
Acting Deputy Commissioner
of Internal Revenue.
Approved November 29, 1999
Jonathan Talisman,
Acting Assistant Secretary
of the Treasury.
(Filed by the Office of the Federal Register on De-
cember 14, 1999, 8:45 a.m., and published in the
issue of the Federal Register for December 15, 1999,
64 F.R. 69903)
December 27, 19997221999–52 I.R.B.
(b) * * *
CFR part or section whereCurrent OMB
identified and describedcontrol No.
* * * * *
1.732-1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1545–0099
1545–1588
* * * * *
1.732-1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1545–0074
1545–1588
* * * *

Section 1361.—S Corporation
Defined
26 CFR 1.1361–1: S corporation defined.
If a state law limited partnership elects
under § 301.7701–3 to be classified as an
association taxable as a corporation, does
the entity have more than one class of
stock for purposes of § 1361(b)(1)(D)?
See Rev. Proc. 99–51, page 760.
26 CFR 601.901: Missing children shown on penalty
mail.
T.D. 8848
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 601
Use of Penalty Mail in the Location
and Recovery of Missing Children
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Procedural rules.
SUMMARY: This rule establishes the
procedures under which the IRS may use
penalty mail to aid in the location and
recovery of missing children. The IRS
can participate in this cause as a result of
the Juvenile Justice and Delinquency
Prevention Act of 1974. Printing pictures
and biographical data of missing children
on blank pages of annual tax forms and
instructions, taxpayer information
publications, and other IRS products will
assist the National Center for Missing
and Exploited Children (National
Center).
DATES: Ef
fective Date:These regulations
are effective December 13, 1999
Applicability Date:For dates of applica-
bility of these regulations, see §601.901 (e).
FOR FURTHER INFORMATION
CONTACT: Concerning the
regulations, Randall Hall, (202) 283-
7900. Concerning the IRS’ forms and
publications program, Sandy Kopta,
(202) 622-3726 (not toll-free
numbers).
SUPPLEMENTARY INFORMATION:
Background
On August 9, 1985, Congress enacted
Public Law 99–87, 99 Stat. 290, which
added a new section 3220 to title 39,
United States Code. That provision au-
thorized Federal agencies to place pho-
tographs and biographical data of missing
children on penalty mail in accordance
with guidelines promulgated by the De-
partment of Justice. On December 1,
1997, Congress amended the statute to
provide that the use of missing children
photographs and biographical data on
penalty mail would be continued until De-
cember 31, 2002.
The Office of Juvenile Justice and
Delinquency Prevention (OJJDP) within
the Department of Justice is directed by
39 U.S.C. 3220 (a) (1), after consultation
with appropriate public and private agen-
cies, to prescribe general guidelines under
which penalty mail may be used to assist
in the location and recovery of missing
children. These guidelines were pub-
lished on November 8, 1985 (50 FR
46622). In addition, each executive de-
partment of the Government of the United
States is required by 39 U.S.C. 3220 (a)
(2) to promulgate or authorize subunits to
promulgate regulations under which
penalty mail sent by such departments
may be used in conformance with the
OJJDP guidelines.
This rule is being promulgated in com-
pliance with 39 U.S.C. 3220 (a)(2) and is
in conformance with the OJJDP guide-
lines. The rule sets forth information on
U.S. Postal Service restrictions on the
placement of information, “shelf-life” re-
strictions on the use of missing children
information, and other applicable admin-
istrative factors.
The IRS will receive photographic and
biographical information on missing chil-
dren through the National Center. The
IRS will then give priority to the use of
missing children information in mail ad-
dressed to members of the public.
Findings and Other Matters
The Commissioner has determined that
notice and prior public procedure are not
required for this regulation because the
subject matter of the regulation pertains
only to the IRS’s use of penalty mail in
the location and recovery of missing chil-
dren. The regulation does not directly af-
fect the rights and interests of the general
public. For these reasons, the rule is to be
effective on the date of publication in the
Federal Register.
Special Analyses
It has been determined that this Trea-
sury decision is not a significant regula-
tory action as defined in Executive
Order 12866. Therefore, a regulatory
assessment is not required. It also has
been determined that section 553 (b) of
the Administrative Procedure Act (5
U.S.C. Chapter 5) does not apply to
these regulations, and because the regu-
lation does not impose a collection of in-
formation on small entities, the Regula-
tory Flexibility Act (5 U.S.C. Chapter 6)
does not apply. Pursuant to section
7805 (f) of the Internal Revenue Code,
this statement of procedural rule will be
submitted to the Chief Counsel for Ad-
vocacy of the Small Business Adminis-
tration for comment on its impact on
small business.
Drafting Information
The principal author of this statement of
procedural rule is Randall Hall, Office of
Chief Counsel (General Legal Services).
However, other personnel from the IRS
participated in its development.
* * * * *
Adoption of Amendments to the
Statement of Procedural Rules
Accordingly, 26 CFR part 601 is
amended as follows:
PART 601–STATEMENT OF
PROCEDURAL RULES
Paragraph 1. The authority citation for
part 601 is revised to read as follows:
Authority: 5 U.S.C. 301 and 552, un-
less otherwise noted.
Subpart I also issued under 39 U.S.C.
1999–52 I.R.B.723December 27, 1999

3220.
Par. 2. Subpart I, consisting of
§601.901, is added to read as follows:
Subpart I–Use of Penalty Mail in the
Location and Recovery
of Missing Children
§601.901 Missing children shown on
penalty mail.
(a) Purpose.To support the national
effort to locate and recover missing chil-
dren, the Internal Revenue Service (IRS)
joins other executive departments and
agencies of the Government of the United
States in using official mail to dissemi-
nate photographs and biographical infor-
mation on hundreds of missing children.
(b) Procedures for obtaining and dis-
seminating data.(1) The IRS shall pub-
lish pictures and biographical data re-
lated to missing children in domestic
penalty mail containing annual tax
forms and instructions, taxpayer infor-
mation publications, and other IRS
products directed to members of the
public in the United States and its terri-
tories and possessions.
(2) Missing children information shall
not be placed on the “Penalty Indicia,”
“OCR Read Area,” “Bar Code Read
Area,” and “Return Address” areas of let-
ter-size envelopes.
(3) The IRS shall accept photographic
and biographical materials solely from the
National Center for Missing and Exploited
Children (National Center). Photographs
that were reasonably current as of the time
of the child’s disappearance, or those which
have been updated to reflect a missing
child’s current age through computer en-
hancement technique, shall be the only ac-
ceptable form of visual media or pictorial
likeness used in penalty mail.
(c) Withdrawal of data.The shelf life
of printed penalty mail is limited to 3
months for missing child cases. The IRS
shall follow those guidelines whenever
practicable. For products with an ex-
tended shelf life, such as those related to
filing and paying taxes, the IRS will not
print any pictures or biographical data re-
lating to missing children without obtain-
ing from the National Center a waiver of
the 3-month shelf-life guideline.
(d) Reports and contact official.IRS
shall compile and submit to OJJDP reports
on its experience in implementing Public
Law 99–87, 99 Stat. 290, as required by
that office. The IRS contact person is:
Chief, Business Publications Section (or
successor office), Tax Forms and Publica-
tions Division, Technical Publications
Branch, OP:FS:FP:P:3, Room 5613, Inter-
nal Revenue Service, 1111 Constitution
Ave., N.W., Washington, DC 20224.
(e) Period of applicability.This sec-
tion is applicable December 13, 1999
through December 31, 2002.
Robert E. Wenzel,
Deputy Commissioner
of Internal Revenue.
(Filed by the Office of the Federal Register on De-
cember 10, 1999, 8:45 a.m., and published in the
issue of the Federal Register for December 13,
1999, 64 F.R. 69398)
December 27, 19997241999–52 I.R.B.

1999–52 I.R.B.725December 27, 1999
26 CFR 601.204: Changes in accounting periods
and in methods of accounting.
(Also Part I, §§ 56, 162, 165, 166, 167, 168, 171,
174, 197, 263, 263A, 404, 446, 451, 454, 455, 461,
471, 472, 475, 481, 585, 1272, 1273, 1278, 1281,
1363; 1.165–2, 1.167(a)–11, 1.167(e)–1, 1.171–4,
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, 1.451–1, 1.454–1,
1.455–6, 1.461–4, 1.461–5, 1.471–1, 1.471–2,
1.471–3, 1.472–6, 1.472–8, 1.481–1, 1.481–4,
1.1272–1, 1.1273–1, 1.1273–2.)
Rev. Proc. 99–49
SECTION 1. PURPOSE . . . . . . . . . . . .9
SECTION 2. BACKGROUND
AND CHANGES . . . . . . . . . . . . . . . . .10
.01 Change in method of accounting
defined . . . . . . . . . . . . . . . . . . .10
.02 Securing permission to make a
method change . . . . . . . . . . . . .12
.03 Terms and conditions of a method
change . . . . . . . . . . . . . . . . . . .12
.04 No retroactive method
change . . . . . . . . . . . . . . . . . . .13
.05 Method change with a § 481(a)
adjustment . . . . . . . . . . . . . . . .13
(1) Need for adjustment . . . . . . .13
(2) Adjustment period . . . . . . . .14
.06 Method change using a cut-off
method . . . . . . . . . . . . . . . . . . .15
.07 Consistency and clear reflection
of income . . . . . . . . . . . . . . . . .16
.08 Separate trades or businesses .16
.09 Penalties . . . . . . . . . . . . . . . . .17
.10 Change made as part of an
examination . . . . . . . . . . . . . . .17
.11 Significant changes . . . . . . . . .18
SECTION 3. DEFINITIONS . . . . . . .20
.01Application . . . . . . . . . . . . . . .20
.02Taxpayer . . . . . . . . . . . . . . . . .20
(1) In general . . . . . . . . . . . . . . .20
(2)Consolidated group . . . . . . .21
.03Filed . . . . . . . . . . . . . . . . . . . . .21
.04Mailed . . . . . . . . . . . . . . . . . . .21
.05Timely performance of acts . . .22
.06Year of change . . . . . . . . . . . . .22
.07 Section 481(a)
adjustment period . . . . . . . . . . .22
.08Under examination . . . . . . . . .22
(1)In general . . . . . . . . . . . . . . .22
(2) Partnerships and S corpora-
tions subject to TEFRA . . . .24
.09 Issue under consideration . . . .25
(1) Under examination . . . . . . . .25
(2) Before an appeals office . . . .26
(3) Before a federal court . . . . . .27
.10 Change within the
LIFO inventory method . . . . . .27
.11 District director . . . . . . . . . . . .27
SECTION 4. SCOPE . . . . . . . . . . . . . .27
.01 Applicability . . . . . . . . . . . . . .27
.02 Inapplicability . . . . . . . . . . . . .28
(1) Under examination . . . . . . . .28
(2) Before an appeals office . . . .28
(3) Before a federal court . . . . . .29
(4) Consolidated group
member . . . . . . . . . . . . . . . . .29
(5) Partnerships and
S corporations . . . . . . . . . . . .29
(6) Prior change . . . . . . . . . . . . .30
(7) Section 381(a) transaction . .30
(8) Final year of trade
or business. . . . . . . . . . . . . . .30
.03 Nonautomatic changes . . . . . .30
SECTION 5. TERMS AND CONDITIONS
OF CHANGE . . . . . . . . . . . . . . . . . . . .31
.01 In general . . . . . . . . . . . . . . . . .31
.02 Year of change . . . . . . . . . . . . .31
.03 Section 481(a) adjustment . . . .31
.04 Section 481(a)
adjustment period . . . . . . . . . . .31
(1) In general . . . . . . . . . . . . . . .31
(2) Short period as a
separate taxable year . . . . . .32
(3) Shortened or accelerated
adjustment periods . . . . . . . .32
.05 NOL carryback limitation
for taxpayer subject to criminal
investigation . . . . . . . . . . . . . . .38
.06Change treated as
initiated by the taxpayer . . . . . .38
SECTION 6. GENERAL APPLICATION
PROCEDURES . . . . . . . . . . . . . . . . . .38
.01 Consent . . . . . . . . . . . . . . . . . .38
.02 Filing requirements . . . . . . . . .39
(1) Waiver of taxable year filing re-
quirement . . . . . . . . . . . . . . .39
(2) Timely duplicate
filing requirement . . . . . . . . .39
(3) Label . . . . . . . . . . . . . . . . . . .40
(4) Signature requirements . . . . .41
(5) Where to file copy . . . . . . . . .42
(6) No user fee . . . . . . . . . . . . . .44
(7) Single application for certain
consolidated groups . . . . . . . . .44
.03 Taxpayer under examination . .45
(1) In general . . . . . . . . . . . . . . .45
(2) 90-day window period . . . . .45
(3) 120-day window period . . . .46
(4) Consent of district director .47
.04 Taxpayer before
an appeals office . . . . . . . . . . .48
.05 Taxpayer before
a federal court . . . . . . . . . . . . .49
.06 Compliance with provisions . .50
SECTION 7. AUDIT PROTECTION
FOR TAXABLE YEARS PRIOR TO
YEAR OF CHANGE . . . . . . . . . . . . .50
.01 In general . . . . . . . . . . . . . . . . .50
.02 Exceptions . . . . . . . . . . . . . . . .51
(1) Change not made or
made improperly . . . . . . . . .51
(2) Change in sub-method . . . . .51
(3) Prior year Service-initiated
change . . . . . . . . . . . . . . . . .51
(4) Criminal investigation . . . . .52
SECTION 8. EFFECT OF
CONSENT . . . . . . . . . . . . . . . . . . . . .52
.01 In general . . . . . . . . . . . . . . . . .52
.02 Retroactive change
or modification . . . . . . . . . . . .53
SECTION 9. REVIEW BY DISTRICT
DIRECTOR . . . . . . . . . . . . . . . . . . . . .53
.01 In general . . . . . . . . . . . . . . . . .54
.02 National office
consideration . . . . . . . . . . . . . .55
SECTION 10. REVIEW BY NATIONAL
OFFICE . . . . . . . . . . . . . . . . . . . . . . . .55
.01 In general . . . . . . . . . . . . . . . . .55
.02 Incomplete application —
30 day rule . . . . . . . . . . . . . . . .55
.03 Conference in the
national office . . . . . . . . . . . . .56
.04 National office
determination . . . . . . . . . . . . . .57
(1) Consent not granted . . . . . . .57
(2) Application changed . . . . . .57
SECTION 11. APPLICABILITY OF
REV. PROCS. 99–1 AND 99–4 . . . . .58
SECTION 12. INQUIRIES . . . . . . . . .58
SECTION 13. EFFECTIVE DATE . . .58
.01 In general . . . . . . . . . . . . . . . . .58
.02 Transition rules . . . . . . . . . . . .59
.03 Special rules. . . . . . . . . . . . . . .59
(1) Change in method of
accounting to comply with
§ 404(a)(11) . . . . . . . . . . . . .59
(2) Changes in methods of account-
ing for rental agreements. . . .60
Part III. Administrative, Procedural, and Miscellaneous

December 27, 19997261999–52 I.R.B.
(3) Change in method of accounting
to discontinue the mark-to-mar-
ket method of accounting . . . .60
(4) Change in method of
accounting for a pool of debt
instruments . . . . . . . . . . . . . .60
SECTION 14. EFFECT ON OTHER
DOCUMENTS . . . . . . . . . . . . . . . . . .60
SECTION 15. PAPERWORK
REDUCTION ACT . . . . . . . . . . . . . . .61
DRAFTING INFORMATION . . . . . .62
APPENDIX . . . . . . . . . . . . . . . . . . . . .64
SECTION 1. TRADE OR BUSINESS
EXPENSES (§ 162) . . . . . . . . . . . . . .64
.01 Advances made by a lawyer on
behalf of clients — Description of
change and scope . . . . . . . . . .64
.02 Year 2000 costs — Description of
change and scope . . . . . . . . . .65
SECTION 1A. AMORTIZABLE BOND
PREMIUM (§ 171) . . . . . . . . . . . . . . .65
.01 Revocation of
§ 171(c) election . . . . . . . . . . .65
(1) Description of
change and scope . . . . . . . . .65
(2) Revocation of election . . . . .66
(3) Manner of making
the change . . . . . . . . . . . . . .66
(4) Additional requirements . . . .66
(5) Audit protection . . . . . . . . . .67
.02 Reserved . . . . . . . . . . . . . . . . .67
SECTION 2. DEPRECIATION OR
AMORTIZATION (§ 56(a)(1),
56(g)(4)(A), 167, 168, OR 197, OR
FORMER § 168) . . . . . . . . . . . . . . . . .67
.01 Impermissible to permissible
method of accounting for depreci-
ation or amortization . . . . . . . .67
(1) Description of change . . . . .67
(2) Scope . . . . . . . . . . . . . . . . . .68
(3) Additional requirements . . . .73
(4) Section 481(a) adjustment . .77
(5) Basis adjustment . . . . . . . . .78
(6) Meaning of depreciation
allowable . . . . . . . . . . . . . . .78
.02 Permissible to permissible
method of accounting
for depreciation . . . . . . . . . . . .81
(1) Description of change . . . . .82
(2) Scope . . . . . . . . . . . . . . . . . .82
(3) Changes covered . . . . . . . . .84
(4) Additional requirements . . . .87
(5) Section 481(a) adjustment . .88
.03 Sale or lease transactions . . . .89
(1) Description of change
and scope . . . . . . . . . . . . . . .89
(2) Manner of making
the change . . . . . . . . . . . . . .90
(3) No audit protection . . . . . . .90
SECTION 2A. RESEARCH AND
EXPERIMENTAL EXPENDITURES
(§ 174) . . . . . . . . . . . . . . . . . . . . . . . .90
.01 Changes to a different
method or different
amortization period . . . . . . . . .91
(1) Description of change . . . . .91
(2) Scope . . . . . . . . . . . . . . . . . .92
(3) Manner of making
the change . . . . . . . . . . . . . .93
(4) Additional requirement . . . .94
(5) No audit protection . . . . . . .95
.02 Reserved . . . . . . . . . . . . . . . . .95
SECTION 3. CAPITAL
EXPENDITURES (§ 263) . . . . . . . . .95
.01 Package design costs . . . . . . . .95
(1) Description of change
and scope . . . . . . . . . . . . . . .95
(2) Additional requirements . . . .96
.02 Line pack gas; cushion gas. . . .96
(1) Description of change
and scope . . . . . . . . . . . . . . .96
(2) Additional requirements . . . .97
SECTION 4. UNIFORM
CAPITALIZATION (§ 263A) . . . . . . .97
.01 Certain uniform capitalization
(UNICAP) methods used by small
resellers, formerly small resellers,
and reseller-producers . . . . . . .97
(1) Description of change
and scope . . . . . . . . . . . . . . .97
(2) Definitions . . . . . . . . . . . . . .99
(3) Section 481(a) adjustment .100
(4) No audit protection . . . . . .100
(5) Example . . . . . . . . . . . . . . .100
.02 Reserved . . . . . . . . . . . . . . . .106
SECTION 4A. DEFERRED
COMPENSATION (§ 404) . . . . . . . .106
.01 Change to comply with
§ 404(a)(11) . . . . . . . . . . . . . .106
(1) Description of change
and scope . . . . . . . . . . . . . .107
(2) Section 481(a) adjustment
period . . . . . . . . . . . . . . . . .108
(3) No audit protection . . . . . .108
.02 Reserved . . . . . . . . . . . . . . . .108
SECTION 5. METHODS OF
ACCOUNTING (§ 446) . . . . . . . . . .108
.01 Cash or hybrid method to
accrual method . . . . . . . . . . .108
(1) Description of change
and scope . . . . . . . . . . . . . .108
(2) Section 481(a) adjustment . .111
(3) Change to a special
method of accounting . . . . .112
.02 Multi-year service
warranty contracts . . . . . . . . .112
(1) Description of change
and scope . . . . . . . . . . . . . .112
(2) Manner of making
the change . . . . . . . . . . . . .113
.03 Multi-year insurance policies
for multi-year service warranty
contracts — Description of
change and scope . . . . . . . . .114
(1) Applicability . . . . . . . . . . . .114
(2) Inapplicability . . . . . . . . . .114
(3) Description of method . . . .115
.04 Interest accruals on short-term
consumer loans —
Rule of 78s method . . . . . . . . .115
(1) Description of change
and scope . . . . . . . . . . . . . .115
(2) Background . . . . . . . . . . . . .116
(3) Manner of making
the change . . . . . . . . . . . . .117
SECTION 5A. TAXABLE YEAR OF
INCLUSION (§ 451) . . . . . . . . . . . . .118
.01 Accrual of interest on nonper-
forming loans . . . . . . . . . . . . .118
(1) Description of change
and scope . . . . . . . . . . . . . .118
(2) Section 481(a)
adjustment . . . . . . . . . . . . .119
.02 Reserved . . . . . . . . . . . . . . . .120
SECTION 6. OBLIGATIONS ISSUED
AT DISCOUNT (§ 454) . . . . . . . . . .120
.01 S
eries E or EE U.S.
savings bonds . . . . . . . . . . . . .120
(1) Description of change
and scope . . . . . . . . . . . . . .120
(2) Manner of making
the change . . . . . . . . . . . . .120
.02 Reserved . . . . . . . . . . . . . . . .121
SECTION 7. PREPAID SUBSCRIPTION
INCOME (§ 455) . . . . . . . . . . . . . . . . .121
.01 Prepaid subscription
income . . . . . . . . . . . . . . . . . .121
(1) Description of change
and scope . . . . . . . . . . . . . .122
(2) Manner of making
the change . . . . . . . . . . . . .122
.02 Reserved . . . . . . . . . . . . . . . .123

