Rev. Proc. 97–27

EXEMPT ORGANIZATIONS

Announcement 97–53, page 22.A list is given of organizations now classified as privatefoundations.

EMPLOYMENT TAXPage 4.Railroad retirement; rate determination; quarterly.The Railroad Retirement Board has determined that therate of tax imposed by Code section 3221 shall be 35cents for the quarter beginning April 1, 1997.

Announcement 97–52, page 22.Extension of test of employment tax early referralprocedures for appeals. This announcement describesthe method by which a taxpayer requests early referralof one or more unagreed employment tax issues fromthe District to Appeals.

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

on the definition of a “chronically ill individual” forpurposes of the definitions of “qualified long-term careservices” and a “qualified long-term care insurancecontract” under Code section 213(d).

Notice 97–32, page 8.This notice sets forth the interim rules regarding therate of interest to be used by insurance companies tocompute under Code sections 807(c)(3) or 807(d)(2)reserves for modified guaranteed contracts as defined inCode section 817A, and the determination of policyinterest under Code section 812 with regard to thesecontracts.

Rev. Proc. 97–27, page 10.Changes in accounting periods and methods of ac-counting. General procedures are provided under Codesection 446(e) and section 1.446–1(e) of the IncomeTax Regulations for obtaining the Commissioner’s con-sent to change a method of accounting for federalincome tax purposes.

Finding Lists begin on page 25.

Bulletin No. 1997–21May 27, 1997

HIGHLIGHTSOF THIS ISSUEThese synopses are intended only as aids to the reader inidentifying the subject matter covered. They may not be reliedupon as authoritative interpretations.

Mission of the Service

The purpose of the Internal Revenue Service is tocollect the proper amount of tax revenue at the leastcost; serve the public by continually improving the

quality of our products and services; and perform in amanner warranting the highest degree of publicconfidence in our integrity, efficiency and fairness.

Statement of Principlesof Internal RevenueTax AdministrationThe function of the Internal Revenue Service is toadminister the Internal Revenue Code. Tax policyfor raising revenue is determined by Congress.

With this in mind, it is the duty of the Service tocarry out that policy by correctly applying the lawsenacted by Congress; to determine the reasonablemeaning of various Code provisions in light of theCongressional purpose in enacting them; and toperform this work in a fair and impartial manner,with neither a government nor a taxpayer point of view.

At the heart of administration is interpretation of theCode. It is the responsibility of each person in theService, charged with the duty of interpreting thelaw, to try to find the true meaning of the statutoryprovision and not to adopt a strained construction inthe belief that he or she is ‘‘protecting the revenue.’’The revenue is properly protected only when we as-certain and apply the true meaning of the statute.

The Service also has the responsibility of applyingand administering the law in a reasonable,practical manner. Issues should only be raised byexamining officers when they have merit, neverarbitrarily or for trading purposes. At the sametime, the examining officer should never hesitateto raise a meritorious issue. It is also importantthat care be exercised not to raise an issue or toask a court to adopt a position inconsistent withan established Service position.

Administration should be both reasonable andvigorous. It should be conducted with as littledelay as possible and with great cour tesy andconsiderateness. It should never try to overreach,and should be reasonable within the bounds of lawand sound administration. It should, however, bevigorous in requiring compliance with law and itshould be relentless in its attack on unreal taxdevices and fraud.

2

Introduction

The Internal Revenue Bulletin is the authoritative instru-ment of the Commissioner of Internal Revenue forannouncing official rulings and procedures of the Inter-nal Revenue Service and for publishing Treasury Deci-sions, Executive Orders, Tax Conventions, legislation,court decisions, and other items of general interest. It ispublished weekly and may be obtained from the Superin-tendent of Documents on a subscription basis. Bulletincontents of a permanent nature are consolidated semi-annually into Cumulative Bulletins, which are sold on asingle-copy basis.

It is the policy of the Service to publish in the Bulletin allsubstantive rulings necessary to promote a uniformapplication of the tax laws, including all rulings thatsupersede, revoke, modify, or amend any of thosepreviously published in the Bulletin. All published rulingsapply retroactively unless otherwise indicated. Proce-dures relating solely to matters of internal managementare not published; however, statements of internalpractices and procedures that affect the rights andduties of taxpayers are published.