1999–52 I.R.B.727December 27, 1999
SECTION 8. TAXABLE YEAR OF
DEDUCTION (§ 461) . . . . . . . . . . . .123
.01 Timing of incurring liabilities
for employee
compensation . . . . . . . . . . . . .123
(1) Description of change
and scope . . . . . . . . . . . . . .123
(2) Amounts taken into account 124
.02 Timing of incurring liabilities for
real property taxes . . . . . . . . .124
(1) Description of change . . . .125
(2) Scope . . . . . . . . . . . . . . . . .125
(3) Amounts taken into
account . . . . . . . . . . . . . . . .126
.03 Timing of incurring liabilities
under a workers’ compensation
act, tort, breach of contract, or
violation of law . . . . . . . . . . .126
(1) Description of change
and scope . . . . . . . . . . . . . .126
(2) Amounts taken into
account . . . . . . . . . . . . . . . .127
.04 Timing of incurring liabilities
for payroll taxes . . . . . . . . . .128
(1) Applicability . . . . . . . . . . . .128
(2) Inapplicability . . . . . . . . . .130
(3) Recurring item exception . .130
(4) Amounts taken into
account . . . . . . . . . . . . . . . .130
.05 Cooperative advertising . . . .131
(1) Description of change
and scope . . . . . . . . . . . . . .131
(2) Scope limitations
inapplicable . . . . . . . . . . . .131
SECTION 8A. CERTAIN PAYMENTS
FOR THE USE OF PROPERTY OR
SERVICES (§ 467) . . . . . . . . . . . . . .132
.01 Change to constant rental
accrual method. . . . . . . . . . . .132
(1) Description of change. . . . .132
(2) Requirements. . . . . . . . . . . .132
(3) Scope limitations
inapplicable. . . . . . . . . . . . .132
.02 Change to comply with §§ 1.467–1
through 1.467–7. . . . . . . . . . .133
(1) Description of change. . . . .133
(2) Requirements . . . . . . . . . . .133
(3) Scope limitations
inapplicable. . . . . . . . . . . . .133
(4) Manner of making
the change. . . . . . . . . . . . . .133
.03 Change to comply with regulation
project IA–292–84. . . . . . . . .134
(1)Description of
the change. . . . . . . . . . . . . .134
(2) Requirements. . . . . . . . . . . .134
(3) Scope limitations
inapplicable. . . . . . . . . . . . .134
SECTION 9. INVENTORIES
(§ 471) . . . . . . . . . . . . . . . . . . .135
.01 Cash discounts — Description of
change and scope . . . . . . . . .135
.02 Estimating inventory
“shrinkage” . . . . . . . . . . . . . .135
(1) Description of change
and scope . . . . . . . . . . . . . .135
(2) Scope limitations
inapplicable . . . . . . . . . . . .136
(3) Additional requirements . . .136
(4) Audit protection . . . . . . . . .137
(5) Future change . . . . . . . . . .137
SECTION 10. LAST-IN, FIRST-OUT
(LIFO) INVENTORIES (§ 472) . . . .137
.01 Change from the LIFO
inventory method . . . . . . . . . .137
(1) Description of change
and scope . . . . . . . . . . . . . .137
(2) Limitation on LIFO
election . . . . . . . . . . . . . . . .140
(3) Effect of subchapter S
election by corporation . . .140
(4) Additional requirements . . .142
.02 Determining the cost of
used vehicles purchased or
taken as a trade-in . . . . . . . . .142
(1) Description of change
and scope . . . . . . . . . . . . . .142
(2) Manner of making
the change . . . . . . . . . . . . .143
.03 Alternative LIFO inventory method
for retail automobile dealers . .143
(1) Description of change
and scope . . . . . . . . . . . . . .143
(2) Manner of making
the change . . . . . . . . . . . . .144
.04 Inventory price index computation
(IPIC) method under the
LIFO inventory method . . . . .145
(1) Description of change
and scope . . . . . . . . . . . . . .145
(2) Manner of making
the change . . . . . . . . . . . . .147
(3) Bargain purchase . . . . . . . .147
.05 Determining current-year
cost under the LIFO
inventory method . . . . . . . . . .148
(1) Description of change
and scope . . . . . . . . . . . . . .148
(2) Manner of making
the change . . . . . . . . . . . . .149
SECTION 10A. MARK-TO-MARKET
ACCOUNTING METHOD
FOR DEALERS IN SECURITIES
(§ 475) . . . . . . . . . . . . . . . . . . . . . . . .149
.01 Discontinuing the mark-to-market
method of accounting for
nonfinancial customer paper . . .149
(1) Description of change
and scope . . . . . . . . . . . . . .149
(2) Additional Requirements . .150
(3) No audit protection . . . . . .150
.02 Commodities dealers, securities
traders, and commodities traders
electing to use the mark-to-market
method of accounting under
§ 475(e) or (f). . . . . . . . . . . . .151
(1) Description of change . . . .151
(2) Scope . . . . . . . . . . . . . . . . .151
SECTION 11. BANK RESERVES FOR
BAD DEBTS (§ 585) . . . . . . . . . . . .152
.01 Changing from the § 585 reserve
method to the § 166 specific
charge-off method . . . . . . . . .152
(1) Description of change
and scope . . . . . . . . . . . . . .153
(2) Section 481(a)
adjustment . . . . . . . . . . . . .153
(3) Change from § 585 required
when electing S corporation
status . . . . . . . . . . . . . . . . .154
.02 Reserved . . . . . . . . . . . . . . . .155
SECTION 12. ORIGINAL ISSUE
DISCOUNT (§§ 1272; 1273) . . . . . .155
.01 De minimis original issue
discount (OID) . . . . . . . . . . . .155
(1) Description of change
and scope . . . . . . . . . . . . . .155
(2) Manner of making
the change . . . . . . . . . . . . .156
(3) Additional requirements . . .156
(4) No audit protection . . . . . .157
.02 Pool of debt instruments . . . .157
(1) Description of change
and scope . . . . . . . . . . . . . .157
(2) Additional requirements . . .160
SECTION 12A. MARKET DISCOUNT
BONDS (§ 1278) . . . . . . . . . . . . . . . .160
.01 Revocation of § 1278(b)
election . . . . . . . . . . . . . . . . .160
(1) Description of change
and scope . . . . . . . . . . . . . .160
(2) Revocation of election . . . .160
(3) Manner of making
the change . . . . . . . . . . . . .161
(4) Additional requirements . . .161
(5) Audit protection . . . . . . . . .162
.02 Reserved . . . . . . . . . . . . . . . .162

December 27, 19997281999–52 I.R.B.
SECTION 13. SHORT-TERM
OBLIGATIONS (§ 1281) . . . . . . . . .162
.01 Interest income on
short-term obligations . . . . . .162
(1) Description of change
and scope . . . . . . . . . . . . . .162
(2) Section 481(a) adjustment
period . . . . . . . . . . . . . . . . .164
.02 Stated interest on short-term loans
of cash method banks in the
Eighth Circuit . . . . . . . . . . . .164
(1) Description of change
and scope . . . . . . . . . . . . . .164
(2) Section 481(a) adjustment
period . . . . . . . . . . . . . . . . .165
(3) No ruling protection . . . . . .165
SECTION 1. PURPOSE
This revenue procedure provides the
procedures by which a taxpayer may ob-
tain automatic consent to change the meth-
ods of accounting described in the AP-
PENDIX of this revenue procedure. This
revenue procedure clarifies, modifies, am-
plifies, and supersedes Rev. Proc. 98–60,
1998–51 I.R.B. 16. It also consolidates au-
tomatic consent procedures for changes in
several methods of accounting that were
published subsequent to the publication of
Rev. Proc. 98–60, and provides new auto-
matic 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 Inter-
nal 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 in-
cludes a change in the overall plan of ac-
counting for gross income or deductions,
or a change in the treatment of any mater-
ial 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 prac-
tice does not permanently affect the tax-
payer’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 treat-
ment. The treatment of a material item in
the same way in determining the gross in-
come or deductions in two or more con-
secutively filed tax returns (without re-
gard to any change in status of the method
as permissible or impermissible) repre-
sents 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 con-
secutive 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). SeeRev. 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 pe-
riod 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. SeeRev. Proc. 91–31.
(4) A change in method of account-
ing does not include correction of mathe-
matical or posting errors, or errors in the
computation of tax liability (such as er-
rors in computation of the foreign tax
credit, net operating loss, percentage de-
pletion, or investment credit). See§
1.446–1(e)(2)(ii)(b).
.02Securing 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 con-
sent of the Commissioner before chang-
ing a method of accounting for federal in-
come 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) autho-
rizes the Commissioner to prescribe ad-
ministrative 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 re-
quest, or otherwise make, a retroactive
change in method of accounting, regard-
less of whether the change is from a per-
missible or an impermissible method. See
generallyRev. Rul. 90–38.
.05 Method change with a § 481(a)
adjustment.
(1) Need for adjustment. Section
481(a) requires those adjustments neces-
sary to prevent amounts from being dupli-
cated 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 al-
ways been used.
Example.A taxpayer that is not required to use
inventories uses the overall cash receipts and dis-
bursements method and changes to an overall ac-
crual 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 receiv-
able 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 re-
quired by § 481(a) may be taken into ac-
count in determining taxable income in

1999–52 I.R.B.729December 27, 1999
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) adjust-
ment 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. How-
ever, 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 pro-
vides specific adjustment periods that are
intended to achieve an appropriate bal-
ance between the goals of mitigating dis-
tortions of income that result from ac-
counting method changes and providing
appropriate incentives for voluntary com-
pliance.
.06 Method change using a cut-off
method. The Commissioner may deter-
mine 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 opera-
tive date) continue to be accounted for
under the taxpayer’s former method of ac-
counting. See, for example, § 263A
(which generally applies to costs incurred
after December 31, 1986, for noninven-
tory property), § 461(h) (which generally
applies to amounts incurred on or after
July 18, 1984), and § 1.446–3 (which ap-
plies to notional principal contracts en-
tered into on or after December 13, 1993).
Because no items are duplicated or omit-
ted from income when a cut-off method is
used to effect a change in accounting
method, no § 481(a) adjustment is neces-
sary.
.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 busi-
nesses, 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 busi-
ness. 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 in-
come of the taxpayer is not clearly re-
flected, the trades or businesses of the
taxpayer are not separate and distinct.
.09 Penalties.Any otherwise applica-
ble penalty for the failure of a taxpayer to
change its method of accounting (for ex-
ample, 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). Addition-
ally, 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 ac-
counting to a permissible one by comply-
ing with all applicable provisions of this
revenue procedure.
.10 Change made as part of an exami-
nation. 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 tax-
able 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) ad-
justment period.
.11 Significant changes.Significant
changes to Rev. Proc. 98–60 include:
(1) The term “district director” is
now defined in new section 3.11 to in-
clude the district director or other appro-
priate examining office or official. This
change was made to accommodate antici-
pated future changes in the organizational
structure of the Internal Revenue Service.
(2) Section 4.02 is modified by the
addition of section 4.02(8), which pro-
vides that this revenue procedure does not
apply if the taxpayer would be required to
accelerate the § 481(a) adjustment in the
year of change. This scope limitation
does not apply to changes of accounting
method under sections 2.01 and 2.02 of
the APPENDIX of this revenue proce-
dure.
(3) The additional statement required
by section 6.02(5) of Rev. Proc. 98–60
has been discontinued. Elimination of
this statement does not otherwise change
the responsibility of a taxpayer seeking
automatic consent to comply with all the
applicable provisions of this revenue pro-
cedure. See sections 5.01, 6.01, 6.06 and
10.04(1) of this revenue procedure.
(4) Section 6.03(4) clarifies that the
office conducting the examination gives
consent to the filing of the application,
rather than to the change itself. This is
consistent with the current authority of
such office, upon examination, to deny
the change if the taxpayer fails to comply
with all the applicable provisions of this
revenue procedure. Seesection 6.06 of
this revenue procedure.
(5) Sections 2.01 and 2.02 of the AP-
PENDIX are modified to include certain
changes in method of accounting for de-
preciation or amortization for purposes of
computing alternative minimum taxable
income and adjusted current earnings
under § 56.
(6) Section 5.01 of the APPENDIX
is modified to permit a taxpayer required
to use an inventory method of accounting
to change to an overall accrual method,
provided the taxpayer uses a proper in-
ventory method and either is a small re-
seller or is eligible to use the simplified
resale method;
(7) Section 5.01 of the APPENDIX is
modified to provide that the change does
not apply to a taxpayer with two or more
trades or businesses, unless the taxpayer
uses or adopts the same overall accrual
method for each such trade or business.
(8) Section 8.04 of the APPENDIX
is modified to include changes in the
method of accounting for state unemploy-
ment taxes and railroad retirement taxes.
(9) The following changes in meth-
ods of accounting have been added to the

December 27, 19997301999–52 I.R.B.
APPENDIX of this revenue procedure:
(a) Section 1A.01 of the APPEN-
DIX regarding the revocation of a §
171(c) election;
(b) Section 4A.01 of the APPEN-
DIX regarding deferred compensation;
(c) Section 5A.01 of the APPEN-
DIX regarding accrual of interest on non-
performing loans;
(d) Sections 8A.01, 8A.02, and
8A.03 of the APPENDIX regarding § 467
rental agreements;
(e) Section 10A.02 regarding elec-
tions to use the mark-to-market method of
accounting under § 475(e) or (f).
(f) Section 12A.01 of the APPEN-
DIX regarding the revocation of a §
1278(b) election.
SECTION 3. DEFINITIONS
.01 Application.The term “applica-
tion” includes a Form 3115, or any state-
ment that is authorized under the APPEN-
DIX of this revenue procedure to be filed
in lieu of a Form 3115, and any attach-
ments.
.02 Taxpayer.
(1) In general.The term “taxpayer”
has the same meaning as the term “per-
son” defined in § 7701(a)(1) (rather than
the meaning of the term “taxpayer” de-
fined in § 7701(a)(14)).
(2) Consolidated group.For pur-
poses of (a) sections 3.08(1), 3.09(1), and
4.02(1) of this revenue procedure (tax-
payer under examination), (b) sections
3.09(2) and 4.02(2) of this revenue proce-
dure (taxpayer before an appeals office),
or (c) sections 3.09(3) and 4.02(3) of this
revenue procedure (taxpayer before a fed-
eral court), the term “taxpayer” includes a
consolidated group.
.03 Filed.Any form (including an ap-
plication), 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 simi-
lar 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 applica-
ble date recorded or marked by a desig-
nated private delivery service. SeeNotice
99– 41, 1999–35 I.R.B. 325.
.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 succeed-
ing 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 effec-
tive, 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 ap-
plicable number of taxable years for tak-
ing into account the § 481(a) adjustment
required as a result of the change in
method of accounting. The year of
change is the first taxable year in the ad-
justment period and the § 481(a) adjust-
ment is taken into account ratably over
the number of taxable years in the adjust-
ment 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 ex-
amination of a taxpayer with respect to a
federal income tax return begins on the
date the taxpayer is contacted in any man-
ner by a representative of the Service for
the purpose of scheduling any type of ex-
amination of the return. An examination
ends:
(i) in a case in which the Ser-
vice 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 exam-
ple, Form 870, 4549, or 4605), the date
the taxpayer makes a payment of tax that
equals or exceeds the proposed defi-
ciency, or the date of the “closing” letter
(for example, Letter 891 or 987) sent to
the taxpayer; or
(iii) in an unagreed or a par-
tially agreed case, on the earliest of the
date the taxpayer (or its representative) is
notified by Appeals that the case has been
referred by the examining agent(s) to Ap-
peals, 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 representa-
tive) is notified by Appeals (or otherwise)
that the case has been referred to the ex-
amining agent(s) for reconsideration.
(2) Partnerships and S corporations
subject to TEFRA. For an entity (includ-
ing a limited liability company), treated
as a partnership or an S corporation for
federal income tax purposes, that is sub-
ject to the TEFRA unified audit and litiga-
tion provisions for partnerships and S cor-
porations, 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 ad-
justments” letter or the “no change” no-
tice of final administrative adjustment
sent to the TMP;
(b) in a fully agreed case, when all
the partners, members, or shareholders exe-
cute 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 by
the examining agent(s) to Appeals, the
date the TMP (or a partner, member, or
shareholder) requests judicial review, or
the date on which the period for request-
ing judicial review expires. But see sec-
tion 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

1999–52 I.R.B.731December 27, 1999
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 docu-
ment request (IDR), or notification of
proposed adjustments or income tax ex-
amination changes) from the examining
agent(s) specifically citing the treatment
of the item as an issue under considera-
tion. For example, a taxpayer’s method
of pooling under the dollar-value, last-in,
first-out (LIFO) inventory method is an
issue under consideration as a result of an
examination plan that identifies LIFO
pooling as a matter to be examined, but it
is not an issue under consideration as a re-
sult 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 con-
sideration as a result of an IDR that re-
quests documentation supporting the
costs included in inventoriable costs, but
it is not an issue under consideration as a
result of an IDR that requests documenta-
tion supporting the amount of cost of
goods sold reported on the return. The
question of whether a method of account-
ing is an issue under consideration may be
referred to the national office as a request
for technical advice under the provisions
of Rev. Proc. 99–2, 1999–1 I.R.B. 73 (or
any successor).
(2) Before an appeals office. A tax-
payer’s method of accounting for an item
is an issue under consideration for the tax-
able years before an appeals office if the
treatment of the item is included as an
item of adjustment in the examination re-
port referred to Appeals or is specifically
identified in writing to the taxpayer by
Appeals.
(3) Before a federal court. A tax-
payer’s method of accounting for an item
is an issue under consideration for the tax-
able years before a federal court if the
treatment of the item is included in the
statutory notice of deficiency, the notice
of claim disallowance, the notice of final
administrative adjustment, the pleadings
(for example, the petition, complaint, or
answer) or amendments thereto, or is
specifically identified in writing to the
taxpayer by the counsel for the govern-
ment.
.10 Change within the LIFO inventory
method.A change within the LIFO inven-
tory method is a change from one LIFO
inventory method or sub-method to an-
other LIFO inventory method or sub-
method. A change within the LIFO in-
ventory 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).
.11 District director. The term “dis-
trict director” includes the district director
or other appropriate examining office or
official.
SECTION 4. SCOPE
.01 Applicability.This revenue proce-
dure 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 other-
wise provided in the APPENDIX of this
revenue procedure (see, for example, sec-
tions 4.01, 4A.01, 5.04, 8.05, 9.02,
10A.01, 12.01, and 12.02 of the APPEN-
DIX of this revenue procedure), this rev-
enue procedure does not apply in the fol-
lowing 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 rev-
enue procedure), except as provided in
sections 6.03(2) (90-day window),
6.03(3) (120-day window), and 6.03(4)
(examination officials 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 sec-
tion 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 sec-
tion 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 rev-
enue procedure) if the consolidated group
is under examination, before an appeals
office, or before a federal court for a tax-
able 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 pur-
poses, if, on the date the entity would oth-
erwise file a copy of the application with
the national office, the entity’s accounting
method to be changed is an issue under
consideration in an examination of a part-
ner, member, or shareholder’s federal in-
come tax return or an issue under consid-
eration 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 (includ-
ing the year of change), (a) has made a
change in the same method of accounting
(with or without obtaining the Commis-
sioner’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);
(7) Section 381(a) transaction. If
the taxpayer engages in a transaction to
which § 381(a) applies within the pro-
posed taxable year of change (determined
without regard to any potential closing of
the year under § 381(b)(1)); or
(8) Final year of trade or business.
If the taxpayer would be required by sec-
tion 5.04(3)(c) of this revenue procedure
to take the entire amount of the § 481(a)
adjustment into account in computing tax-
able income for the year of change.
.03 Nonautomatic changes. If a tax-
payer is precluded by other than sections
4.02(1) through 4.02(5) of this revenue
procedure from using this revenue proce-
dure to make a change in method of ac-
counting, the taxpayer requesting such a

December 27, 19997321999–52 I.R.B.
change must file a Form 3115 with the
Commissioner in accordance with the re-
quirements of § 1.446–1(e)(3)(i) and Rev.
Proc. 97–27, 1997–1 C.B. 680 (or any
other applicable Code, regulation, or ad-
ministrative provision).
SECTION 5. TERMS AND
CONDITIONS OF CHANGE
.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 proce-
dure.
.02 Year of change.The year of change
is the taxable year designated on the ap-
plication and for which the application is
timely filed under section 6.02(2).
.03 Section 481(a) adjustment.Unless
otherwise provided in this revenue proce-
dure, 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 AP-
PENDIX of this revenue procedure, the §
481(a) adjustment period for positive and
negative § 481(a) adjustments is four tax-
able years.
(2) Short period as a separate tax-
able year.If the year of change, or any
taxable year during the § 481(a) adjust-
ment period, is a short taxable year, the §
481(a) adjustment must be included in in-
come as if that short taxable year were a
full 12-month taxable year. SeeRev. Rul.
78–165, 1978–1 C.B. 276.
Example 1. A calendar year taxpayer received
permission to change an accounting method begin-
ning with the 1999 calendar year. The § 481(a) ad-
justment is $30,000 and the adjustment period is
four taxable years. The taxpayer subsequently re-
ceives permission to change its annual accounting
period to September 30, effective for the taxable
year ending September 30, 2000. The taxpayer must
include $7,500 of the § 481(a) adjustment in gross
income for the short period from January 1, 2000,
through September 30, 2000.
Example 2. Corporation X, a calendar year tax-
payer, received permission to change an accounting
method beginning with the 1999 calendar year. The
§ 481(a) adjustment is $30,000 and the adjustment
period is four taxable years. On July 1, 2001, Cor-
poration Zacquires Corporation Xin a transaction to
which § 381(a) applies. Corporation Zis a calendar
year taxpayer that uses the same method of account-
ing to which Corporation Xchanged in 1999. Cor-
poration Xmust include $7,500 of the § 481(a) ad-
justment in gross income for its short period income
tax return for January 1, 2001, through June 30,
2001. In addition, Corporation Zmust include
$7,500 of the § 481(a) adjustment in gross income in
its income tax return for calendar year 2001.
(3) Shortened or accelerated adjust-
ment 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 fol-
lowing 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) adjust-
ment is less than $25,000 (either positive
or negative). A taxpayer makes an elec-
tion under this de minimisrule by so indi-
cating on the application. For example,
for a taxpayer filing a Form 3115, the tax-
payer 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 tax-
able 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 re-
maining balance of any § 481(a) adjust-
ment relating to the trade or business into
account in computing taxable income in
the taxable year of the cessation or termi-
nation. Except as provided in sections
5.04(3)(c)(iv) and (v) of this revenue pro-
cedure, a taxpayer is treated as ceasing to
engage in a trade or business if the opera-
tions of the trade or business cease or sub-
stantially all the assets of the trade or busi-
ness 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 nonexclu-
sive list of transactions that are treated as
the cessation of a trade or business for
purposes of accelerating the § 481(a) ad-
justment 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 trans-
action 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;
(D) a division of a corpora-
tion ceases to operate the trade or busi-
ness to which the § 481(a) adjustment
relates; or
(E) the assets of a trade or
business to which the § 481(a) adjust-
ment relates are contributed to a partner-
ship.
(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 sec-
tion 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 sec-
tion 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 an-
other 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 cor-
poration is subject to any terms and con-
ditions 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.
(A) In general.No accelera-
tion of the § 481(a) adjustment is required
under section 5.04(3)(c) of this revenue
procedure when one member of an affiliat-
ed group filing a consolidated return trans-
fers 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 quali-

1999–52 I.R.B.733December 27, 1999
fying under § 351 and the transferee mem-
ber 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 mem-
ber must continue to take the § 481(a)
adjustment into account pursuant to the
terms and conditions set forth in this rev-
enue 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 exam-
ple, 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 sec-
tion 5.04(3)(c)(iv) or 5.04(3)(c)(v)(A) of
this revenue procedure.
(B)Exception.The provi-
sions of section 5.04(3)(c)(v)(A) of this
revenue procedure cease to apply and the
transferor member must take any remain-
ing balance of the § 481(a) adjustment
into account in the taxable year immedi-
ately preceding 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, car-
ried over, or used by any transferee mem-
ber 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 transfer-
or member is not required to accelerate
the § 481(a) adjustment if a transferee
member ceases to be a member of a con-
solidated group by reason of an acquisi-
tion 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 tax-
payer subject to criminal investigation.
Generally, no portion of any net operating
loss that is attributable to a negative §
481(a) adjustment may be carried back to
a taxable year prior to the year of change
that is the subject of any pending or future
criminal investigation or proceeding con-
cerning (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 tax-
payer 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 Com-
missioner is hereby granted to any tax-
payer within the scope of this revenue
procedure to change a method of account-
ing, provided the taxpayer complies with
all the applicable provisions of this rev-
enue procedure.
.02 Filing requirements.
(1) Waiver of taxable year filing re-
quirement. 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 ap-
plication for a change in method of ac-
counting filed pursuant to this revenue
procedure. See§ 1.446–1(e)(3)(ii).
(2) Timely duplicate filing requirement.
(a) In general. A taxpayer chang-
ing a method of accounting pursuant to
this revenue procedure must complete and
file an application in duplicate. The origi-
nal must be attached to the taxpayer’s
timely filed (including extensions) origi-
nal federal income tax return for the year
of change, and a copy (with signature) of
the application must be filed with the na-
tional office (see section 6.02(6) of this
revenue procedure for the address) no ear-
lier 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 appli-
cation.
(i) Automatic extension. An au-
tomatic 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 tax-
payer (A) timely filed (including exten-
sions) its federal income tax return for the
year of change, (B) files an amended re-
turn 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 re-
turn, and (E) writes at the top of the appli-
cation “FILED PURSUANT TO §
301.9100–2.”
(ii) Other extensions.A tax-
payer 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 exten-
sion of time to file under § 301.9100 of
the Procedure and Administration Regula-
tions, 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 proce-
dure, the section of the APPENDIX of
this revenue procedure describing the spe-
cific 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. 99–49”
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 identifica-
tion 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 ap-
plication 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

December 27, 19997341999–52 I.R.B.
officer must sign on behalf of a corpora-
tion, 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 individ-
ual taxpayer on behalf of a sole proprietor-
ship. If the taxpayer is a member of a con-
solidated group, an application submitted
on behalf of the taxpayer must be signed
by a duly authorized officer of the com-
mon parent. See the signature require-
ments set forth in the General Instructions
attached to a current Form 3115 regarding
those who are to sign. If an agent is autho-
rized to represent the taxpayer before the
Service, receive the original or a copy of
the correspondence concerning the appli-
cation, or perform any other act(s) regard-
ing 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 representa-
tive without a power of attorney to repre-
sent the taxpayer as indicated in this sec-
tion will not be given any information
regarding the application.
(5) Where to file copy.
(a) For a taxpayer other than an
exempt organization, the copy of the ap-
plication must be addressed to the Com-
missioner 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 de-
livery service: Commissioner of Internal
Revenue, Attention: CC:DOM:IT&A
(Automatic Rulings Branch), 1111 Con-
stitution Avenue, NW, Washington, D.C.
20224).
(b) For an exempt organization,
the copy of the application must be ad-
dressed to the Commissioner, Tax Exempt
and Government Entities, Attention:
TEGE:EO, P.O. Box 120, Benjamin
Franklin Station, Washington, D.C. 20044
(or, in the case of a designated private de-
livery service: Commissioner, Tax Ex-
empt and Government Entities, Attention:
TEGE: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
th
Street entrance of 1111 Constitution Av-
enue, NW, Washington, D.C. No receipt
will be given at the drop box. For a tax-
payer other than an exempt organization,
the copy of the application must be ad-
dressed to the Commissioner of Internal
Revenue, Attention: CC:DOM:IT&A
(Automatic Rulings Branch), 1111 Con-
stitution Avenue, NW, Washington, D.C.
20224. For an exempt organization, the
copy of the application must be addressed
to the Commissioner, Tax Exempt and
Government Entities, Attention:
TEGE: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 courier’s desk. For a
taxpayer other than an exempt organiza-
tion, the copy of the application must be
addressed to the Commissioner of Inter-
nal Revenue, Attention: CC:DOM:IT&A
(Automatic Rulings Branch), 1111 Con-
stitution Avenue, NW, Washington, D.C.
20224. For an exempt organization, the
copy of the application must be addressed
to the Commissioner, Tax Exempt and
Government Entities, Attention:
TEGE:EO, 1111 Constitution Avenue,
NW, Washington, D.C. 20224
(6) No user fee.A user fee is not re-
quired for an application filed under this
revenue procedure, and, except as pro-
vided in section 6.02(6)(c)(ii) of this rev-
enue procedure, the receipt of an applica-
tion filed under this revenue procedure
will not be acknowledged.
(7) Single application for certain
consolidated groups.A parent corpora-
tion 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 tax-
payers 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 pro-
posed method of accounting. All aspects
of the change in method of accounting,
including the present and proposed meth-
ods, the underlying facts, and the author-
ity for the change, must be identical, ex-
cept for the § 481(a) adjustment. See
section 15.07(3) of Rev. Proc. 99– 1,
1999–1 I.R.B. 6, 53 (or any successor),
for the information required to be submit-
ted with the application.
.03 Taxpayer under examination.
(1) In general.Except as otherwise
provided in the APPENDIX of this rev-
enue procedure (see, for example, sec-
tions 4.01, 4A.01, 5.04, 8.05, 9.02,
10A.01, 12.01, and 12.02 of the AP-
PENDIX 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 rev-
enue procedure only if the taxpayer is
within the provisions of section 6.03(2)
(90-day window), 6.03(3) (120-day win-
dow), or 6.03(4) (district director con-
sent) of this revenue procedure. A tax-
payer 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 avail-
able if the method of accounting the tax-
payer is changing is an issue under con-
sideration at the time the copy of the
application is filed or an issue the examin-
ing 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 num-
ber(s) of the examining agent(s). The tax-
payer must attach to the application a sep-
arate statement signed by the taxpayer
certifying that, to the best of the tax-
payer’s knowledge, the same method of
accounting is not an issue under consider-
ation 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 pe-

1999–52 I.R.B.735December 27, 1999
riod 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 ap-
plication 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 examina-
tion that is in process at the same time it
files the copy of the application with the
national office. The application must
contain the name(s) and telephone num-
ber(s) of the examining agent(s). The tax-
payer must attach to the application a sep-
arate statement signed by the taxpayer
certifying that, to the best of the tax-
payer’s knowledge, the same method of
accounting is not an issue under consider-
ation 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 dis-
trict director consents to the filing of the
application. The district director will con-
sent to the filing of the application 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 ex-
ample, the district director will consent to
the filing of an application to change from
a clearly permissible method of account-
ing, or 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 permis-
sible or was adopted subsequent to the
years under examination may be referred
to the national office as a request for tech-
nical advice under the provisions of Rev.
Proc. 99–2 (or any successor).
(b) A taxpayer changing a method
of accounting under this revenue proce-
dure with the consent of the district direc-
tor must attach to the application a state-
ment from the district director consenting
to the filing of the application. The tax-
payer must provide a copy of the applica-
tion 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 num-
ber(s) of the examining agent(s).
.04 Taxpayer before an appeals office.
Except as otherwise provided in the AP-
PENDIX of this revenue procedure (see,
for example, sections 4.01, 4A.01, 5.04,
8.05, 9.02, 10A.01, 12.01, and 12.02 of
the APPENDIX of this revenue proce-
dure), a taxpayer that is before an appeals
office must attach to the application a sep-
arate statement signed by the taxpayer
certifying that, to the best of the tax-
payer’s knowledge, the same method of
accounting is not an issue under consider-
ation 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 ap-
peals officer.
.05 Taxpayer before a federal court.
Except as otherwise provided in the AP-
PENDIX of this revenue procedure (see,
for example, sections 4.01, 4A.01, 5.04,
8.05, 9.02, 10A.01, 12.01, and 12.02 of
the APPENDIX of this revenue proce-
dure), a taxpayer that is before a federal
court must attach to the application a sepa-
rate statement signed by the taxpayer cer-
tifying that, to the best of the taxpayer’s
knowledge, the same method of account-
ing is not an issue under consideration by
the federal court. The taxpayer must pro-
vide a copy of the application to the coun-
sel for the government at the same time it
files a copy of the application with the na-
tional office. The application must con-
tain 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 account-
ing without complying with all the applic-
able 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 proce-
dure), the taxpayer has initiated a change
in method of accounting without obtain-
ing the consent of the Commissioner as
required by § 446(e). Upon examination,
a taxpayer that has initiated an unautho-
rized 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 Service will not require the
taxpayer to change its method of account-
ing for the same item for a taxable year
prior to the year of change.
.02 Exceptions.
(1) Change not made or made im-
properly.The Service may change a tax-
payer’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 com-
ply with all the applicable provisions of
this revenue procedure, or (c) the method
of accounting is changed or modified be-
cause there has been a misstatement or
omission of material facts (seesection
8.02(2) of this revenue procedure).
(2) Change in sub-method.The Ser-
vice may change a taxpayer’s method of
accounting for prior taxable years if the
taxpayer is changing a sub-method of ac-
counting within the method. For exam-
ple, 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 cur-
rent year.
(3) Prior year Service-initiated
change.The Service may make adjust-
ments 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 Ser-
vice may change a taxpayer’s method of
accounting for the same item for taxable
years prior to the year of change if there is

December 27, 19997361999–52 I.R.B.
any pending or future criminal investiga-
tion or proceeding concerning (a) directly
or indirectly, any issue relating to the tax-
payer’s federal tax liability for any tax-
able year prior to the year of change, or
(b) the possibility of false or fraudulent
statements made by the taxpayer with re-
spect 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 pur-
suant 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 state-
ment 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 cur-
rent views of the Service; or
(6) a change in the material facts on
which the consent was based.
.02 Retroactive change or modifica-
tion.Except in rare or unusual circum-
stances, 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 account-
ing, 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 ac-
counting made in compliance with all
the applicable provisions of this revenue
procedure in determining the taxpayer’s
liability, unless the district director rec-
ommends that the change in method of
accounting should be modified or re-
voked. (See section 6.06 of this revenue
procedure if a change in method of ac-
counting is made without complying
with all the applicable provisions of this
revenue procedure.) The district direc-
tor will ascertain if the change in
method of accounting was made in com-
pliance with all the applicable provi-
sions of this revenue procedure, includ-
ing 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) ad-
justment was properly determined;
(3) the change in method of account-
ing was implemented in compliance with
all the applicable provisions of this rev-
enue 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 ac-
counting 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 provi-
sions of this revenue procedure should be
modified or revoked, the district director
will forward the matter to the national of-
fice for consideration before any further
action is taken. Such a referral to the na-
tional office will be treated as a request
for technical advice, and the provisions of
Rev. Proc. 99–2 (or any successor) will be
followed.
SECTION 10. REVIEW BY NA-
TIONAL OFFICE
.01 In general.Any application filed
under this revenue procedure may be re-
viewed by the national office. If the ap-
plication is reviewed by the national of-
fice, the procedures in sections 10.02
through 10.04 of this revenue procedure
apply.
.02 Incomplete application — 30 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 provi-
sions of this revenue procedure, or if sup-
plemental information is needed, the Ser-
vice will notify the taxpayer. The
notification will specify the information
that needs to be provided, and the taxpayer
will be permitted 30 days from the date of
the notification to furnish the necessary in-
formation. The Service reserves the right
to impose shorter reply periods if subse-
quent requests for additional information
are made. An extension of the 30-day pe-
riod to furnish information, not to exceed
30 days, may be granted to a taxpayer. A
request for an extension of the 30-day pe-
riod must be made in writing and submit-
ted within the initial 30-day period. If the
extension request is denied, there is no
right of appeal. Ordinarily, if the taxpayer
fails to provide the additional information
on a timely basis, the application does not
qualify for the automatic consent proce-
dures of this revenue procedure.
.03 Conference in the national office.
If the national office tentatively deter-
mines that the taxpayer has changed its
method of accounting without comply-
ing with all the applicable provisions of
this revenue procedure (for example, the
taxpayer changed to a method of ac-
counting that varies from the applicable
accounting method described in this rev-
enue procedure or the taxpayer is outside
the scope of this revenue procedure), the
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 con-
ference. For conference procedures for
taxpayers other than exempt organiza-
tions, see section 11 of Rev. Proc. 99–1
(or any successor). For conference pro-
cedures for exempt organizations, see
section 12 of Rev. Proc. 99–4, 1999–1
I.R.B. 115 (or any successor).

1999–52 I.R.B.737December 27, 1999
.04 National office determination.
(1) Consent not granted.Except as
provided in section 10.04(2) of this rev-
enue procedure, if the national office de-
termines 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 na-
tional 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 appropri-
ate 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 proce-
dure is subject to review by the district di-
rector as provided in section 9 of this rev-
enue procedure.
SECTION 11. APPLICABILITY OF
REV. PROCS. 99–1 AND 99–4
Rev. Procs. 99–1 and 99–4 (or any suc-
cessors) 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 proce-
dure may be addressed to the Commis-
sioner of Internal Revenue, Attention:
CC:DOM:IT&A, 1111 Constitution Av-
enue, 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 ef-
fective for taxable years ending on or
after December 27, 1999. The Service
will return any application that is filed on
or after December 27, 1999 if the applica-
tion is filed with the national office pur-
suant to the Code, regulations, or admin-
istrative guidance other than this revenue
procedure and the change in method of
accounting is within the scope of this rev-
enue 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 applica-
tion or ruling request is pending with the
national office on December 27, 1999,
the taxpayer may make the change under
this revenue procedure. However, the
national office will process the applica-
tion or ruling request in accordance with
the authority under which it was filed,
unless prior to the later of February 1,
2000, 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 tax-
payer timely notifies the national office
that it wants to make the method change
under this revenue procedure, the na-
tional 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 applica-
tion or ruling request will be returned to
the taxpayer.
.03 Special rules.
(1) Change in method of accounting
to comply with § 404(a)(11). For a
change in method of accounting described
in section 4A.01 of the APPENDIX of
this revenue procedure, this revenue pro-
cedure is effective for the taxpayer’s first
taxable year ending after July 22, 1998.
(2) Changes in methods of account-
ing for § 467 rental agreements.For
changes in methods of accounting de-
scribed in sections 8A.01, 8A.02, and
8A.03 of the APPENDIX of this revenue
procedure, this revenue procedure is ef-
fective for applications filed after Decem-
ber 27, 1999 for the taxpayer’s first tax-
able year ending after May 18, 1999.
(3) 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 proce-
dure, this revenue procedure is effective
for the taxpayer’s first taxable year end-
ing after July 22, 1998.
(4) Change in method of accounting
for a pool of debt instruments.For a
change in method of accounting described
in section 12.02 of the APPENDIX of this
revenue procedure, this revenue proce-
dure is effective for the taxpayer’s first
taxable year beginning after August 5,
1997.
SECTION 14. EFFECT ON OTHER
DOCUMENTS
.01 Rev. Proc. 98–60, is clarified,
modified, amplified, and superseded.
.02 Section 7 of Rev. Proc. 92–67,
1992–2 C.B. 429, is modified and, as
modified, is superseded. The remainder
of Rev. Proc. 92–67 remains in effect as
originally published.
.03 Section 6 of Rev. Proc. 99–17,
1999–7 I.R.B. 52, is superseded. The re-
mainder of Rev. Proc. 99–17 remains in
effect as originally published.
SECTION 15. PAPERWORK
REDUCTION ACT
The collections of information con-
tained in this revenue procedure have
been reviewed and approved by the Of-
fice of Management and Budget in accor-
dance 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 col-
lection of information displays a valid
OMB control number.
The collections of information in this
revenue procedure are in sections 6, 10,
and sections 1A, 2, 3, 5, 6, 7, 10, 10A, 12,
and 12A of the APPENDIX. This infor-
mation is necessary and will be used to
determine whether the taxpayer properly
changed to a permitted method of ac-
counting. The collections of information
are required for the taxpayer to obtain
consent to change its method of account-
ing. The likely respondents are the fol-
lowing: individuals, farms, business or
other for-profit institutions, nonprofit in-
stitutions, and small businesses or organi-
zations.
The estimated total annual reporting
and/or recordkeeping burden is 15,739
hours.
The estimated annual burden per re-
spondent/recordkeeper varies from
1
/
6

December 27, 19997381999–52 I.R.B.
hour to 8
1
/
2
hours, depending on individ-
ual circumstances, with an estimated av-
erage of 1
1
/
2
hours. The estimated num-
ber of respondents is 13,650. The
estimated annual frequency of responses
is on occasion.
Books or records relating to a collec-
tion of information must be retained as
long as their contents may become mater-
ial 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 Grant D. Anderson of the Of-
fice of Assistant Chief Counsel (Income
Tax and Accounting). For further infor-
mation regarding this revenue procedure,
contact Mr. Anderson on (202) 622-4970
(not a toll-free call). For further informa-
tion regarding the APPENDIX of this rev-
enue procedure contact the following in-
dividuals: (1) for changes in methods of
accounting under sections 1A.01 and
12A.01 of the APPENDIX of this revenue
procedure, Christina Morrison of the Of-
fice of Assistant Chief Counsel (Financial
Institutions and Products) on (202) 622-
3960 (not a toll-free call); (2) 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); (3)
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 Industries) on
(202) 622-3120 (not a toll free call);(4)for
changes in methods of accounting under
section 4A.01 of the APPENDIX of this
revenue procedure, Norm Paul of the Of-
fice of Associate Chief Counsel (Em-
ployee Benefits and Exempt Organiza-
tions); (5) for changes in methods of
accounting under sections 5.04, 6, 12, and
13 of the APPENDIX of this revenue pro-
cedure, William Blanchard of the Office
of Assistant Chief Counsel (Financial In-
stitutions and Products) on (202) 622-
3950 (not a toll-free call); (6) for changes
in methods of accounting under section
5A.01 of the APPENDIX of this revenue
procedure, Timothy Sebastian of the Of-
fice of Assistant Chief Counsel (Financial
Institutions and Products) on (202) 622-
3920 (not a toll-free call); (7) 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 Insti-
tutions and Products) on (202) 622-3950
(not a toll-free call); (8) for changes in
methods of accounting under section
10A.02 of the APPENDIX of this revenue
procedure, JoLynn Ricks of the Office of
Assistant Chief Counsel (Financial Insti-
tutions and Products) on (202) 622-3920
(not a toll-free call); (9) for changes in
methods of accounting under section 11
of the APPENDIX of this revenue proce-
dure, Craig R. Wojay of the Office of As-
sistant Chief Counsel (Financial Institu-
tions and Products) on (202) 622-3920
(not a toll-free call); and (10) for all other
sections, Mr. Anderson 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)
.01 Advances made by a lawyer on be-
half 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 ad-
vances from treating them as deductible
business expenses to treating them as
loans. See Boccardo v. United States, 12
Cl. Ct. 184 (1987); Canelo v. Commis-
sioner, 53 T.C. 217 (1969), aff ’d per cu-
riam, 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 de-
scribed 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 capi-
tal expenditures if the taxpayer treats
these costs in accordance with Rev. Proc.
69–21.
SECTION 1A. AMORTIZABLE BOND
PREMIUM (§ 171)
.01 Revocation of § 171(c) election.
(1) Description of change and scope.
This change applies to a taxpayer that
wants to change its method of accounting
for amortizable bond premium by revoking
its § 171(c) election. Under § 171(c), a
taxpayer that holds certain taxable bonds
may elect to amortize any bond premium
on the bonds in accordance with regula-
tions prescribed by the Secretary. Sections
1.171–1 through 1.171–5 provide rules re-
lating to the amortization of bond premium
by a taxpayer. Section 1.171–4 provides
the procedures to make a § 171(c) election
to amortize bond premium.
(2) Revocation of election.The re-
vocation of a § 171(c) election applies to
all taxable bonds that are held by the tax-
payer on the first day of the first taxable
year for which the revocation is effective
(year of change), and to all taxable bonds
that are subsequently acquired by the tax-
payer.
(3) Manner of making the change.
This change is made using a cut-off
method and applies only to taxable bonds
held during or after the year of change.
Consequently, for taxable bonds held at
the beginning of the year of change, the
taxpayer may not amortize any remaining
bond premium on the bonds. Because
cut-off treatment is prescribed for this
change, the basis of any bond, adjusted
for amounts previously amortized during
the period of the election, is not affected
by the revocation.
(4) Additional requirements.On a
statement attached to the application, the
taxpayer must provide:
(a) the reason(s) for revoking the
election; and
(b) a description of the method by
which, and the date on which, the tax-
payer made the § 171(c) election that is
proposed to be revoked.
(5) Audit protection.A taxpayer re-
ceives audit protection under section 7 of