Revenue rulings represent the conclusions of the Ser-vice on the application of the law to the pivotal factsstated in the revenue ruling. In those based on positionstaken in rulings to taxpayers or technical advice toService field offices, identifying details and informationof a confidential nature are deleted to prevent unwar-ranted invasions of privacy and to comply with statutoryrequirements.

Rulings and procedures reported in the Bulletin do nothave the force and effect of Treasury DepartmentRegulations, but they may be used as precedents.Unpublished rulings will not be relied on, used, or citedas precedents by Service personnel in the disposition ofother cases. In applying published rulings and proce-dures, the effect of subsequent legislation, regulations,

court decisions, rulings, and procedures must be consid-ered, and Service personnel and others concerned arecautioned against reaching the same conclusions inother cases unless the facts and circumstances aresubstantially the same.

The Bulletin is divided into four parts as follows:

Part I.—1986 Code.This part includes rulings and decisions based onprovisions 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, Legislationand Related Committee Reports.

Part III.—Administrative, Procedural, and Miscellaneous.To the extent practicable, pertinent cross references tothese subjects are contained in the other Parts andSubparts. Also included in this part are Bank SecrecyAct Administrative Rulings. Bank Secrecy Act Administra-tive Rulings are issued by the Department of theTreasury’s Office of the Assistant Secretary (Enforce-ment).

Part IV.—Items of General Interest.With the exception of the Notice of Proposed Rulemak-ing and the disbarment and suspension list included inthis part, none of these announcements are consoli-dated in the Cumulative Bulletins.

The first Bulletin for each month includes an index forthe matters published during the preceding month.These monthly indexes are cumulated on a quarterly andsemiannual basis, and are published in the first Bulletinof the succeeding quarterly and semi-annual period,respectively.

The contents of this publication are not copyrighted and may be reprinted freely. A citation of the Internal Revenue Bulletin as the source would be appropriate.

For sale by the Superintendent of Documents U.S. Government Printing Office, Washington, D.C. 20402.

3

Part I. Rulings and Decisions Under the Inernal Revenue Code of 1986Section 101.—Certain DeathBenefits26 CFR 1.101–1: Exclusion from gross income ofproceeds of life insurance contracts payable byreason of death.

Interim guidance is provided relating to thedefinition of a ‘‘chronically ill individual’’ forpurposes of the treatment of certain accelerateddeath benefits. See Notice 97–31, page 5.

Section 104.—Compensation forInjuries or Sickness26 CFR 1.104–1: Compensation for injuries orsickness.

Interim guidance is provided relating to thedefinition of a ‘‘chronically ill individual’’ forpurposes of the definition of a ‘‘qualified long-term care insurance contract’’ under section7702B. See Notice 97–31, page 5.

Section 105.—Amounts ReceivedUnder Accident and Health Plans26 CFR 1.105–2: Amounts expended for medicalcare.

Interim guidance is provided relating to thedefinition of a ‘‘chronically ill individual’’ forpurposes of the definition of a ‘‘qualified long-term care insurance contract’’ under section7702B. See Notice 97–31, page 5.

Section 213.—Medical, Dental,Etc., Expenses26 CFR 1.213–1: Medical, dental, etc., expenses.

Interim guidance is provided relating to thedefinition of a ‘‘chronically ill individual’’ forpurposes of the definitions of ‘‘qualified long-termcare services’’ and a ‘‘qualified long-term careinsurance contract’’ under section 213(d). SeeNotice 97–31, page 5.

Section 446.—General Rule forMethods of Accounting26 CFR 1.446–1: General rule for methods ofaccounting.

General procedures are provided under section1.446–1(e) for obtaining the Commissioner’s con-sent to change a method of accounting. See Rev.Proc. 97–27, page 10.

Section 481.—AdjustmentsRequired by Changes in Method ofAccounting26 CFR 1.481–1: Adjustments in general.

General procedures are provided under section1.446–1(e) for obtaining the Commissioner’s con-

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

26 CFR 1.481–4: Adjustments taken into accountwith consent.

General procedures are provided under section1.446–1(e) for obtaining the Commissioner’s con-sent to change a method of accounting. See Rev.Proc. 97–27, page 10.

Section 807.—Rules for CertainReservesThe notice sets forth the interim rules regarding

the rate of interest to be used by insurancecompanies to compute under sections 807(c)(3) or807(d)(2) reserves for modified guaranteed con-tracts as defined in section 817A, and the determi-nation of policy interest under section 812 withregard to these contracts.