1999–52 I.R.B.739December 27, 1999
this revenue procedure in connection with
this change. However, the audit protec-
tion applicable to this change does not
preclude the Commissioner from examin-
ing the method used by the taxpayer to
determine the amount of amortizable
bond premium under § 171(b) for a tax-
able year prior to the year of change.
.02 Reserved.
SECTION 2. DEPRECIATION OR
AMORTIZATION (§ 56(a)(1),
56(g)(4)(A), 167, 168, OR 197, OR
FORMER § 168)
.01 Impermissible to permissible
method of accounting for depreciation or
amortization.
(1) Description of change.
(a) This change applies to a tax-
payer that wants to change from an imper-
missible method of accounting for depre-
ciation or amortization (depreciation)
under which the taxpayer did not claim
the depreciation allowable, to a permissi-
ble 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 de-
preciation under which the taxpayer will
claim the depreciation allowable is a
change in method of accounting for which
the consent of the Commissioner is re-
quired. 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 er-
rors. Section 1.446–1(e)(2)(ii)(b).
(2)Scope.
(a) Applicability.This change ap-
plies to any taxpayer that has used an im-
permissible method of accounting for de-
preciation in at least the two taxable years
immediately preceding the year of
change, and is changing that accounting
method to a permissible method of ac-
counting for depreciation, for any item of
property:
(i) for which, under the tax-
payer’s impermissible method of account-
ing, the taxpayer has not taken into ac-
count any depreciation allowance or has
taken into account some depreciation but
less than or more than the depreciation al-
lowable (claimed less than or more than
the depreciation allowable);
(ii) for which depreciation is
determined under
§ 56(a)(1), 56(g)(4)(A),
167, 168, 197, or 168 prior to its amend-
ment in 1986 (former § 168); and
(iii) that is owned by the tax-
payer at the beginning of the year of
change.
(b) Certain scope limitations inap-
plicable.The scope limitations in section
4.02(8) of this revenue procedure are not
applicable to this change.
(c) 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 tax-
payer wants to change its method of ac-
counting under section 2.01 of this AP-
PENDIX, if the taxpayer is not
capitalizing the costs as required;
(iii) any intangible property
subject to § 56(g)(4)(A) or 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. 674, or
Rev. Proc. 83–35, 1983–1 C.B. 745, as
appropriate, that does not explicitly in-
clude § 1250 property (for example, asset
class 57.0, Distributive Trades and Ser-
vices);
(vi) any property for which a tax-
payer 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 amor-
tizable § 197 intangibles). A taxpayer may
request consent to revoke or make the elec-
tion by submitting a request for a letter rul-
ing under Rev. Proc. 99–1, 1999–1 I.R.B. 6
(or any successor);
(vii) any property subject to §
56(g)(4)(A) or 167 (other than § 167(f),
regarding certain property excluded from
§ 197), for which a taxpayer is changing
only the estimated useful life of the prop-
erty. A change in the estimated useful life
of property for which depreciation is de-
termined under § 56(g)(4)(A) or 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 § 56(a)(1), 56(g)(4)(A), 168 or for-
mer § 168);
(viii) any depreciable property
that changes use but continues to be
owned by the same taxpayer (see, for ex-
ample, § 168(i)(5));
(ix) any property for which de-
preciation is determined in accordance
with § 1.167(a)–11 (regarding the Class
Life Asset Depreciation Range System
(ADR));
(x) any change in method of ac-
counting involving a change from deduct-
ing the cost or other basis of any property
as an expense to capitalizing and depreci-
ating 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 deprecia-
tion for videocassettes. SeeRev. 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 deduct-
ing costs of removal as an expense (pro-
vided the costs of removal are not
required to be capitalized under any pro-
vision of the Code, such as, § 263(a))
and including salvage proceeds in tax-
able income (see section 2.02 of this
APPENDIX for making this change for
property for which depreciation is deter-
mined under § 167);
(xii) any change in method of
accounting involving both a change from
treating the cost or other basis of the prop-
erty as nondepreciable property to treat-
ing the cost or other basis of the property
as depreciable property and the adoption
of a method of accounting for deprecia-
tion 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

December 27, 19997401999–52 I.R.B.
nondepreciable to depreciable property
(assuming section 2.01(2)(c)(xiii) of the
APPENDIX does not apply) and the mak-
ing of an election under § 168(f)(1) to de-
preciate 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 de-
duction other than depreciation, even if a
taxpayer’s present method of accounting
may have resulted in the taxpayer claim-
ing less than or more than the deprecia-
tion 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 proper-
ty to depreciable property for unrecover-
able line pack gas or unrecoverable cush-
ion 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 deter-
mining depreciation under § 168 to
determining depreciation under former §
168 for any property subject to the tran-
sition 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 tax-
payer also must comply with the following:
(a) Permissible depreciation
method.A taxpayer must change to a per-
missible method of accounting for depre-
ciation for the item of property. This
method is the same method that deter-
mines the depreciation allowable for the
item of property (as provided in section
2.01(6) of this APPENDIX).
(b) Statements required.A tax-
payer must provide the following state-
ments, 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 in-
come-producing activities. Also, if the
taxpayer has more than one business or
income-producing activity, a statement
describing the taxpayer’s business or in-
come-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. 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-produc-
ing 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 de-
preciated 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 addi-
tional 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 applica-
tion;
(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 regula-
tory 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
(C) within 30 calendar days
of filing the federal income tax return for
the year of change, the taxpayer will pro-
vide 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 con-
taining the following representation: “For
purposes of § 168(e)(3)(E)(iii) of the In-
ternal Revenue Code, the taxpayer repre-
sents that (A) 50 percent or more of the
gross revenue generated from the item of
§ 1250 property is from the sale of petro-
leum products (not including gross rev-
enue from related services, such as the
labor cost of oil changes and gross rev-
enue from the sale of nonpetroleum prod-
ucts 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 prop-
erty 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, and a state-
ment containing the following representa-
tion: “Each item of property that is the
subject of the application filed under sec-
tion 2.01 of the APPENDIX of Rev. Proc.
99–49 for the year of change beginning
[Insert the date], and that is reclassified
from [Insert, as appropriate: nonresiden-
tial real property, residential rental prop-
erty, 19-year real property, 18-year real
property, or 15-year real property]to an
asset class of [Insert, as appropriate, ei-
ther: 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 deprecia-
tion purposes.”
(4) Section 481(a) adjustment.Be-
cause the adjusted basis of the property is
changed as a result of a method change
made under section 2.01 of this APPEN-
DIX (seesection 2.01(5) of this APPEN-
DIX), 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) adjust-
ment (a decrease in taxable income) or a
positive § 481(a) adjustment (an increase

1999–52 I.R.B.741December 27, 1999
in taxable income) and may be a different
amount for regular tax, alternative mini-
mum tax, and adjusted current earnings
purposes. This § 481(a) adjustment equals
the difference between the total amount of
depreciation taken into account in com-
puting taxable income for the property
under the taxpayer’s former method of ac-
counting, and the total amount of depreci-
ation 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 to account for the proper
amount of the depreciation allowable that
is required to be capitalized under any pro-
vision of the Code (for example, § 263A)
at the beginning of the year of change.
(5) Basis adjustment.As of the be-
ginning of the year of change, the basis of
depreciable property to which section
2.01 of this APPENDIX applies must re-
flect the reductions required by §
1016(a)(2) for the depreciation allowable
for the property (as determined under sec-
tion 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 § 56(a)(1), 56(g)(4)(A), 167, 168,
197, or former § 168. This amount, how-
ever, may be limited by other provisions
of the Code (for example, § 280F).
(b)Section 56(a)(1) property. The
depreciation allowable for any taxable
year for property for which depreciation
is determined under § 56(a)(1) is deter-
mined by using the depreciation method,
recovery period, and convention provided
for under § 56(a)(1) that applies for the
property’s placed-in-service date.
(c) Section 56(g)(4)(A) property.
The depreciation allowable for any tax-
able year for property for which deprecia-
tion is determined under § 56(g)(4)(A) is
determined by using the depreciation
method, recovery period or useful life, as
applicable, and convention provided for
under § 56(g)(4)(A) that applies for the
property’s placed-in-service date.
(d) Section 167 property.Gener-
ally, for any taxable year, the depreciation
allowable for property for which depreci-
ation is determined under § 167, is deter-
mined 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 deprecia-
tion method.
For determining the estimated useful
life and salvage value of the property, see
§§ 1.167(a)–1(b) and (c), respectively.
The depreciation allowable for any tax-
able year for property subject to § 167(f)
(regarding certain property excluded from
§ 197) is determined by using the depreci-
ation method and useful life prescribed in
§ 167(f).
(e) Section 168 property. The de-
preciation allowable for any taxable year
for property for which depreciation is de-
termined under § 168, is determined by
using either:
(i) the general depreciation sys-
tem in § 168(a); or
(ii) the alternative depreciation
system in § 168(g) if the property is re-
quired to be depreciated under the alterna-
tive 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 alter-
native 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).
(f)Section 197 property. The de-
preciation allowable for any taxable year
for an amortizable § 197 intangible (in-
cluding 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 pe-
riod.
(g) Former § 168 property. The
depreciation allowable for any taxable
year for property subject to former § 168
is determined by using either:
(i) the accelerated method of
cost recovery applicable to the property
(for example, for 5-year property, the re-
covery method under former § 168(b)(1));
or
(ii) the straight-line method ap-
plicable to the property if the property is
required to be depreciated under the
straight-line method (for example, prop-
erty described in former § 168(f)(12) or
former § 280F(b)(2)) or if the taxpayer
elected to determine the depreciation al-
lowance 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 ac-
counting for depreciation under §
56(g)(4)(A)(iv) or 167 to another permis-
sible method of accounting for deprecia-
tion under § 56(g)(4)(A)(iv) or 167. Pur-
suant 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 ap-
plies to any taxpayer wanting to make a
change in method of accounting for de-
preciation specified in section 2.02(3) of
this APPENDIX for the property in an ac-
count:
(i) for which the present and
proposed methods of accounting for de-
preciation specified in section 2.02(3) of
this APPENDIX are permissible methods
for the property under § 56(g)(4)(A) or
167; and
(ii) that is owned by the tax-
payer at the beginning of the year of
change.
(b) Certain scope limitations inap-
plicable.The scope limitations in section
4.02(8) of this revenue procedure are not
applicable to this change.
(c) 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 tax-
payer wants to change its method of ac-
counting under section 2.02 of this AP-
PENDIX, 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 ex-
cluded from § 197);

December 27, 19997421999–52 I.R.B.
(v) any property subject to §
167(g) (regarding property depreciated
under the income forecast method);
(vi) any property for which de-
preciation is determined under § 56(a)(1),
56(g)(4)(A)(i), (ii), (iii), or (v), 168 or §
168 prior to its amendment in 1986 (for-
mer § 168);
(vii) any property that the tax-
payer elected under § 168(f)(1) or former
§ 168(e)(2) to exclude from the applica-
tion of, respectively, § 168 or former §
168;
(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 depreci-
ation method pursuant to § 1.167(e)–1(b)
(change from declining-balance method to
straight-line method), § 1.167(e)–1(c) (cer-
tain 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 fol-
lowing changes in methods of accounting
for depreciation:
(a) a change from the straight-line
method to the
sum-of-the-years-digits method, the sink-
ing 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 any proper percentage of the
straight-line rate, or the straight-line
method;
(d) a change from the unit-of-pro-
duction 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 percent-
age of the straight-line rate;
(f) a change in the interest factor
used in connection with a compound in-
terest method or sinking fund method;
(g) a change in averaging conven-
tion 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 substan-
tially distorts the depreciation allowance
for the taxable year, it may not be used
(seeRev. Rul. 73–202, 1973–1 C.B. 81);
(h) a change from charging the de-
preciation 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). SeeRev. 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
(ii) the removal costs are not re-
quired to be capitalized under any provi-
sion of the Code (for example, § 263(a),
263A, or 280B);
(i) a change from crediting the de-
preciation reserve with the salvage pro-
ceeds 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 ordi-
nary income (including the combination
method of crediting the lesser of esti-
mated salvage value or actual salvage
proceeds to the depreciation reserve, with
any excess of salvage proceeds over esti-
mated salvage value credited to ordinary
income) with the salvage proceeds real-
ized on normal retirement sales, to com-
puting and recognizing gains and losses
on such sales (seeRev. Rul. 70–166,
1970–1 C.B. 44); or
(k) a change from item accounting
for specific assets to multiple asset ac-
counting for the same assets, or vice
versa.
(4) Additional requirements.A tax-
payer also must comply with the follow-
ing:
(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 account-
ing for 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-bal-
ance 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 addi-
tional 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 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.Be-
cause 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 dupli-
cated or omitted. Accordingly, the §

1999–52 I.R.B.743December 27, 1999
481(a) adjustment is zero.
.03 Sale or lease transactions.
(1) Description of change and scope.
(a) Applicability.This change ap-
plies to a taxpayer that wants to change its
method of accounting from:
(i) improperly treating prop-
erty as sold by the taxpayer to properly
treating property as leased by the tax-
payer;
(ii) improperly treating property
as leased by the taxpayer to properly
treating property as sold by the taxpayer;
(iii) improperly treating prop-
erty as purchased by the taxpayer to prop-
erly treating property as leased by the tax-
payer; and
(iv) improperly treating prop-
erty as leased by the taxpayer to properly
treating property as purchased by the tax-
payer.
(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
(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 ac-
counting under section 2.03 of this AP-
PENDIX is made using a cut-off method
and applies to transactions entered into on
or after the beginning of the year of
change. Seesection 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 Com-
missioner in accordance with the re-
quirements 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 tax-
payer that wants to change the treatment of
expenditures that qualify as research and
experimental expenditures under § 174.
(b) Section 174 and the regulations
thereunder provide the specific rules for
changing a method of accounting under §
174 for research and experimental expen-
ditures. 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 ex-
penses under § 174(a) or as deferred ex-
penses amortizable ratably over a period
of not less than 60 months under § 174(b).
Pursuant to § 1.174–1, research and exper-
imental expenditures that are not treated as
expenses or deferred expenses under §
174 must be treated as capital expendi-
tures. 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 re-
search and experimental expenditures as
expenses under § 174(a), §§ 174(a)(2)(B)
and 1.174–3(b)(2) provide that the tax-
payer may, with consent, adopt the ex-
pense method at any time.
(d) If a taxpayer has treated re-
search and experimental expenditures as
expenses under § 174(a), §§ 174(a)(3)
and 1.174–3(b)(3) provide that the tax-
payer may, with consent, change to a dif-
ferent method of treating research and ex-
perimental expenditures.
(e) If a taxpayer has treated re-
search 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 or
experimental expenditures or to a differ-
ent period of amortization for deferred ex-
penses.
(2) Scope.
(a) Applicability. This change ap-
plies 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 experimen-
tal 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 ex-
penses under § 174(a) or deferred ex-
penses 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 ap-
plied 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 in-
curred for a particular project during the
year of change or in subsequent taxable
years (that is, the 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 in-
curred for a particular project or projects
during the year of change and in subse-
quent taxable years. Seesection 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. How-
ever, see section 6 of this revenue proce-
dure for filing requirements applicable
under this revenue procedure.
(c) The consent granted under this
revenue procedure satisfies the consent

December 27, 19997441999–52 I.R.B.
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 tax-
payer must attach to the application a
written statement providing:
(a) the information required in §
1.174–3(b)(2) if the taxpayer is changing
to treating research and experimental ex-
penditures 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 differ-
ent 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 ap-
plies 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 account-
ing 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 design-
by-design capitalization and 60-month
amortization method, and (3) the pool-of-
cost capitalization and 48-month amorti-
zation 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 ac-
counting for package design costs to the
capitalization method or the design-by-
design capitalization and 60-month amor-
tization 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 sec-
tions 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.
(2) Additional requirements.A tax-
payer that changes its method of account-
ing for unrecoverable line pack gas or un-
recoverable cushion gas under section
3.02 of this APPENDIX must change to a
permissible method of accounting for de-
preciation for the cost of that gas.
SECTION 4. UNIFORM
CAPITALIZATION (§ 263A)
.01 Certain uniform capitalization
(UNICAP) methods used by small re-
sellers, formerly small resellers, and re-
seller-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-UNI-
CAP 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 chang-
ing from a permissible UNICAP method
for both its production and resale activi-
ties 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 pro-
duction and resale activities under §
1.263A–3(a)(4) (resellers with de min-
imis production activities); or
(iv) a reseller-producer chang-
ing 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 exami-
nation, 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 ap-
plication with the national office. The ap-
plication 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 his-
toric 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 de-
scribed in § 1221(1) for resale.
(b) “Small reseller” means a re-
seller whose average annual gross re-
ceipts for the three immediately preceding
taxable 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 re-
seller.
(f) “Permissible UNICAP

1999–52 I.R.B.745December 27, 1999
method” means a method of capitalizing
costs that is permissible under § 263A.
(g) “Permissible non-UNICAP in-
ventory capitalization method” means a
method of capitalizing inventory costs
that is permissible under § 471.
(3) Section 481(a) adjustment.Be-
ginning with the year of change, a tax-
payer changing its method of accounting
for costs pursuant to section 4.01 of this
APPENDIX generally must take any ap-
plicable § 481(a) adjustment into account
ratably over the same number of taxable
years, not to exceed four, that the tax-
payer used its former method of account-
ing. 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.
(5) Example. The following exam-
ple illustrates the principles of section
4.01 of this APPENDIX for small re-
sellers and formerly small resellers.
Assume X, a corporate reseller of
personal property, incorporated January 2,
1991, adopted a taxable year ending De-
cember 31. X determines that its average
annual gross receipts for the three taxable
years (or fewer, if applicable) immedi-
ately preceding taxable years 1991
through 2000 are as shown in the table
below:
AVERAGE Annual Gross
Current Receipts for the Three
Taxable Years
Taxable Years Immediately Pre-
ceding the
Current
Taxable Year Year
1991$ 0
19925,000,000
19936,000,000
19947,000,000
199511,000,000
199611,000,000
19979,000,000
19988,000,000
199911,000,000
200012,000,000
Furthermore, X, which adopted the dol-
lar-value LIFO inventory method, has the
following LIFO inventory balances deter-
mined without considering the effects of
the UNICAP method:
BeginningEnding
1995$1,000,000$1,100,000
19961,100,0001,200,000
19971,200,000 1,300,000
19981,300,0001,400,000
19991,400,0001,500,000
20001,500,0001,600,000
X was required by § 263A to change to
the UNICAP method for 1995 because its
average annual gross receipts for the three
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 “ad-
ditional § 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 tax-
able years beginning with 1995. Thus, X
was required to include a $20,000 posi-
tive § 481(a) adjustment in its 1995 tax-
able income.
X elected to use the simplified resale
method without a historic absorption ratio
election under § 1.263A–3(d)(3) for de-
termining 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) adjust-
ment:
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 re-
seller exception for 1996, X was required
to continue using the UNICAP method
for its inventory costs. Furthermore, X
was required to include $20,000 of the
unamortized 1995 positive § 481(a) ad-
justment in 1996 taxable income. As-
sume 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 volun-
tarily from the UNICAP method to a per-
missible non-UNICAP inventory capital-
ization 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) adjust-
ment, 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 in-
clude 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 tax-
able 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
1997 Increment . . . . . . . . . . . .100,000
1997 § 481(a) Adjustment
<Negative> . . . . . . . . . . . . .<100,000>
Total 1997 Ending
Inventory . . . . . . . . . . . . . . .$1,300,000

December 27, 19997461999–52 I.R.B.
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 ex-
ception for 1998 and, therefore, is not re-
quired 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) ad-
justment 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 re-
seller exception and, therefore, must re-
turn 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 elec-
tion under § 1.263A–3(d)(3). Assume
that X must capitalize $120,000 of addi-
tional § 263A costs to the cost of its 1999
beginning inventory because of this
change in inventory method. In addi-
tion, 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 tax-
able 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 ad-
ditional § 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) adjust-
ment:
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 con-
tinue using the UNICAP method for its
inventory costs. Furthermore, X is re-
quired to include $60,000 of the un-
amortized 1999 positive § 481(a) adjust-
ment in 2000 taxable income. Assume
that X is required to add $10,000 of ad-
ditional § 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 Incremen . . . . . . . . . . . . .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 4A. DEFERRED
COMPENSATION (§ 404)
.01 Change to comply with §
404(a)(11).
(1) Description of change and scope.
(a) Applicability. This change
applies to a taxpayer that must change
its method of accounting for its first
taxable year ending after July 22, 1998,
to comply with § 404(a)(11). Section
404(a)(11) provides that, for purposes
of determining under § 404 whether
compensation of an employee is de-
ferred compensation and when deferred
compensation is paid, no amount is
treated as received by the employee, or
paid, until it is actually received by the
employee. Section 404(a)(11) over-
turns the decision in Schmidt Baking
Co. v. Commissioner, 107 T.C. 271
(1996), in which the court held that a
§ 83(a) income inclusion event upon
securitization of vacation and sever-
ance pay benefits with a letter of credit
constitutes receipt of those benefits by
employees for purposes of determining
whether an employer’s deduction for
the benefits is subject to § 404. See
Notice 99–16, 1999–13 I.R.B. 10
(March 29, 1999).
(b) Scope limitations inapplica-
ble.A taxpayer that must make this
change is not subject to the scope limi-
tations 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 ap-
plication to the examining agent(s), ap-
peals officer, or counsel for the govern-
ment, as appropriate, at the same time
that it files the copy of the application
with the national office. The applica-
tion must contain the name(s) and tele-
phone number(s) of the examining
agent(s), appeals officer, or counsel for
the government, as appropriate.

1999–52 I.R.B.747December 27, 1999
(2) Section 481(a) adjustment pe-
riod.A taxpayer must take the § 481(a)
adjustment into account ratably over
three taxable years.
(3) 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 5. METHODS OF
ACCOUNTING (§ 446)
.01 Cash or hybrid method to accrual
method.
(1) Description of change and scope.
(a) Applicability.This change ap-
plies to:
(i) a taxpayer that wants to
change to an overall accrual method, or
to an overall accrual method in conjunc-
tion 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:
(i) a financial institution de-
scribed in § 581 or 591;
(ii) a farmer;
(iii) a cooperative organization
described in § 501(c)(12), 521, or 1381;
(iv) an individual taxpayer, ex-
cept for activities conducted as a sole pro-
prietorship;
(v) a taxpayer required to use an
inventory method of accounting, unless:
(A) the taxpayer is using or
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 tax-
payer has production activities, the tax-
payer’s production activities qualify
under the de minimis presumption of §
1.263A–3(a)(2)(iii); or
(B) the taxpayer is using or
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 com-
pliance with that section and any related
administrative guidance;
(vii) a taxpayer required or
wanting to use a special method of ac-
counting, unless the taxpayer is permitted
to change automatically to the special
method under this revenue procedure. A
special method of accounting is a method
that deviates from the normal tax account-
ing rules, such as the method of account-
ing for advance payments pursuant to ei-
ther 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, such as the percentage
of completion method or the completed
contract method;
(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 auto-
matic 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 re-
quired under any Code section (or regula-
tions thereunder) other than § 448 (for ex-
ample, a taxpayer with inventories); or
(ix) a taxpayer engaged in two
or more trades or businesses, unless the
taxpayer uses or adopts the same overall
accrual method for each such trade or
business.
(2) Section 481(a) adjustment.
(a) In general.The § 481(a) ad-
justment takes into account the accounts
receivable, accounts payable, inventory,
and any other item determined to be nec-
essary 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.
(b) Recurring item exception.
As part of the change to an overall accrual
method, a taxpayer may adopt the recur-
ring item exception for the year of change
if the taxpayer is eligible and follows the
procedures of § 1.461–5(d). If the tax-
payer 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 conjunc-
tion 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 ap-
plies to an eligible accrual method manu-
facturer, wholesaler, or retailer of motor
vehicles or other durable consumer goods
that wants to change to the service war-
ranty 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 circum-
stances, 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 war-
ranty obligation.
(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 in-
come method for all qualified advance
payment amounts received in the year of
change and thereafter. Seesection 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 iden-
tified at the top as follows: “CHANGE
TO THE SERVICE WARRANTY IN-

December 27, 19997481999–52 I.R.B.
COME METHOD UNDER SECTION
5.02 OF THE APPENDIX OF REV.
PROC. 99–49.” The statement must set
forth the information required under sec-
tion 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. 99–49.
(c) A taxpayer changing to the ser-
vice warranty income method of account-
ing under section 5.02 of this APPENDIX
must satisfy the annual reporting require-
ment 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.
(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 in-
curred to insure its risks under multi-year
service warranty contracts to the method
described in section 5.03(3) of this APPEN-
DIX. 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 con-
tracts. 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 ac-
tual 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 con-
stituting insurance.
(3) Description of method. If a tax-
payer purchases a multi-year service war-
ranty 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 in-
curred and may only obtain deductions
for that amount by prorating (or amortiz-
ing) it over the life of the insurance policy
(whether the cash method or an 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 ap-
plies 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 inter-
est 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 inapplica-
ble. 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 limita-
tions in section 4.02 of this revenue pro-
cedure. However, if the taxpayer is
under examination, before an appeals
office, or before a federal court, the tax-
payer must provide a copy of the appli-
cation to the examining agent(s), ap-
peals officer, or counsel for the
government, as appropriate, at the same
time that it files the copy of the applica-
tion with the national office. The appli-
cation 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.
(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 regu-
lar intervals at least annually, over a pe-
riod 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 pe-
riods’ 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 con-
stant yield method. The Rule of 78s
method generally front-loads interest as
compared to the constant yield method.
(d) Rev. Proc. 83–40 was obso-
leted 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 dis-
count on a debt instrument (loan) by using
a constant yield method. As a result, the
Rule of 78s method is no longer an ac-
ceptable method of accounting for federal
income tax purposes.
(e) Notwithstanding §§ 1.446–2
and 1.1272–1, as a matter of administra-
tive 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 be-
gins 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 rev-
enue 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 sepa-
rately.
SECTION 5A. TAXABLE YEAR OF
INCLUSION (§ 451)
.01 Accrual of interest on nonperform-
ing loans.
(1) Description of change and scope.
(a) This change applies to an ac-
crual method taxpayer that is a bank as
defined in § 581 (or whose primary busi-
ness is making or managing loans) and
wants to change its method of accounting
to comply with §§ 451 and 1.451–1(a) for
qualified stated interest (as defined in §
1.1273–1(c)) on nonperforming loans.
(b) Section 1.451–1(a) requires in-
come to be accrued when all the events
have occurred that fix the right to receive
the income and the amount thereof can be
determined with reasonable accuracy. A
taxpayer may not stop accruing qualified
stated interest on a nonperforming loan
for federal income tax purposes merely
because payments on the loan are overdue
by a certain length of time, such as 90

1999–52 I.R.B.749December 27, 1999
days, even if a federal, state, or other reg-
ulatory authority having jurisdiction over
the taxpayer permits or requires that the
overdue interest not be accrued for regu-
latory purposes.
(c) Under §§ 451 and 1.451–1(a),
a taxpayer must continue accruing quali-
fied stated interest on any nonperforming
loan until either (i) the loan is worthless
under § 166 and charged off as a bad debt,
or (ii) the interest is determined to be un-
collectible. In order for interest to be de-
termined uncollectible, the taxpayer must
substantiate, taking into account all the
facts and circumstances, that it has no rea-
sonable expectation of payment of the in-
terest. This substantiation requirement is
applied on a loan by loan basis.
(d) A taxpayer that changes its
method of accounting under section
5A.01 of this APPENDIX must do so for
all of its loans.
(2) Section 481(a) adjustment.In
general, the § 481(a) adjustment for a
method change under section 5A.01 of
this APPENDIX represents the amount of
qualified stated interest, on the taxpayer’s
nonperforming loans outstanding as of the
beginning of the year of change, that
should have been accrued under §§ 451
and 1.451–1(a) and was not accrued. In-
terest for which the taxpayer, as of the be-
ginning of the year of change, has no rea-
sonable expectation of payment is not
taken into account in determining the
amount of the § 481(a) adjustment.
.02 Reserved.
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 tax-
payer 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 in-
crease in redemption price on a bond oc-
curring in a taxable year, and that now
wants to report this income in the taxable
year in which the bond is redeemed, dis-
posed 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 in-
crease 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. Seesection 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 iden-
tified at the top as follows: “CHANGE
IN METHOD OF ACCOUNTING
UNDER SECTION 6.01 OF THE AP-
PENDIX OF REV. PROC. 99–49.” The
statement must set forth:
(i) the Series E or EE U.S. sav-
ings bonds for which this change in ac-
counting method is requested;
(ii) an agreement to report all
interest on any bonds acquired during or
after the year of change when the inter-
est is realized upon disposition, redemp-
tion, or final maturity, whichever is ear-
liest; and
(iii) an agreement to report all
interest on the bonds acquired before the
year of change when the interest is real-
ized upon disposition, redemption, or
final maturity, whichever is earliest, with
the exception of any interest income pre-
viously reported in prior taxable years.
.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 in-
come 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 be-
fore 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 for-
mer method of accounting. Seesection
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 iden-
tified at the top as follows: “CHANGE
IN METHOD OF ACCOUNTING
FOR PREPAID SUBSCRIPTION IN-
COME UNDER SECTION 7.01 OF
THE APPENDIX OF REV. PROC.
99–49.” The statement must set forth the
information required under § 1.455–6(b).
(c) The consent granted under
this revenue procedure satisfies the con-
sent required under §§ 455(c)(3) and
1.455–6(b).
.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 ap-
plies 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 (seeRev. 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 calen-
dar 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 bene-
fits. If the obligation to pay an em-
ployee’s medical expenses is neither in-
sured 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 tax-
payer wants to change its method of ac-

December 27, 19997501999–52 I.R.B.
counting under section 8.01 of this AP-
PENDIX, if the taxpayer is not capitaliz-
ing the costs as required.
(2) Amounts taken into account. Ap-
plicable provisions of the Code, regulations,
and other published guidance prescribe the
manner in which a liability that has been in-
curred 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 tax-
payer may not rely on the provisions of sec-
tion 8.01 of this APPENDIX to take a cur-
rent year deduction.
.02 Timing of incurring liabilities for
real property taxes.
(1) Description of change. An ac-
crual 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 lia-
bility 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 tax-
payer is to pay a tax, economic perfor-
mance occurs as the tax is paid to the gov-
ernment authority that imposed the tax.
(2) Scope.
(a) Applicability. This change ap-
plies to an accrual method taxpayer that
wants to change its method of accounting to:
(i) treat a liability for real prop-
erty 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 tax-
payer wants to change its method of ac-
counting under section 8.02 of this AP-
PENDIX, if the taxpayer is not
capitalizing the costs as required.
(3) Amounts taken into account.Ap-
plicable provisions of the Code, regula-
tions, and other published guidance pre-
scribe the manner in which a liability that
has been incurred is taken into account.
For example, for a taxpayer with invento-
ries, 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.
(1) Description of change and scope.
(a) Applicability. This change ap-
plies 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 insur-
ance 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’ com-
pensation, tort, breach of contract, or vio-
lation of law as being incurred in the tax-
able year in which all the events have
occurred which establish the fact of the li-
ability, 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 tax-
payer wants to change its method of ac-
counting under section 8.03 of this AP-
PENDIX, 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, regu-
lations, and other published guidance pre-
scribe the manner in which a liability that
has been incurred is taken into account.
For example, for a taxpayer with invento-
ries, certain employee benefit costs (in-
cluding 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) Applicability. This change ap-
plies to:
(a) an accrual method employer
that wants to change its method of ac-
counting for
(i) 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 de-
ductible 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 ex-
ception are met); and
(ii) state unemployment taxes
and, in the event the taxpayer is an em-
ployer within the meaning of the Railroad
Retirement Tax Act (see§ 3231(a)), rail-
road retirement taxes to a method under
which the taxpayer may deduct in Year 1
its otherwise deductible state unemploy-
ment taxes and railroad retirement taxes
(if applicable) 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
(including the requirement that, as of the
end of the taxable year, all events have
occurred that establish the fact of the lia-
bility and the amount of the liability can
be determined with reasonable accuracy,
see§ 1.461–5(b)); or
(b) an accrual method employer that
utilizes a method of accounting for FICA
and FUTA taxes that is consistent with the
holding in Rev. Rul. 96–51, 1996–2 C.B.
36 and wishes to change its method of ac-
counting for state unemployment taxes
and, in the event the employer is an em-
ployer within the meaning of the Railroad
Retirement Tax Act (see§ 3231(a)), rail-
road retirement taxes to a method under
which the taxpayer may deduct in Year 1
its otherwise deductible state unemploy-
ment taxes and railroad retirement taxes
(if applicable)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
(including the requirement that, as of the
end of the taxable year, all events have
occurred that establish the fact of the lia-

1999–52 I.R.B.751December 27, 1999
bility and the amount of the liability can
be determined with reasonable accuracy,
see§ 1.461–5(b)).
(2) 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 tax-
payer wants to change its method of ac-
counting under section 8.04 of this AP-
PENDIX, if the taxpayer is not
capitalizing the costs as required.
(3) Recurring item exception. A tax-
payer that previously has not changed to
or adopted the recurring item exception
for FICA, FUTA, state unemployment
taxes and railroad retirement taxes (if ap-
plicable) must change to the recurring
item exception method for FICA, FUTA,
state unemployment taxes and railroad re-
tirement taxes (if applicable) as specified
in § 461(h)(3) as part of this change.
(4) Amounts taken into account. Ap-
plicable provisions of the Code, regula-
tions, and other published guidance pre-
scribe the manner in which a liability that
has been incurred is taken into account.
For example, for a taxpayer with invento-
ries, certain taxes must be included in in-
ventory 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 AP-
PENDIX 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 per-
formed, 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 rev-
enue procedure. However, if the taxpayer
is under examination, before an appeals of-
fice, 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 8A. CERTAIN PAYMENTS
FOR THE USE OF PROPERTY OR
SERVICES (§ 467)
.01 Change to constant rental accrual
method.
(1) Description of change.This
change applies to a taxpayer that wants to
change to the constant rental accrual
method, as described in § 1.467–3, for all
of its section 467 rental agreements de-
scribed in § 1.467–8(b). See§ 1.467–8.
(2) Requirements. Taxpayers chang-
ing their method of accounting in accor-
dance with this change must do so for all
of their section 467 rental agreements de-
scribed in § 1.467–8(b). This change
must be made for the taxpayer’s first tax-
able year ending after May 18, 1999.
(3) Scope limitations inapplicable.
The scope limitations in section 4.02 of this
revenue procedure are not applicable to this
change. 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 ex-
amining agent(s), appeals officer, or coun-
sel 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.
.02 Change to comply with §§ 1.467–1
through 1.467–7.
(1) Description of change. This
change applies to a taxpayer that wants to
change its method of accounting for rental
agreements described in § 1.467–9(a)(2)
to comply with §§ 1.467–1 through
1.467–7. See § 1.467–9(e)(1).
(2) Requirements.This change must
be made for the taxpayer’s first taxable
year ending after May 18, 1999.
(3) Scope limitations inapplicable.
The scope limitations in section 4.02 of this
revenue procedure are not applicable to this
change. 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 ex-
amining agent(s), appeals officer, or coun-
sel 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.
(4) Manner of making the change.
This change is made using a cut-off
method and applies only to rental agree-
ments described in § 1.467–9(a)(2). See
section 2.06 of this revenue procedure.
For purposes of this paragraph (4), a
rental agreement is entered into on its
agreement date (within the meaning of §
1.467–1(h)(1) and, if applicable, §
1.467–1(f)(1)(i)).
.03 Change to comply with regulation
project IA–292–84.
(1)Description of the change.This
change applies to a taxpayer that wants to
change its method of accounting for any
rental agreement described in §
1.467–9(c) to comply with the provisions
of regulation project IA–292–84 (1996–2
C.B. 462).
(2) Requirements. This change must
be made for the taxpayer’s first taxable
year ending after May 18, 1999.
(3) Scope limitations inapplicable.
The scope limitations in section 4.02 of this
revenue procedure are not applicable to this
change. 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 ex-
amining agent(s), appeals officer, or coun-
sel 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,

December 27, 19997521999–52 I.R.B.
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. SeeRev. 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 account-
ing 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
(b) a method other than the retail
safe harbor method, provided (i) the tax-
payer’s present method of accounting
does not estimate inventory shrinkage,
and (ii) the taxpayer’s new method of ac-
counting (that estimates inventory shrink-
age) 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 exami-
nation, 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 ap-
plication with the national office. The ap-
plication 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 descrip-
tion of all aspects of the new method of
estimating inventory shrinkage (includ-
ing, 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 esti-
mates inventory shrinkage, does not re-
ceive 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 estimat-
ing inventory shrinkage is an issue under
consideration within the meaning of sec-
tion 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 ap-
plies to any taxpayer that wants to:
(i) change from the LIFO in-
ventory method for all its LIFO inven-
tory; 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
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 permit-
ted 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 taxpay-
er must use a permitted method.
(ii) Permitted method defined.
For purposes of section 10.01 of this AP-
PENDIX, 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 identifi-
cation inventory method; and
(B) the valuation method is
cost; cost or market, whichever is lower;
market (but only if the taxpayer is a deal-
er in securities, as defined in § 1.471–5);
the “farm price 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 re-
ferred 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 identifi-
cation and valuation, and not by which
types and amounts of costs are capitalized
under the taxpayer’s method of comput-
ing 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

1999–52 I.R.B.753December 27, 1999
Rev. Proc. 97–27, 1997–1 C.B. 680. A
taxpayer 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, Applica-
tion 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 tax-
payer’s gross income for the LIFO recap-
ture 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 ad-
justment to the basis of the taxpayer’s in-
ventory as of the end of the taxable year
preceding the year of change. Any in-
crease in income tax as a result of the in-
clusion of the LIFO recapture amount is
payable in four equal installments, begin-
ning with the taxpayer’s last taxable year
as a C corporation as provided in §
1363(d)(2). Any corresponding basis ad-
justment is taken into account in comput-
ing 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 corpora-
tion elects to be treated as an S corporation
for a taxable year after the taxable year in
which it discontinued use of the LIFO in-
ventory method, the remaining balance of
any positive § 481(a) adjustment must be
included in its gross income in its last tax-
able year as a C corporation. If this inclu-
sion results in an increase in tax for its last
taxable year as a C corporation, this in-
crease in tax is payable in four equal install-
ments, beginning with the taxpayer’s last
taxable year as a C corporation as provided
in § 1363(d)(2), unless the taxpayer is re-
quired to take the remaining balance of the
§ 481(a) adjustment into account in the last
taxable year as a C corporation under an-
other acceleration provision in section
5.02(3)(c) of this revenue procedure.
(4) Additional requirements.The tax-
payer must complete the following state-
ments and attach them to the application:
(a) “The new method of identify-
ing inventory goods is the [insert method;
that is, specific identification; FIFO; re-
tail; etc.] method.”
(b) “The new method of valuing in-
ventory 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. 99–49 because
[explain in detail how the new method
conforms to the specific subdivision].”
.02 Determining the cost of used vehi-
cles purchased or taken as a trade-in.
(1) Description of change and scope.
This change applies to a LIFO taxpayer
that wants to:
(a) determine the cost of used vehi-
cles acquired by trade-in using the aver-
age wholesale price listed by an official
used car guide on the date of the trade-in.
SeeRev. Rul. 67–107, 1967–1 C.B. 115.
The official used car guide selected must
be consistently used;
(b) determine the cost of used ve-
hicles 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 na-
tional 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 ac-
quired during the year of change and all
subsequent years. Seesection 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 ap-
plies 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 “Alter-
native LIFO Method” described in section
4 of Rev. Proc. 97–36, 1997–2 C.B. 450,
for its LIFO inventories of new automo-
biles and new light-duty trucks. Light-duty
trucks are trucks with a gross vehicle
weight of 14,000 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 com-
putation (IPIC) method for goods other
than new automobiles, new light-duty
trucks, parts and accessories, used auto-
mobiles, and used trucks.
(2) Manner of making the change.
(a) Cut-off method.This change is
made using a cut-off method. Seesection
2.06 of this revenue procedure and sec-
tion 5.03(6) of Rev. Proc. 97–36.
(b) IPIC method changes. An au-
tomobile 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 acces-
sories, 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:
(i) the conditions in section
5.03 of Rev. Proc. 97–36; and
(ii) for an automobile dealer
changing from the IPIC method, the auto-
mobile dealer also must attach to the ap-
plication 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 APPEN-
DIX 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 eligi-
ble 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 De-
tailed Report, select an index from Table
3 (Consumer Price Index for All Urban
Consumers (CPI-U): U.S. city average,
detailed expenditure categories); and