Section 812.—Definition ofCompany’s Share andPolicyholders’ ShareThe notice sets forth the interim rules regarding


Section 817A.—Special Rules forModified Guaranteed ContractsThe notice sets forth the interim rules regarding


Section 3221.—Rate of Tax

Determination of Quarterly Rate ofExcise Tax for Railroad RetirementSupplemental Annuity Program

In accordance with directions in Sec-tion 3221(c) of the Railroad RetirementTax Act (16 U.S.C., Section 3221(c)),the Railroad Retirement Board has de-termined that the excise tax imposed bysuch Section 3221(c) on every em-ployer, with respect to having individu-als in his employ, for each work-hourfor which compensation is paid by suchemployer for services rendered to himduring the quarter beginning April 1,1997, shall be at the rate of 35 cents.

In accordance with directions in Sec-tion 15(a) of the Railroad RetirementAct of 1974, the Railroad RetirementBoard has determined that for the quar-ter beginning April 1, 1997, 31.5 percentof the taxes collected under Sections3211(b) and 3221(c) of the RailroadRetirement Tax Act shall be credited tothe Railroad Retirement Account and68.5 percent of the taxes collected undersuch Sections 3211(b) and 3221(c) plus100 percent of the taxes collected underSection 3221(d) of the Railroad Retire-ment Tax Act shall be credited to theRailroad Retirement Supplemental Ac-count.Dated February 25, 1997.By Authority of the Board.

Beatrice Ezerski,Secretary to the Board.

(Filed by the Office of the Federal Register onMarch 5, 1997, 8:45 a.m., and published in theissue of the Federal Register for March 6, 1997,62 F.R. 10297)

Section 4980C.—Requirements forIssuers of Qualified Long-term CareInsurance ContractsInterim guidance is provided relating to the

definition of a ‘‘chronically ill individual’’ forpurposes of the term ‘‘qualified long-term careinsurance contract’’ and to certain issues relatingto consumer protection, rules for adjustments tononforfeiture benefits, and grandfather rules forcertain pre-1997 insurance contracts. See Notice97–31, page 5.

Section 7121.—ClosingAgreements26 CFR 301.7121–1: Closing agreements.

What is the method by which a taxpayerrequests early referral of one or more unagreedempolyment tax issues from the District to Ap-peals? See Announcement 97–52, page 22.

Section 7702B.—Treatment ofQualified Long-Term CareInsuranceInterim guidance is provided relating to the

definition of a ‘‘chronically ill individual’’ and tocertain issues relating to consumer protection,rules for adjustments to nonforfeiture benefits, andgrandfather rules for certain pre-1997 insurancecontracts. See Notice 97–31, page 5.

4

Part III. Administrative, Procedural, and MiscellaneousLong-Term Care Services andInsurance

Notice 97–31

This notice provides interim guidancerelating to qualified long-term care ser-vices and qualified long-term care insur-ance contracts under §§ 213, 7702B,and 4980C of the Internal RevenueCode. It is effective pending the publi-cation of proposed regulations or otherguidance.

SUMMARY

The notice includes interim guidanceconcerning the definition of a ‘‘chroni-cally ill individual,’’ including safe-harbor definitions of the terms ‘‘substan-tial assistance,’’ ‘‘hands-on assistance,’’‘‘standby assistance,’’ ‘‘severe cognitiveimpairment,’’ and ‘‘substantial supervi-sion.’’ Under the long-term care provi-sions added to the Internal RevenueCode in 1996, certain payments receivedon account of a chronically ill individualfrom a qualified long-term care insur-ance contract are excluded from income.In addition, certain expenditures in-curred for qualified long-term care ser-vices required by a chronically ill indi-vidual are deductible as medical careexpenses.The notice also includes an interim

safe harbor that allows key provisions inqualified long-term care insurance con-tracts to be interpreted by an insurancecompany using the same standards thatthe company used before 1997 to deter-mine whether an individual is unable toperform activities of daily living or iscognitively impaired. In addition, thenotice provides interim guidance on thescope of the statutory grandfather provi-sions that apply to individual and grouplong-term care insurance contracts is-sued before 1997.The safe harbors are designed to