December 27, 19997541999–52 I.R.B.
(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 in-
dividual 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-year
cost. See§ 1.472–8(e)(2)(ii). Further-
more, there must be a nexus between the
taxpayer’s method of determining cur-
rent-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 in-
ventory 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 begin-
ning 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 prin-
ciples for establishing pools of manufactur-
ers 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 follow-
ing 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. Seesection 6.02(3) of
this revenue procedure.
(2) Manner of making the change.
This change is made using a cut-off
method. Seesection 2.06 of this revenue
procedure.
(3) Bargain purchase.If the tax-
payer has previously improperly ac-
counted for a bulk bargain purchase, the
taxpayer must, as part of this change, first
change its method of accounting to com-
ply with Hamilton Industries, Inc. v. Com-
missioner, 97 T.C. 120 (1991), and com-
pute a § 481(a) adjustment for that part of
the change. SeeAnnouncement 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. How-
ever, 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 pur-
chase. 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 deter-
mining current year cost:
(a) by reference to the actual cost
of the goods most recently purchased or
produced;
(b) by reference to the actual cost
of the goods purchased or produced dur-
ing the taxable year in the order of acqui-
sition; 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 pro-
duced. See§ 1.472–8(e)(2)(ii).
(2) Manner of making the change.
This change is made using a cut-off
method. Seesection 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 ap-
plies to:
(i) a taxpayer that must discon-
tinue 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 end-
ing 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, 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 se-
curities (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 exami-
nation, 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 ap-
plication with the national office. The ap-
plication 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 tax-
payer should indicate whether the tax-
payer is changing under section
10A.01(1)(a)(i) or sections
10A.01(1)(a)(i) and (ii) of this APPEN-
DIX.
(3) No audit protection. A taxpayer
does not receive audit protection under
section 7 of this revenue procedure in
connection with this change.
.02 Commodities dealers, securities
traders, and commodities traders electing
to use the mark-to-market method of ac-
counting under § 475(e) or (f).
(1) Description of change. This
change applies to certain taxpayers that
have elected to use the mark-to-market
method of accounting under § 475(e) or (f).
Under § 475(e) and (f) and Rev. Proc.
99–17, 1999–7 I.R.B. 52, if a taxpayer
makes an election under § 475(e) or (f),

1999–52 I.R.B.755December 27, 1999
then beginning with the first taxable year
for which the election is effective (election
year), mark to market is the only permissi-
ble method of accounting for securities or
commodities subject to the election. Thus,
if the electing taxpayer’s method of ac-
counting for its taxable year immediately
preceding the election year is inconsistent
with § 475, the taxpayer is required to
change its method of accounting to comply
with the election. A taxpayer that makes a
§ 475(e) or (f) election but fails to change
its method of accounting to comply with
that election is using an impermissible
method. Seesection 4 of Rev. Proc. 99–17.
(2) Scope
(a) Applicability. This change ap-
plies to a taxpayer if all of the following
conditions are satisfied:
(i) The taxpayer is a commodities
dealer, securities trader, or commodities
trader that has made a valid election under
§ 475(e) or (f) (seesection 5.02 or 5.03(1)
of Rev. Proc. 99–17) and that is required
to change its method of accounting to
comply with the election;
(ii) The method of accounting to
which the taxpayer changes is in accor-
dance with its election under § 475(e) or
(f);and
(iii) The year of change is the
election year.
(b) Scope limitations inapplicable.
A taxpayer making this change is not sub-
ject to the scope limitations in section
4.02 of this revenue procedure. However,
if the taxpayer is under examination, be-
fore 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 govern-
ment, 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 num-
ber(s) of the examining agent(s), appeals
officer, or counsel for the government, as
appropriate.
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 ap-
plies to a bank (as defined in § 581, in-
cluding a bank for which a qualified sub-
chapter 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 inap-
plicable.A bank that changed from the §
593 reserve method under § 593(g) to the
§ 585 reserve method will not be prohib-
ited 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 pro-
hibited under section 4.02(7) of this rev-
enue 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 a large bank as defined
in § 585(c)(2).
(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 re-
serves (as described in §
593(g)(2)(A)(ii), without taking into ac-
count § 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 acceler-
ate the § 481(a) adjustment. In accor-
dance 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 re-
spect to the bank will constitute an agree-
ment by the bank to change its method of
accounting for bad debts from the § 585
reserve method to the § 166 specific
charge-off method effective as of the tax-
able year for which the S corporation elec-
tion or QSSS election is effective (year of
change) in accordance with all of the ap-
plicable provisions of this revenue proce-
dure (including section 6 of this revenue
procedure, which requires filing a Form
3115 in duplicate). The § 481(a) adjust-
ment 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 ap-
plies to a taxpayer that wants to change to
the principal-reduction method of ac-
counting described in section 5 of Rev.
Proc. 97–39, 1997–2 C.B. 485. The prin-
cipal-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 exami-
nation, 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 ap-
plication with the national office. The ap-
plication 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. The principal-re-
duction method of accounting is a permis-
sible method for use by taxpayers to ac-
count 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 ac-
count for any loans in a category of loans,
the method must be used for the entire
category of loans. The principal-reduc-
tion method applies only to loans de-
scribed in section 3 of Rev. Proc. 97–39.

December 27, 19997561999–52 I.R.B.
(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. Seesection 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 cate-
gories” permitted under section 4.03 of
Rev. Proc. 97–39.
(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 ap-
plies 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 be-
ginning after August 5, 1997.
(b) Scope limitations inapplicable.
A taxpayer that must make this change is
not subject to the scope limitations in sec-
tion 4.02 of this revenue procedure.
However, if the taxpayer is under exami-
nation, 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 ap-
plication with the national office. The ap-
plication 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 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 in-
struments 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 Tax-
payer Relief Act of 1997, which is effec-
tive for taxable years beginning after Au-
gust 5, 1997, extended the rules in §
1272(a)(6) to any pool of debt instru-
ments 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). SeeH.R. Conf.
Rep. No. 220, 105th Cong., 1st Sess. 522
(1997). (A credit card receivable subject
to a grace period provision has OID be-
cause none of the stated interest on the re-
ceivable 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 regard-
ing the timing of the payments by the oblig-
ors 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 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 experi-
ence 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 in-
come for the following taxable year to ac-
count for any difference between its accrual
based on a reasonable assumption and its
actual experience.
(2) Additional requirements.On a
statement attached to the application, the
taxpayer must provide a detailed descrip-
tion of the pool(s) of debt instruments and
the proposed method (including the pre-
payment assumption used for each pool).
SECTION 12A. MARKET DISCOUNT
BONDS (§ 1278)
.01 Revocation of § 1278(b) election.
(1) Description of change and scope.
This change applies to a taxpayer that
wants to change its method of accounting
for market discount bonds by revoking its
§ 1278(b) election. Under § 1278(b), a
taxpayer may elect a method of account-
ing under which market discount is cur-
rently included in gross income for the
taxable years to which the discount is at-
tributable. See Rev. Proc. 92–67, 1992–2
C.B. 429, for the procedures to make a §
1278(b) election (including a deemed §
1278(b) election). The procedures for re-
voking a § 1278(b) election were for-
merly provided in section 7 of Rev. Proc.
92–67.
(2) Revocation of election.The re-
vocation of a § 1278(b) election ap-
plies to all market discount bonds that are
held by the taxpayer on the first day of the
first taxable year for which the revocation
is effective (year of change), and to all
market discount bonds that are subse-
quently acquired by the taxpayer. If a §
1278(b) election is revoked, then, for pur-
poses of § 1276(a), accrued market dis-
count with respect to any bond previously
subject to the election means accrued
market discount as defined in § 1276(b)
less any market discount included in in-
come while the bond was subject to the §
1278(b) election.
(3) Manner of making the change.
This change is made using a cut-off
method and applies only to market dis-
count accruing on or after the first day of
the year of change. Market discount ac-
cruing on a bond prior to the year of
change was currently included in income
and market discount accruing on the bond
on and after the first day of the year of
change is included in income generally
upon disposition of the bond. See §
1276(a). Because cut-off treatment is pre-
scribed for this change, the basis of any
bond, adjusted for amounts previously in-
cluded in income during the period of the
election, is not affected by the revocation.
(4) Additional requirements. On a
statement attached to the application, the
taxpayer must provide:
(a) the reason(s) for revoking the §
1278(b) election (or deemed § 1278(b)
election);

1999–52 I.R.B.757December 27, 1999
(b) a description of the method by
which, and the date on which, the tax-
payer made the § 1278(b) election (or
deemed § 1278(b) election) that is being
revoked; and
(c) a statement that, after the revo-
cation, the taxpayer will not make a con-
stant interest rate election for any bond
that has been subject to the § 1278(b)
election (or deemed § 1278(b) election)
being revoked and for which a constant
interest rate election was not effective in
the year of acquisition.
(5) Audit protection.A taxpayer re-
ceives audit protection under section 7 of
this revenue procedure in connection with
this change. However, the audit protec-
tion applicable to this change does not
preclude the Commissioner from examin-
ing the method used by the taxpayer to
determine the amount of accrued market
discount under § 1276(b) for a taxable
year prior to the year of change.
.02 Reserved.
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 tax-
payer that wants to change its method of
accounting to comply with § 1281 for in-
terest income on short-term obligations.
(b) Under § 1281, a holder of cer-
tain 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 inter-
est income, including acquisition dis-
count, original issue discount (OID), and
stated interest. SeeS. 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 oblig-
ation.
(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 por-
tions of the 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 de-
termine the daily portions of acquisition
discount or OID. In addition, § 1281(a)
requires the holder to include in gross in-
come any stated interest that is payable on
the short-term obligation (other than
stated interest taken into account to deter-
mine the amount of the acquisition dis-
count or OID) as it accrues.
(2) Section 481(a) adjustment pe-
riod.A taxpayer must take the entire §
481(a) adjustment into account in com-
puting taxable income for the year of
change.
.02 Stated interest on short-term loans
of cash method banks in the Eighth Cir-
cuit.
(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 ’g98 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 in-
come stated interest on short-term loans
made in the ordinary course of business as
that interest accrues. The Service dis-
agrees with the interpretation of § 1281 in
Security Bank Minnesotaand 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 pe-
riod.A taxpayer must take the entire §
481(a) adjustment into account in com-
puting taxable income for the year of
change.
(3) No ruling protection.If the Ser-
vice 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.
26 CFR 601.602: Tax forms and instructions. (Also
Part I, §§ 138, 220, 408, 408A, 529, 530, 1441,
1442, 1443, 3402, 3405, 3406, 6011, 6041, 6041A,
6042, 6043, 6044, 6045, 6047, 6049, 6050A, 6050B,
6050D, 6050E, 6050H, 6050J, 6050N, 6050P,
6050Q, 6050R, 6050S; 1.408–7, 1.408A–7,
1.1461–1, 1.1461–2, 31.3402(q)–1, 31.3404(r)–1,
31.3405(c)–1, 35.3405–1, 31.3406(a)–1,
31.3406(g)–2, 35a.3406–2, 1.6011–1, 1.6011–3,
1.6041–1, 7.6041–1, 1.6041A–1, 1.6042–2,
1.6044–2, 1.6045–1, 1.6045–2, 1.6045–4, 1.6049–4,
1.6050A–1, 1.6050E–1, 1.6050H–1, 1.6050J–1T,
1.6050N–1, and 1.6050P–1.)
Rev. Proc. 99–50
SECTION 1. PURPOSE
This revenue procedure permits com-
bined information reporting by a succes-
sor business entity (i.e., a corporation,
partnership, or sole proprietorship) in cer-
tain situations following a merger or an
acquisition and supersedes Rev. Proc.
90–57, 1990–2 C.B. 641 and Rev. Rul.
69–556, 1969–2 C.B. 242. This revenue
procedure explains both the procedure
otherwise required under the regulations
(the “standard procedure”) and an elec-
tive procedure (the “alternative proce-
dure”) for preparing and filing certain
Forms 1042–S, all forms in the series
1098, 1099, and 5498, and Forms W-2G,
in certain situations involving a successor
business entity and a predecessor business
entity (i.e., a corporation, partnership, or
sole proprietorship) when the successor
acquires substantially all of the property
(1) used in the trade or business of the
predecessor (including certain situations
when one or more corporations are ab-
sorbed by another corporation pursuant to
a merger agreement), or (2) used in a sep-
arate unit of a trade or business of the pre-
decessor.
SECTION 2. BACKGROUND
.01 General Requirement of Return or

December 27, 19997581999–52 I.R.B.
Statement. Section 6011(a) of the Inter-
nal Revenue Code provides that, when
required by regulations, any person
made liable for any tax imposed by the
Code, or for the collection of the tax,
must make a return or statement accord-
ing to the forms and regulations pre-
scribed by the Secretary.
.02 Certain Payments Reported on
Forms 1042-S. Payments under the
Code sections described in this para-
graph are reported on Forms 1042-S.
Section 1441(a) generally provides that
persons having the control, receipt, cus-
tody, disposal, or payment of items of
gross income specified in § 1441(b)
from sources within the United States of
any nonresident alien individual or for-
eign partnership must deduct and with-
hold a tax equal to either 30 percent or
14 percent of those amounts. Section
1442 provides that, in the case of cer-
tain foreign corporations, a tax equal to
30 percent shall be deducted and with-
held in the same manner and on the
same items of income as provided in §
1441. Section 1443(a) provides that, in
the case of certain foreign tax-exempt
organizations, a tax equal to 30 percent
of the amount of the unrelated business
taxable income shall be deducted and
withheld in the same manner as pro-
vided in § 1441. Section 1443(b) pro-
vides that, in the case of certain foreign
tax-exempt organizations, a tax on gross
investment income derived from
sources within the United States equal
to 4 percent of such amount shall be de-
ducted and withheld in the same manner
as provided in § 1441(a) or § 1442(a).
Persons required to deduct and withhold
taxes under § 1441, 1442, or 1443 gen-
erally must file Forms 1042-S reporting
aggregate amounts for the calendar
year, as provided in the Income Tax
Regulations under § 1461.
.03 Payments Reported on Forms
1098. Payments and receipts under the
following Code sections are reported on
forms in the series 1098: §§ 6050H (re-
turns relating to mortgage interest re-
ceived in trade or business from indi-
viduals); and 6050S (returns relating to
higher education tuition and related ex-
penses).
.04 Payments Reported on Forms
1099.(1) In general.Payments under
the following Code sections are re-
ported on forms in the series 1099: §§
220(h) (medical savings accounts);
408(i) (individual retirement arrange-
ments); 529(d) (qualified state tuition
programs); 530(h) (education individual
retirement accounts); 6041 (information
at source); 6041A (returns regarding
payments of remuneration for services
and direct sales); 6042 (returns regard-
ing payments of dividends and corpo-
rate earnings and profits); 6043 (liqui-
dating, etc., transactions); 6044 (returns
regarding payments of patronage divi-
dends); 6045 (returns of brokers); 6047
(information relating to certain trusts
and annuity plans); 6049 (returns re-
garding payments of interest); 6050A
(reporting requirements of certain fish-
ing boat operators); 6050B (returns re-
lating to unemployment compensation);
6050D (returns relating to energy grants
and financing); 6050E (state and local
income tax refunds); 6050J (returns re-
lating to foreclosures and abandon-
ments of security); 6050N (returns re-
garding payments of royalties); 6050P
(returns relating to the cancellation of
indebtedness by certain entities); 6050Q
(certain long-term care benefits); and
6050R (returns relating to certain pur-
chases of fish).
(2) Persons Made Liable for
Backup Withholding. Section 3406 pro-
vides that payors of reportable pay-
ments (as defined in § 3406(b)) must, in
certain circumstances, deduct and with-
hold a tax equal to 31 percent of the
payment (“backup withholding”).
Under § 3406(b), reportable payments
generally are payments required to be
shown on a return under §§ 6041 (relat-
ing to certain information at source),
6041A(a) (relating to payments of re-
muneration for services), 6042(a) (relat-
ing to payments of dividends), 6044 (re-
lating to patronage dividends), 6045
(relating to returns of brokers), 6049(a)
(relating to payments of interest),
6050A (relating to reporting require-
ments of certain fishing boat operators),
and 6050N (relating to payments of roy-
alties).
(3) Persons Made Liable for With-
holding on Pensions, Annuities, and
Other Deferred Income.Section 3405
provides that payors of pensions, annu-
ities and certain other deferred income
must, in certain circumstances, deduct
and withhold a tax: (1) on periodic pay-
ments as defined in § 3405(e)(2), an
amount that would be required to be
withheld from such payment if such
payment were a payment of wages; (2)
on nonperiodic distributions as defined
in § 3405(e)(3), 10 percent of the distri-
bution; and (3) on eligible rollover dis-
tributions as defined in § 3405(c)(3), 20
percent of the distribution. Generally,
the persons required to deduct and with-
hold taxes under § 3405 must file Forms
1099 reporting payments and distribu-
tions, as provided under § 35.3405–1 of
the Temporary Employment Tax Regu-
lations and § 31.3405(c)–1 of the Em-
ployment Tax Regulations.
.05 Contributions Reported on
Forms 5498. Contributions under the
following Code sections are reported on
forms in the series 5498: §§ 138
(medicare+choice MSA); 220 (medical
savings accounts); 408(a) (individual
retirement account); 408(b) (individual
retirement annuity); 408(k) (simplified
employee pension); 408(p) (simple re-
tirement account); 408A (Roth IRA);
and 530 (education individual retire-
ment account).
.06 Payments Reported on Forms W-
2G. (1) In general. Section 7.6041–1 of
the Temporary Income Tax Regulations
provides that payments of winnings of
$1,200 or more from a bingo game or
slot machine play, and payments of win-
nings of $1,500 or more from a keno
game, are reportable on Forms W-2G.
Section 31.3406(g)–2(d) generally pro-
vides that under § 3406 a reportable
gambling winning is any gambling win-
ning subject to information reporting
under § 6041. In addition, a gambling
winning (other than a winning from
bingo, keno, or slot machines) is a re-
portable gambling winning only if the
amount paid with respect to the wager is
$600 or more and if the proceeds are at
least 300 times as large as the amount
wagered.
(2) Extension of Withholding to Cer-
tain Gambling Winnings. Section
3402(q) provides that every person
making a payment of winnings that are
subject to withholding (defined in §§
3402(q)(3) and 31.3402(q)–1) shall
deduct and withhold a tax in an amount
equal to 28 percent of such payment.

1999–52 I.R.B.759December 27, 1999
SECTION 3. SCOPE
This revenue procedure applies only
when all of the following conditions are
met:
(1) One business entity (i.e., a cor-
poration, partnership, or sole proprietor-
ship) (the “successor”) acquires from an-
other business entity (the “predecessor”)
substantially all the property (a) used in
the trade or business of the predecessor
(including when two or more corporations
are parties to a merger agreement under
which the surviving corporation becomes
the owner of all the assets and assumes all
the liabilities of the absorbed corpora-
tion(s)), or (b) used in a separate unit of a
trade or business of the predecessor;
(2) During the pre-acquisition por-
tion of the “acquisition year” (the calen-
dar year in which the acquisition occurs),
the predecessor is required to file infor-
mation returns as a result of making or re-
ceiving payments, or withholding or col-
lecting taxes, as provided under the
appropriate sections of the Code and reg-
ulations set forth above;
(3) During the post-acquisition por-
tion of the acquisition year, the predeces-
sor (for an acquisition described in sec-
tion 3(1)(a)) or the separate unit of the
predecessor (for an acquisition described
in section 3(1)(b)) does not make or re-
ceive any such payments and does not
withhold or collect any such tax;
(4) The requirements of section 5 of
this revenue procedure are met; and
(5) The Internal Revenue Service in-
structions or publications relating to
Forms 1042–S, a specific form in the se-
ries 1098, 1099, or 5498, or Forms W-2G
do not prohibit use of the alternative pro-
cedure described in section 5.
SECTION 4. STANDARD
PROCEDURE
Each person that makes or receives
payments, or withholds or collects taxes,
that are reportable on Forms 1042-S,
forms in the series 1098, 1099, and 5498,
or Forms W-2G, is responsible for infor-
mation reporting of those transactions.
Thus, unless the alternative procedure of
section 5 of this revenue procedure is
used, both the predecessor and the succes-
sor must file certain Forms 1042-S, forms
in the series 1098, 1099, and 5498, or
Forms W-2G for reportable transactions
occurring in the acquisition year.
SECTION 5. ALTERNATIVE
PROCEDURE
.01 The predecessor and the successor
must agree that the successor assumes the
predecessor’s entire information reporting
obligations for those Forms 1042-S (as
described in section 2.02 of this revenue
procedure), forms in the series 1098,
1099, and 5498, and Forms W-2G to
which their agreement applies. The pre-
decessor is relieved of its information re-
porting obligations for reportable transac-
tions occurring in the acquisition year
only if and to the extent that their agree-
ment meets, and the successor satisfies,
each of the requirements of section 5 of
this revenue procedure.
.02 The predecessor and successor
must agree upon the specific Forms 1042-
S, forms in the series 1098, 1099, and
5498, and Forms W-2G to which this al-
ternative procedure applies. The prede-
cessor and successor may agree to (a) use
the alternative procedure for all Forms
1042-S, forms in the series 1098, 1099, or
5498, or Forms W-2G; or (b) limit the
use of the alternative procedure to (1) spe-
cific Forms 1042-S, forms in the series
1098, 1099, or 5498, or Forms W-2G; or
(2) specific reporting entities (i.e., any
unit, branch or location within a particular
business entity that files its own separate
information returns). For example, if the
only compatible computer or record keep-
ing systems of a predecessor and succes-
sor are their dividends paid ledgers, they
may use the alternative procedure for
Forms 1099-DIV, and use the standard
procedure for Forms 1042-S and all other
forms in the series 1098 or 1099. Simi-
larly, if the only compatible computer or
record keeping systems of a predecessor
and successor are in their branches lo-
cated in the Midwest, they may use the al-
ternative procedure with respect to the
records maintained at those locations, and
use the standard procedure with respect to
the records maintained at all other loca-
tions. The sharing between the predeces-
sor and successor of taxpayer identifica-
tion numbers and other information
obtained under § 3406 for information re-
porting and backup withholding purposes,
for the sole purpose of complying with
this revenue procedure, does not violate
the confidentiality rules contained in §
3406(f).
.03 On each “appropriate form” (i.e.,
each form to which the agreement in sec-
tion 5 of this revenue procedure applies),
the successor must combine (1) the pay-
ments made or received on account of a
person by the predecessor in the pre-ac-
quisition portion of the acquisition year
with (2) the payments made or received
on account of that person by the successor
in that year, if any, and must report the ag-
gregate amount(s) on account of that per-
son for that year. In the case of amounts
that are required or permitted to be re-
ported transactionally (for example, bro-
ker sales of stock that are required to be
reported on Forms 1099-B, Proceeds
From Broker and Barter Exchange Trans-
actions) the successor must report each
transaction of the predecessor and each of
its transactions on each appropriate form.
The successor may include with the form
additional information explaining to the
recipient the combined reporting by the
predecessor and successor.
.04 On each appropriate form, the suc-
cessor must also combine the amount of
any tax withheld under §§ 1441, 1442,
1443, 3402(q), 3402(r), 3405, and
3406(a) for a person by the predecessor in
the pre-acquisition portion of the acquisi-
tion year with the amount withheld under
such sections for that person by the suc-
cessor in that year and, on the appropriate
form(s), must report the aggregate
amount for the year.
.05 The successor must file a state-
ment with the Internal Revenue Service
indicating that the appropriate forms are
being filed on a combined basis in ac-
cordance with the provisions of this rev-
enue procedure. This statement is
needed to assist the Service in process-
ing the forms filed under the alternative
procedure. If tax has been withheld by
the predecessor pursuant to §§ 3402(q),
3402(r), 3405, and 3406(a) during the
acquisition year and reported by the pre-
decessor on Form 945, Annual Return of
Withheld Federal Income Tax, the total
of the withholding amounts shown on
the successor’s Forms 1099 and W-2G
for that year will exceed the total of the
withholding amounts shown on the suc-
cessor’s Form 945. Therefore, the state-
ment that must be filed with the Service
must reflect the amount of any tax that

December 27, 19997601999–52 I.R.B.
has been withheld by the predecessor
and by the successor for each type of
form (for example, Forms 1099-R or
Forms 1099-MISC). Likewise, if any
tax has been withheld under §§ 1441
and 1442 during the acquisition year and
reported on Form 1042, Annual With-
holding Tax Return for U.S. Source In-
come of Foreign Persons, the total of the
withholding amounts shown on the suc-
cessor’s Forms 1042-S for that year will
exceed the total of the withholding
amounts shown on the successor’s Form
1042. Therefore, the statement that
must be filed with the Service must re-
flect the amount of tax that has been
withheld by the predecessor and succes-
sor for Form 1042-S.
.06 The statement required by section
5.05 of this revenue procedure must in-
clude the name, address, telephone num-
ber, and Employer Identification Num-
bers of both the successor and
predecessor, and the name and telephone
number of the person responsible for
preparing this statement.
.07 The statement for Forms 1042-S
must be attachedto the Form 1042 and
mailed to the address for filing the Form
1042 (appearing in the instructions to the
form) on or before the date the Form 1042
is due.
.08 The statement for forms in the se-
ries 1098, 1099 and 5498, and Forms W-
2G must be filed separatelyfrom such
forms and Form 945. Unless directed
otherwise by the instructions to the
forms, the statement for forms in the se-
ries 1098, 1099, and 5498, and Forms
W-2G must be mailed to the following
address on or before the date those
forms are due:
Internal Revenue Service
Martinsburg Computing Center
230 Murall Drive
Attention: Chief, Information
Returns Branch
Mail Stop 360
Kearneysville, WV 25430
SECTION 6. EFFECT ON OTHER
DOCUMENTS
Rev. Proc. 90–57, 1990–2 C.B. 641,
and Rev. Rul. 69–556, 1969–2 C.B. 242,
are modified and, as modified, are super-
seded.
SECTION 7. EFFECTIVE DATE
This revenue procedure is effective for
Forms 1042-S, forms in the series 1098,
1099, and 5498, and Forms W-2G filed
after December 31, 1999. In addition, if a
successor filed forms on or before De-
cember 31, 1999, in the circumstances de-
scribed in section 3 of this revenue proce-
dure, the predecessor’s filing obligations
are deemed to have been satisfied with re-
spect to amounts shown on those forms if
the predecessor and successor have sub-
stantially complied with all the require-
ments of section 5 of this revenue proce-
dure (except for the statement
requirement of section 5.05).
SECTION 8. PAPERWORK
REDUCTION ACT
The collections of information con-
tained in this revenue procedure have
been reviewed and approved by the Of-
fice of Management and Budget in accor-
dance with the Paperwork Reduction Act
(44 U.S.C. 3507) under control number
1545-1667. 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 dis-
plays a valid control number.
The collection of information is con-
tained in section 5 of this revenue proce-
dure which requires the filing of a state-
ment that the alternative procedure has
been elected. This information is required
to aid the Service in processing Forms
1042-S, forms in the series 1098, 1099, and
5498, and Forms W-2G filed by successors
who use the alternative procedure, recon-
cile discrepancies between the amounts re-
ported on Forms 945 and Forms 1099 and
W-2G filed by both predecessors and suc-
cessors who use the alternative procedure,
and reconcile discrepancies between the
amounts reported on Forms 1042-S and
Forms 1042 filed by predecessors and suc-
cessors who use the alternative procedure.
The likely respondents are business or
other for-profit institutions.
The estimated average annual burden
to prepare the statement is 5 minutes.
The estimated number of respondents that
will elect to use the alternate procedure is
6,000 and the estimated total annual re-
porting burden is 500 hours.
The estimated annual frequency of re-
sponses is on occasion.
Books or records relating to a collec-
tion of information must be retained as
long as their contents may become mater-
ial 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 A. Katharine Jacob Kiss of
the Office of Assistant Chief Counsel (In-
come Tax and Accounting). For further
information regarding this revenue proce-
dure contact Ms. Kiss on (202) 622-4920
(not a toll-free call).
26 CFR 601.201: Rulings and determination letters.
(Also Part I, section 1361)
Rev. Proc. 99–51
SECTION 1. PURPOSE
This revenue procedure amplifies
Rev. Proc. 99–3, 1999–1 I.R.B. 103,
which sets forth areas of the Internal
Revenue Code under the jurisdiction of
the Associate Chief Counsel (Domestic)
in which the Internal Revenue Service
will not issue advance rulings or deter-
mination letters.
SECTION 2. BACKGROUND
Section 301.7701–3 of the Procedure
and Administrative Regulations allows an
eligible entity to elect to be classified as
an association taxable as a corporation for
federal tax purposes. Under §
301.7701–3(a), an eligible entity is a busi-
ness entity not classified as a corporation
under § 301.7701–2(b)(1), (3), (4), (5),
(6), (7), or (8). A state law partnership is
an eligible entity. Consequently, a state
law limited partnership may elect to be
classified as an association taxable as a
corporation for federal tax purposes.
Section 1362(a) of the Internal Rev-
enue Code allows an eligible corporation
to elect to be taxable as an S corporation.
For a corporation to be eligible to elect
under § 1362(a), the corporation must be
a small business corporation. Section
1361(b)(1)(D) requires that a small busi-
ness corporation have no more than a sin-
gle class of stock. A general partnership

1999–52 I.R.B.761December 27, 1999
interest includes rights and obligations
not included in a limited partnership inter-
est. If these obligations and rights result
in general and limited partnership inter-
ests in a limited partnership having non-
pro rata distribution rights, such interests
are different classes of stock for purposes
of § 1361(b)(1)(D).
Given the factual difficulties involved in
determining whether the differences be-
tween the rights and obligations of general
and limited partnership interests give rise to
a second class of stock, the issue of whether
a state law limited partnership complies
with the single class of stock requirement is
under extensive study. Accordingly, ad-
vanced rulings will not be provided on the
issue until the Service resolves it through
publication of a revenue ruling, revenue
procedure, regulations, or otherwise.
SECTION 3. PROCEDURE
Rev Proc. 99–3 is amplified by adding
the following to section 5.01:
Section 1361. — Definition of a Small
Business Corporation. — Whether a
state law limited partnership electing
under § 301.7701–3 to be classified as an
association taxable as a corporation has
more than one class of stock for purposes
of § 1361(b)(1)(D). The Service will treat
any request for a ruling on whether a state
law limited partnership is eligible to elect
S corporation status as a request for a rul-
ing on whether the partnership complies
with § 1361(b)(1)(D).
SECTION 4. EFFECTIVE DATE
This revenue procedure applies to all
ruling requests, including any pending in
the National Office and any submitted
after the date of this publication.
SECTION 5. EFFECT ON OTHER
DOCUMENTS
Rev. Proc. 99–3 is amplified.
SECTION 6. DRAFTING
INFORMATION
The principal author of this revenue pro-
cedure is Richard Castanon of the Office of
Assistant Chief Counsel (Passthroughs and
Special Industries). For further information
regarding this revenue procedure contact
Richard Castanon at 202-622-3070 (not a
toll free call).
Tax Avoidance Using
Distributions of Encumbered
Property
Notice 99–59
The Internal Revenue Service and
Treasury Department have become aware
of certain types of transactions, as de-
scribed below, that are being marketed to
taxpayers for the purpose of generating
tax losses. This notice is being issued to
alert taxpayers and their representatives
that the purported losses arising from
such transactions are not properly allow-
able for federal income tax purposes.
The transactions are cast in a variety of
forms. In one typical arrangement, tax-
payers act through a partnership to con-
tribute cash to a foreign corporation,
which has been formed for the purpose of
carrying out the transaction, in exchange
for the common stock of that corporation.
Another party contributes additional capi-
tal to the corporation in exchange for the
preferred stock of that corporation. The
foreign corporation then acquires addi-
tional capital by borrowing from a bank
and grants the bank a security interest in
securities acquired by the foreign corpo-
ration that have a value equal to the
amount of the borrowing. Thereafter, the
foreign corporation makes a distribution
of the encumbered securities to the part-
nership that holds its common stock. The
effect of the distribution, combined with
fees and other transaction costs incurred
at the corporate level, is to reduce the re-
maining value of the foreign corporation’s
common stock to zero or a minimal
amount. Although the distributed securi-
ties are encumbered by the bank debt (and
the taxpayers or their partnership may be
secondarily liable for the debt as guaran-
tors), the foreign corporation has suffi-
cient other assets to repay the debt, and it
is the understanding of all parties that the
foreign corporation will repay the debt
with such other assets.
For example, if the taxpayers’ partner-
ship had contributed $100x for the com-
mon stock of the foreign corporation, the
partnership might receive a distribution of
securities with a fair market value of ap-
proximately $100x, and that distribution
would have the economic effect of reduc-
ing the remaining value of the foreign
corporation‘s common stock to zero.
Nonetheless, because the distribution to
the partnership is subject to the bank debt,
the parties take the position, pursuant to §
301(b)(2) of the Internal Revenue Code,
that the amount of the distribution is zero
for purposes of § 301. On that theory, no
part of the distribution is treated either as
a dividend or as a reduction of stock basis
under § 301(c).
The partnership is treated as having
subsequently disposed of the stock of
the foreign corporation, giving rise to a
tax loss equal to the excess of the part-
nership’s original basis in the stock
($100x in the example) over the fair
market value of the common stock after
the distribution of securities (zero). The
deemed disposition of the stock may be
based upon an election under §
301.7701–3(c) of the regulations to
change the federal income tax classifica-
tion of the foreign corporation from a
corporation to a partnership, giving rise
to a deemed liquidation of the foreign
corporation, or by treating the partner-
ship as a trader in securities which elects
under § 475(f) to treat the securities that
it holds, including the stock of the for-
eign corporation, as having been sold
for their fair market value on the last
business day of the taxable year.
Thereafter, typically in a later taxable
year, the bank debt is repaid out of other
assets held by the foreign corporation.
Although the parties previously treated
the debt as reducing the amount of the
earlier distribution from the foreign cor-
poration, promoters advise taxpayers to
take the position that the foreign corpora-
tion’s repayment of the debt is not treated
as a distribution on its common stock.
A loss is allowable as a deduction for
federal income tax purposes only if it is
bona fide and reflects actual economic
consequences. An artificial loss lacking
economic substance is not allowable. See
ACM Partnership v. Commissioner, 157
F.3d 231, 252 (3d Cir. 1998), cert. denied,
119 S. Ct. 1251 (1999) (“Tax losses such
as these . . . which do not correspond to
any actual economic losses, do not consti-
tute the type of ‘bona fide’ losses that are
deductible under the Internal Revenue
Code and regulations.”); Scully v. United
States, 840 F.2d 478, 486 (7th Cir. 1988)
(to be deductible, a loss must be a “gen-
uine economic loss”); Shoenberg v. Com-

December 27, 19997621999–52 I.R.B.
missioner, 77 F.2d 446, 448 (8th Cir.
1935) (to be deductible, a loss must be
“actual and real”); § 1.165–1(b) (“Only a
bona fide loss is allowable. Substance
and not mere form shall govern in deter-
mining a deductible loss.”).
In the view of the Service and the Trea-
sury Department, the arrangement de-
scribed above (or any similar arrange-
ment) does not produce an allowable loss.
Through a series of contrived steps, tax-
payers claim tax losses for capital outlays
that they have in fact recovered. Such ar-
tificial losses are not allowable for federal
income tax purposes.
The purported tax benefits from these
transactions may also be subject to chal-
lenge under other provisions of the Code
and regulations, including but not limited
to §§ 269, 301, 331, 446, 475, 482, 752,
and 1001 of the Code.
Additionally, the Service may impose
penalties on participants in these transac-
tions or, as applicable, on persons who
participate in the promotion or reporting
of these transactions, including the accu-
racy-related penalty under § 6662, the re-
turn preparer penalty under § 6694, the
promoter penalty under § 6700, and the
aiding and abetting penalty under § 6701.
The principal author of this notice is
Ken Cohen of the Office of Assistant
Chief Counsel (Corporate). For further
information regarding this notice, con-
tact Mr. Cohen on (202) 622-7790 (not
a toll-free call).
Information Reporting – Royalty
Payments
Notice 99–60
Section 6050N(a)(1) requires that
every person who makes payments of
royalties (or similar amounts) aggregating
$10 or more to any other person during
the calendar year shall make a return ac-
cording to the forms or regulations pre-
scribed by the Secretary, setting forth the
aggregate amount of such payments and
the name and address of the person to
whom paid. Section 6050N(a)(2) im-
poses this requirement on every person
who receives payments of royalties (or
similar amounts) as a nominee and who
makes payments aggregating $10 or more
during any calendar year to any other per-
son with respect to the royalties (or simi-
lar amounts) so received.
However, the reporting requirement of
§ 6050N does not apply to payments of
royalties that are not subject to income
tax because the royalties are derived di-
rectly by a noncompetent Indian from al-
lotted and restricted land under the Gen-
eral Allotment Act, 25 U.S.C. §§
331–358, or from land held under acts or
treaties containing an exception provi-
sion similar to the General Allotment
Act. SeeRev. Rul. 67–284, 1967–2 C.B.
55, modified on another issue by Rev.
Rul. 74–13, 1974–1 C.B. 14, and ampli-
fied on another issue byRev. Rul. 94–16,
1994–1 C.B. 19.
The principal author of this notice is
Eric Lucas of the Office of Assistant
Chief Counsel (Income Tax and Account-
ing). For further information regarding
this notice contact Mr. Lucas at (202)
622-4920 (not a toll-free call).
Weighted Average Interest Rate
Update
Notice 99-61
Notice 88-73 provides guidelines for
determining the weighted average interest
rate and the resulting permissible range of
interest rates used to calculate current lia-
bility for the purpose of the full funding
limitation of § 412(c)(7) of the Internal
Revenue Code as amended by the Om-
nibus Budget Reconciliation Act of 1987
and as further amended by the Uruguay
Round Agreements Act, Pub. L. 103-465
(GATT).
The average yield on the 30-year Trea-
sury Constant Maturities for November
1999 is 6.15 percent.
The following rates were determined
for the plan years beginning in the month
shown below.
90% to 105%90% to 110%
WeightedPermissiblePermissible
MonthYearAverageRangeRange
December19996.005.40 to 6.305.40 to 6.60
Drafting Information
The principal author of Notice 99–61 is
Todd Newman of Employee Plans, Tax
Exempt and Government Entities Divi-
sion. For further information regarding
this notice, call the Employee Plans Actu-
arial hotline, (202) 622-6076 between
2:30 and 3:30 p.m. Eastern time (not a
toll-free number). Mr. Newman’s number
is (202) 622-8458 (also not a toll-free
number).

1999–52 I.R.B.763December 27, 1999
Foundations Status of Certain
Organizations
Announcement 99–115
The following organizations have
failed to establish or have been unable to
maintain their status as public charities
or as operating foundations. Accord-
ingly, grantors and contributors may not,
after this date, rely on previous rulings
or designations in the Cumulative List
of Organizations (Publication 78), or on
the presumption arising from the filing
of notices under section 508(b) of the
Code. This listing does notindicate that
the organizations have lost their status
as organizations described in section
501(c)(3), eligible to receive deductible
contributions.
Former Public Charities.The following
organizations (which have been treated as
organizations that are not private founda-
tions described in section 509(a) of the
Code) are now classified as private foun-
dations:
A & M Nutrition, Incorporated,
Winnsboro, LA
Assist, Inc., Buffalo, NY
Children & Youth 2000, c/o Wolin &
Rosen, Chicago, IL
Colorado Collective for Medical
Decisions, Inc., Denver, CO
Friends of the Environment, Sacramento,
CA
Glenville Community Festival
Foundation, Cleveland, OH
Impact For Change Ministries
International, Inc. Waldorf, MD
Jersey Shore Public Relations &
Advertising Charitable Scholarship
Trust, Princeton, NJ
Lewis IDA Community Development
Corp, Lowville, NY
Lo Society Branch of Wisconsin Inc,
Oshkosh, WI
MPA Foundation, New York, NY
Neighborhood Network Inc., Uniontown,
PA
SGV Property Management,
Los Angeles, CA
Vision Research Foundation Inc.,
Phoenix, AZ
Voters Organized to Educate, Compton,
CA
West Tennessee Young Farmers &
Homemakers Leadership
Development, Columbia, TN
White Collar Crime, Inc., Roseland, NJ
Working With Women Transporting
Service, Inc., Los Angeles, CA
If an organization listed above submits
information that warrants the renewal of its
classification as a public charity or as a pri-
vate operating foundation, the Internal Rev-
enue Service will issue a ruling or determi-
nation letter with the revised classification
as to foundation status. Grantors and con-
tributors may thereafter rely upon such rul-
ing or determination letter as provided in
section 1.509(a)–7 of the Income Tax Reg-
ulations. It is not the practice of the Service
to announce such revised classification of
foundation status in the Internal Revenue
Bulletin.
Actions on Decisions; Correction
Announcement 99–116
This document corrects the Actions on
Decisions published in 1999–35 I.R.B.
314. All 7 footnotes describing the “Ac-
quiescence” or “Nonacquiesence” in each
decision included the words “in result
only,” which were erroneous. The court
cases are listed below, followed by the
footnotes with the correct text.
The Commisioner ACQUIESCES in
the following decisions:
Internal Revenue Service v. Wald-
schmidt (In re Bradley),
1
(M.D. Tenn 1999)
Estate of Mellinger v. Commisioner,
2
112 T.C. 4 (1999)
Hospital Corp. of America and Sub-
sidiaries v. Commissioner,
3
109 T.C. 21 (1997)
Boyd Gaming Corporation v. Com-
missioner,
4
F.3d (9th Cir. 1999)
The Commissioner NONACQUI-
ESCES in the following decisions:
Vulcan Materials Company and Sub-
sidiaries v. Commissioner,
5
96 T.C. 410 (1991)
St. Jude Medical, Inc. v. Commis-
sioner,
6
34 F.3d 1394 (8th Cir. 1994)
Hospital Corp. of America and Sub-
sidiaries v. Commissioner,
7
109 T.C. 21 (1997)
Social Security Contribution and
Benefit Base for 2000
Under authority contained in the
Social Security Act (“the Act”), the
Commissioner, Social Security
Administration, has determined and
announced (64 F.R. 57506, dated
October 25, 1999) that the contribution
and benefit base for remuneration paid
in 1999, and self-employment income
earned in taxable years beginning in
2000 is $76,200.
Part IV. Items of General Interest
1
Acquiescence relating to whether gain on the sale of
the debtor’s residence is excluded from gross income
of the bankruptcy estate to the extent provided by
I.R.C. §121 and in accord with section 1398.
2
Acquiescence relating to whether, for estate tax valu-
ation purposes, a minority interest in a closely held
corporation held in a Qualified Terminable Interest
Property (QTIP) trust, which is includible in the gross
estate under I.R.C. §2044, is aggregated with a minor-
ity interest in the same corporation that is includible in
a decedent’s gross estate under other provisions of the
Code.
3
Acquiescence relating to whether the tests developed
under the investment tax credit (ITC) prior to the 1981
adoption of the cost recovery system are applicable in
determining a structural component for the purposes of
Accelerated Cost Recovery System (ACRS) and
Modified Accelerated Cost Recovery System
(MACRS).
4
Acquiescence relating to whether a meal furnished by
the taxpayer/employer on its business premises to an
employee is furnished for “the convenience of the
employer” within the meaning of that phrase in section
119 of the Internal Revenue Code.
5
Nonacquiescence relating to whether the term “accu-
mulated profits” as used in the denominator of the sec-
tion 902 deemed paid credit fraction before the Tax
Reform Act of 1986 means all of a foreign corpora-
tion’s accumulated profits for the taxable year. This
revised action on decision clarifies the Service’s posi-
tion on this issue in cases appealable to the 11th
Circuit.
6
Nonacquiescence relating to whether section
1.861–8(e)(3) of the Income Tax Regulations is invalid
as applied to DISC combined taxable income (CTI)
calculations.
7
Nonacquiescence relating to whether certain items
treated as tangible personal property and depreciated
over a 5-year recovery period were in fact structural
components of the buildings to which they relate
which must be depreciated over the same recovery
period as the buildings, pursuant to I.R.C. §168.

“Old-Law” Contribution and
Benefit Base
General
The “old-law” contribution and benefit
base for 2000 is $56,700. This is the base
that would have been effective under the
Act without the enactment of the 1977
amendments. The base is computed under
section 230(b) of the Act as it read prior to
the 1977 amendments.
The “old-law” contribution and benefit
base is used by:
(a) The Railroad Retirement program to
determine certain tax liabilities and tier II
benefits payable under that program to
supplement the tier I payments which cor-
respond to basic Social Security benefits,
(b) The Pension Benefit Guaranty
Corporation to determine the maximum
amount of pension guaranteed under the
Employee Retirement Income Security
Act (as stated in section 230(d) of the
Social Security Act),
(c) Social Security to determine a year
of coverage in computing the special min-
imum benefit, as described earlier, and
(d) Social Security to determine a year
of coverage (acquired whenever earnings
equal or exceed 25 percent of the “old-
law” base for this purpose only) in com-
puting benefits for persons who are also
eligible to receive pensions based on
employment not covered under section
210 of the Act.
Domestic Employee Coverage
Threshold
General
Section 2 of the “Social Security
Domestic Employment Reform Act of
1994” (Pub. L. 103-387) increased the
threshold for coverage of a domestic
employee’s wages paid per employer
from $50 per calendar quarter to $1,000
per annum in calendar year 1994. The
statute held the coverage threshold at the
$1,000 level for 1995 and then increased
the threshold in $100 increments for years
after 1995. Section 3121(x) of the Internal
Revenue Code provides the formula for
increasing the threshold.
Computation
Under the formula, the domestic
employee coverage threshold amount for
2000 shall be equal to the 1995 amount of
$1,000 multiplied by the ratio of the
national average wage index for 1998 to
that for 1993. If the amount so determined
is not a multiple of $100, it shall be round-
ed to the next lower multiple of $100.
Domestic Employee Coverage Threshold
Amount
The ratio of the national average wage
index for 1998, $28,861.44, compared to
that for 1993, $23,132.67, is 1.2476485.
Multiplying the 1995 domestic employee
coverage threshold amount of $1,000 by the
ratio of 1.2476485 produces the amount of
$1,247.65, which must then be rounded to
$1,200. Accordingly, the domestic employ-
ee coverage threshold amount is deter-
mined to be $1,200 for 2000.
(Filed by the Office of the Federal Regis-
ter on October 22, 1999, 8:45 a.m., and
published in the issue of the Federal Reg-
ister for October 25, 1999, 64 F.R. 57506)
December 27, 19997641999–52 I.R.B.

December 27, 1999i1999–52 I.R.B.
Revenue rulings and revenue procedures
(hereinafter referred to as “rulings”)
that have an effect on previous rulings
use the following defined terms to de-
scribe the effect:
Amplified describes a situation where
no change is being made in a prior pub-
lished position, but the prior position is
being extended to apply to a variation of
the fact situation set forth therein. Thus,
if an earlier ruling held that a principle
applied to A, and the new ruling holds
that the same principle also applies to B,
the earlier ruling is amplified. (Compare
with modified, below).
Clarified is used in those instances
where the language in a prior ruling is
being made clear because the language
has caused, or may cause, some confu-
sion. It is not used where a position in a
prior ruling is being changed.
Distinguisheddescribes a situation
where a ruling mentions a previously
published ruling and points out an essen-
tial difference between them.
Modified is used where the substance
of a previously published position is
being changed. Thus, if a prior ruling
held that a principle applied to A but not
to B, and the new ruling holds that it ap-
plies to both A and B, the prior ruling is
modified because it corrects a published
position. (Compare with amplified and
clarified, above).
Obsoleted describes a previously pub-
lished ruling that is not considered deter-
minative with respect to future transac-
tions. This term is most commonly used
in a ruling that lists previously published
rulings that are obsoleted because of
changes in law or regulations. A ruling
may also be obsoleted because the sub-
stance has been included in regulations
subsequently adopted.
Revoked describes situations where the
position in the previously published rul-
ing is not correct and the correct position
is being stated in the new ruling.
Superseded describes a situation where
the new ruling does nothing more than
restate the substance and situation of a
previously published ruling (or rulings).
Thus, the term is used to republish under
the 1986 Code and regulations the same
position published under the 1939 Code
and regulations. The term is also used
when it is desired to republish in a single
ruling a series of situations, names, etc.,
that were previously published over a pe-
riod of time in separate rulings. If the
new ruling does more than restate the
substance of a prior ruling, a combination
of terms is used. For example, modified
and superseded describes a situation
where the substance of a previously pub-
lished ruling is being changed in part and
is continued without change in part and it
is desired to restate the valid portion of
the previously published ruling in a new
ruling that is self contained. In this case
the previously published ruling is first
modified and then, as modified, is super-
seded.
Supplemented is used in situations in
which a list, such as a list of the names of
countries, is published in a ruling and
that list is expanded by adding further
names in subsequent rulings. After the
original ruling has been supplemented
several times, a new ruling may be pub-
lished that includes the list in the original
ruling and the additions, and supersedes
all prior rulings in the series.
Suspended is used in rare situations to
show that the previous published rulings
will not be applied pending some future
action such as the issuance of new or
amended regulations, the outcome of
cases in litigation, or the outcome of a
Service study.
Abbreviations
The following abbreviations in current use and for-
merly used will appear in material published in the
Bulletin.
A—Individual.
Acq.—Acquiescence.
B—Individual.
BE—Beneficiary.
BK—Bank.
B.T.A.—Board of Tax Appeals.
C.—Individual.
C.B.—Cumulative Bulletin.
CFR—Code of Federal Regulations.
CI—City.
COOP—Cooperative.
Ct.D.—Court Decision.
CY—County.
D—Decedent.
DC—Dummy Corporation.
DE—Donee.
Del. Order—Delegation Order.
DISC—Domestic International Sales Corporation.
DR—Donor.
E—Estate.
EE—Employee.
E.O.—Executive Order.
ER—Employer.
ERISA—Employee Retirement Income Security Act.
EX—Executor.
F—Fiduciary.
FC—Foreign Country.
FICA—Federal Insurance Contribution Act.
FISC—Foreign International Sales Company.
FPH—Foreign Personal Holding Company.
F.R.—Federal Register.
FUTA—Federal Unemployment Tax Act.
FX—Foreign Corporation.
G.C.M.—Chief Counsel’s Memorandum.
GE—Grantee.
GP—General Partner.
GR—Grantor.
IC—Insurance Company.
I.R.B.—Internal Revenue Bulletin.
LE—Lessee.
LP—Limited Partner.
LR—Lessor.
M—Minor.
Nonacq.—Nonacquiescence.
O—Organization.
P—Parent Corporation.
PHC—Personal Holding Company.
PO—Possession of the U.S.
PR—Partner.
PRS—Partnership.
PTE—Prohibited Transaction Exemption.
Pub. L.—Public Law.
REIT—Real Estate Investment Trust.
Rev. Proc.—Revenue Procedure.
Rev. Rul.—Revenue Ruling.
S—Subsidiary.
S.P.R.—Statements of Procedral Rules.
Stat.—Statutes at Large.
T—Target Corporation.
T.C.—Tax Court.
T.D.—Treasury Decision.
TFE—Transferee.
TFR—Transferor.
T.I.R.—Technical Information Release.
TP—Taxpayer.
TR—Trust.
TT—Trustee.
U.S.C.—United States Code.
X—Corporation.
Y—Corporation.
Z—Corporation.
Definition of Terms

December 27, 1999ii1999–52 I.R.B.
Numerical Finding List
1
Bulletins 1999–27 through 1999–51
Announcements:
99–47, 1999–28 I.R.B. 29
99–64, 1999–27 I.R.B.7
99–65, 1999–27 I.R.B. 9
99–66, 1999–27 I.R.B. 9
99–67, 1999–28 I.R.B. 31
99–68, 1999–28 I.R.B. 31
99–69, 1999–28 I.R.B. 33
99–70, 1999–29 I.R.B. 118
99–71, 1999–31 I.R.B. 223
99–72, 1999–30 I.R.B. 132
99–73, 1999–30 I.R.B. 133
99–74, 1999–30 I.R.B. 133
99–75, 1999–30 I.R.B. 134
99–76, 1999–31 I.R.B. 223
99–77, 1999–32 I.R.B. 243
99–78, 1999–31 I.R.B. 229
99–79, 1999–31 I.R.B. 229
99–80, 1999–34 I.R.B. 310
99–81, 1999–32 I.R.B. 244
99–82, 1999–32 I.R.B. 244
99–83, 1999–32 I.R.B. 245
99–84, 1999–33 I.R.B. 248
99–85, 1999–33 I.R.B. 248
99–86, 1999–35 I.R.B. 332
99–87, 1999–35 I.R.B. 333
99–88, 1999–36 I.R.B. 407
99–89, 1999–36 I.R.B. 408
99–90, 1999–36 I.R.B. 409
99–91, 1999–37 I.R.B. 421
99–92, 1999–38 I.R.B. 433
99–93, 1999–36 I.R.B. 409
99–94, 1999–39 I.R.B. 437
99–95, 1999–42 I.R.B. 520
99–96, 1999–41 I.R.B. 504
99–97, 1999–41 I.R.B.505
99–98, 1999–42 I.R.B. 520
99–99, 1999–42 I.R.B. 522
99–100, 1999–42 I.R.B. 522
99–101, 1999–43 I.R.B. 544
99–102, 1999–43 I.R.B. 545
99–103, 1999–43 I.R.B. 546
99–104, 1999–44 I.R.B. 555
99–105, 1999–44 I.R.B. 555
99–106, 1999–45 I.R.B. 561
99–107, 1999–45 I.R.B. 561
99–108, 1999–46 I.R.B. 573
99–109, 1999–46 I.R.B. 573
99–110, 1999–46 I.R.B. 574
99–111, 1999–47 I.R.B. 587
99–112, 1999–49 I.R.B. 649
99–113, 1999–50 I.R.B. 673
99–114, 1999–50 I.R.B. 674
Notices:
99–34, 1999–35 I.R.B. 323
99–35, 1999–28 I.R.B.26
99–37, 1999–30 I.R.B. 124
99–38, 1999–31 I.R.B. 138
99–39, 1999–34 I.R.B.313
99–40, 1999–35 I.R.B. 324
99–41, 1999–35 I.R.B. 325
99–42, 1999–35 I.R.B. 325
99–43, 1999–36 I.R.B. 344
99–44, 1999–35 I.R.B. 326
Notices—Continued
99–45, 1999–37 I.R.B. 415
99–46, 1999–37 I.R.B. 415
99–47, 1999–36 I.R.B. 391
99–48, 1999–38 I.R.B. 429
99–49, 1999–39 I.R.B. 436
99–50, 1999–40 I.R.B. 444
99–51, 1999–40 I.R.B. 447
99–52, 1999–43 I.R.B. 525
99–53, 1999–46 I.R.B.565
99–54, 1999–47 I.R.B.579
99–55, 1999–49 I.R.B. 638
99–56, 1999–50 I.R.B.668
99–57, 1999–51 I.R.B. 693
99–58, 1999–51 I.R.B. 694
Proposed Regulations:
REG–252487–96, 1999–34 I.R.B. 303
REG–101519–97, 1999–29 I.R.B. 114
REG–107069–97, 1999–36 I.R.B. 346
REG–110385–99, 1999–50 I.R.B. 670
REG–121063–97, 1999–43 I.R.B. 540
REG–106010–98, 1999–40 I.R.B. 493
REG–106527–98, 1999–34 I.R.B. 304
REG–108287–98, 1999–28 I.R.B.27
REG–113526–98, 1999–37 I.R.B. 417
REG–113909–98, 1999–30 I.R.B. 125
REG–116733–98, 1999–36 I.R.B. 392
REG–116991–98, 1999–32 I.R.B. 242
REG–121946–98, 1999–36 I.R.B. 403
REG–103841–99, 1999–49 I.R.B. 639
REG–104939–99, 1999–49 I.R.B. 643
REG–105237–99, 1999–35 I.R.B. 331
REG–105327–99, 1999–29 I.R.B. 117
REG–105565–99, 1999–37 I.R.B. 419
REG–115932–99, 1999–47 I.R.B. 583
REG–116125–99, 1999–44 I.R.B. 552
Railroad Retirement Quarterly Rate:
1999–45 I.R.B. 560
1999–46 I.R.B.563
Revenue Procedures:
99–28, 1999–29 I.R.B.109
99–29, 1999–31 I.R.B. 138
99–30, 1999–31 I.R.B. 221
99–31, 1999–34 I.R.B. 280
99–32, 1999–34 I.R.B. 296
99–33, 1999–34 I.R.B. 301
99–34, 1999–40 I.R.B. 450
99–35, 1999–41 I.R.B. 501
99–36, 1999–42 I.R.B. 509
99–37, 1999–42 I.R.B. 517
99–38, 1999–43 I.R.B. 525
99–39, 1999–43 I.R.B. 532
99–40, 1999–46 I.R.B. 565
99–41, 1999–46 I.R.B. 566
99–42, 1999–46 I.R.B. 568
99–43, 1999–47 I.R.B.579
99–44, 1999–48 I.R.B.598
99–45, 1999–49 I.R.B.603
99–46, 1999–49 I.R.B.605
99–47, 1999–48 I.R.B.624
Revenue Rulings:
99–29, 1999–27 I.R.B.3
99–30, 1999–28 I.R.B. 24
99–31, 1999–37 I.R.B. 410
Revenue Rulings—Continued
99–32, 1999–31 I.R.B. 135
99–33, 1999–34 I.R.B. 251
99–34, 1999–33 I.R.B. 247
99–35, 1999–34 I.R.B. 278
99–36, 1999–35 I.R.B. 319
99–37, 1999–36 I.R.B. 336
99–38, 1999–36 I.R.B. 335
99–39, 1999–38 I.R.B. 424
99–40, 1999–40 I.R.B. 441
99–41, 1999–40 I.R.B. 439
99–42, 1999–41 I.R.B. 497
99–43, 1999–42 I.R.B. 506
99–44, 1999–44 I.R.B. 549
99–45, 1999–45 I.R.B. 558
99–46, 1999–45 I.R.B. 557
99–47, 1999–48 I.R.B.588
99–48, 1999–49 I.R.B.600
99–49, 1999–50 I.R.B. 667
99–50, 1999–50 I.R.B. 656
99–51, 1999–50 I.R.B. 652
99–52, 1999–50 I.R.B. 652
99–53, 1999–50 I.R.B. 657
99–54, 1999–51 I.R.B. 675
99–55, 1999–51 I.R.B. 675
99–56, 1999–51 I.R.B. 676
99–57, 1999–51 I.R.B. 678
Treasury Decisions:
8822, 1999–27 I.R.B.5
8823, 1999–29 I.R.B. 34
8824, 1999–29 I.R.B. 62
8825, 1999–28 I.R.B. 19
8826, 1999–29 I.R.B. 107
8827, 1999–30 I.R.B.120
8828, 1999–30 I.R.B.120
8829, 1999–32 I.R.B.235
8830, 1999–38 I.R.B. 430
8831, 1999–34 I.R.B.264
8832, 1999–35 I.R.B. 315
8833, 1999–36 I.R.B. 338
8834, 1999–34 I.R.B.251
8835, 1999–35 I.R.B.317
8836, 1999–37 I.R.B. 411
8837, 1999–38 I.R.B. 426
8838, 1999–38 I.R.B. 424
8839, 1999–41 I.R.B. 498
8840, 1999–47 I.R.B. 575
8841, 1999–48 I.R.B. 593
8842, 1999–47 I.R.B. 576
8843, 1999–48 I.R.B. 590
8844, 1999–50 I.R.B.661
8845, 1999–51 I.R.B.684
8846, 1999–51 I.R.B.679
1
A cumulative list of all revenue rulings, revenue
procedures, Treasury decisions, etc., published in
Internal Revenue Bulletins 1999–1 through 1999–26
is in Internal Revenue Bulletin 1999–27, dated July
6, 1999.

1999–52 I.R.B.iiiDecember 27, 1999
Finding List of Current Action on
Previously Published Items
1
Bulletins 1999–27 through 1999–51
Announcements:
99–5
Modified by
Ann. 99–106, 1999–45 I.R.B. 561
99–57
Modified by
Ann. 99–104, 1999–44 I.R.B. 555
99–59
Corrected by
Ann. 99–67, 1999–28 I.R.B. 31
Notices:
83–10
Modified by
Notice 99–44, 1999–35 I.R.B. 326
96–64
Modified by
Notice 99–40, 1999–35 I.R.B. 324
97–26
Modified by
Notice 99–41, 1999–35 I.R.B. 325
97–50
Modified and superseded by
Notice 99–41, 1999–35 I.R.B. 325
97–73
Modified by
Notice 99–37, 1999–30 I.R.B. 124
98–7
Modified by
Notice 99–37, 1999–30 I.R.B. 124
98–46
Modified by
Notice 99–37, 1999–30 I.R.B. 124
98–47
Modified and superseded by
Notice 99–41, 1999–35 I.R.B. 325
98–54
Modified by
Notice 99–37, 1999–30 I.R.B. 124
98–59
Modified by
Notice 99–37, 1999–30 I.R.B. 124
Proposed Regulations:
REG–208156–91
Corrected by
Ann. 99–65, 1999–27 I.R.B. 9
Revenue Procedures:
65–17
Superseded by
Rev. Proc. 99–32, 1999–34 I.R.B. 296
65–31
Superseded by
Rev. Proc. 99–32, 1999–34 I.R.B. 296
70–23
Superseded by
Rev. Proc. 99–32, 1999–34 I.R.B. 296
Revenue Procedures—Continued
71–35
Superseded by
Rev. Proc. 99–32, 1999–34 I.R.B. 296
72–22
Superseded by
Rev. Proc. 99–32, 1999–34 I.R.B. 296
72–46
Superseded by
Rev. Proc. 99–32, 1999–34 I.R.B. 296
72–48
Superseded by
Rev. Proc. 99–32, 1999–34 I.R.B. 296
72–53
Superseded by
Rev. Proc. 99–32, 1999–34 I.R.B. 296
89–48
Obsoleted (after Jan. 31, 2000) by
Notice 99–42, 1999–35 I.R.B. 325
89–49
Obsoleted (after Jan. 31, 2000) by
Notice 99–42, 1999–35 I.R.B. 325
96–9
Superseded by
Rev. Proc. 99–28, 1999–29 I.R.B. 109
96–17
Modified by
Rev. Proc. 99–39, 1999–43 I.R.B. 532
96–47
Amplified and superseded by
Rev. Proc. 99–40, 1999–46 I.R.B. 565
97–19
Modified by
Notice 99–41, 1999–35 I.R.B. 325
97–47
Amplified, clarified, modified, and superseded by
Rev. Proc. 99–39, 1999–43 I.R.B. 532
98–10
Modified by
Rev. Proc. 99–45, 1999–49 I.R.B. 603
98–22
Clarified and supplemented by
Rev. Proc. 99–31, 1999–34 I.R.B. 280
98–35
Superseded by
Rev. Proc. 99–29, 1999–31 I.R.B. 138
98–37
Superseded by
Rev. Proc. 99–34, 1999–40 I.R.B. 450
98–63
Modified by Ann. 99–7 and superseded by
Rev. Proc. 99–38, 1999–43 I.R.B. 525
99–19
Modified and superseded by
Rev. Proc. 99–43, 1999–47 I.R.B. 579
99–29
Corrected by
Ann. 99–112, 1999–49 I.R.B. 649
Revenue Rulings:
66–9
Revoked by
Rev. Rul. 99–56, 1999–51 I.R.B. 676
66–223
Obsoleted by
T.D. 8846, 1999–51 I.R.B. 679
73–51
Revoked by
Rev. Rul. 99–56, 1999–51 I.R.B. 676
73–98
Obsoleted by
T.D. 8846, 1999–51 I.R.B. 679
77–475
Modified and superseded by
Rev. Rul. 99–40, 1999–40 I.R.B. 441
80–159
Obsoleted by
T.D. 8846, 1999–51 I.R.B. 679
82–80
Superseded by
Rev. Proc. 99–32, 1999–34 I.R.B. 296
84–58
Modified and superseded by
Rev. Rul. 99–40, 1999–40 I.R.B. 441
88–98
Modified and superseded by
Rev. Rul. 99–40, 1999–40 I.R.B. 441
88–225
Modified by
Rev. Rul. 99–44, 1999–48 I.R.B. 598
93–48
Obsoleted by
T.D. 8846, 1999–51 I.R.B. 679
98–58
Supplemented and superseded by
Rev. Rul. 99–50, 1999–50 I.R.B. 656
98–59
Supplemented and superseded by
Rev. Rul. 99–49, 1999–50 I.R.B. 667
99–23
Corrected by
Ann. 99–89, 1999–36 I.R.B. 408
Treasury Decisions:
8476
Corrected by
Ann. 99–74, 1999–30 I.R.B. 133
8742
Corrected by
Ann. 99–73, 1999–30 I.R.B. 133
8793
Corrected by
Ann. 99–75, 1999–30 I.R.B. 134
8805
Corrected by
Ann. 99–66, 1999–27 I.R.B. 9
8806
Corrected by
Ann. 99–84, 1999–33 I.R.B. 248
1
A cumulative finding list of actions published in
Internal Revenue Bulletins 1999–1 through 1999–26
is in Internal Revenue Bulletin 1999–27, dated July
6, 1999.

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pictures
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