provide standards for taxpayers to use ininterpreting the new long-term care pro-visions and to provide interim guidanceto facilitate operation of the insurancemarket without the need for interimamendment of contracts.The guidance takes into account com-

ments and information provided by Stateinsurance regulators (including the Na-tional Association of Insurance Commis-sioners), insurance companies offeringlong-term care insurance, consumer rep-resentatives, groups representing indi-viduals with chronic disabilities, the De-

partment of Health and Human Services,health professionals expert in the careand rehabilitation of individuals withchronic illnesses, and others. The noticeaddresses certain issues identified asthose for which interim guidance wouldbe most helpful. The Internal RevenueService and Treasury Department arecontinuing to consider these and otherissues and welcome further comments.

STATUTORY CHANGES

Sections 7702B and 4980C, added by§§ 321 and 326 of the Health InsurancePortability and Accountability Act of1996 (Pub. L. 104–191, 110 Stat. 1936,2054 and 110 Stat. at 2065)(HIPAA),establish requirements for qualifiedlong-term care insurance contracts andissuers of those contracts. Section7702B(b)(1)(A) requires a qualifiedlong-term care insurance contract to pro-vide insurance protection only for quali-fied long-term care services. Generally,§ 7702B applies to contracts issued af-ter December 31, 1996, and § 4980Capplies to actions taken after December31, 1996.SeeHIPAA §§ 321(f)(1) and327.Section 7702B(c)(1) defines ‘‘quali-

fied long-term care services’’ as neces-sary diagnostic, preventive, therapeutic,curing, treating, mitigating, and rehabili-tative services, and maintenance or per-sonal care services that are required bya chronically ill individual, and providedpursuant to a plan of care prescribed bya licensed health care practitioner.Section 7702B(c)(2)(A) defines a

‘‘chronically ill individual’’ as any indi-vidual who has been certified by alicensed health care practitioner as —(i) being unable to perform with-out substantial assistance from an-other individual at least 2 out of6 activities of daily living listed in§ 7702B(c)(2)(B) (ADLs) for a pe-riod of at least 90 days due to a lossof functional capacity (the ADL Trig-ger);(ii) having a level of disability simi-lar to the level of disability describedin the ADL Trigger as determinedunder regulations prescribed by theSecretary of the Treasury in consulta-tion with the Secretary of Health andHuman Services (the Similar LevelTrigger); or(iii) requiring substantial supervisionto protect the individual from threatsto health and safety due to severe

cognitive impairment (the CognitiveImpairment Trigger).

The 6 ADLs listed in § 7702B(c)(2)(B)are eating, toileting, transferring, bath-ing, dressing, and continence. Section7702B(c)(2)(B) further provides that acontract is not a qualified long-term careinsurance contract unless it takes intoaccount at least 5 of these 6 activities indetermining whether an individual is achronically ill individual.In addition, § 322 of HIPAA

amended § 213 of the Code. For tax-payers who itemize deductions, § 213generally allows a deduction for ex-penses paid during the taxable year, notcompensated for by insurance or other-wise, for medical care of the taxpayer,his or her spouse, and dependents, to theextent that the expenses exceed 7.5percent of the taxpayer’s adjusted grossincome. As amended by HIPAA,§ 213(d) provides that the term ‘‘medi-cal care’’ includes (1) eligible premiumspaid for any qualified long-term careinsurance contract (as defined in§ 7702B(b)) and (2) amounts paid forqualified long-term care services (asdefined in § 7702B(c)).

INTERIM GUIDANCE

I. CHRONICALLY ILL INDIVIDUAL

This section of the notice providesinterim guidance including safe harborsrelating to the determination of whetheran individual is a ‘‘chronically ill indi-vidual’’ under § 7702B(c)(2). Taxpayers(including uninsured individuals, insur-ance companies, employers, policyhold-ers, and certificate holders) may rely onthis interim guidance to determinewhether an individual is a chronically illindividual under the ADL Trigger or theCognitive Impairment Trigger for pur-poses of the definitions of ‘‘qualifiedlong-term care services’’ in § 7702B(c)and ‘‘medical care’’ in § 213(d).ADL Trigger. For purposes of the

ADL Trigger, taxpayers may rely on allor any of the following safe-harbordefinitions —(1) ‘‘Substantial assistance’’ means

hands-on assistance and standby assis-tance.(2) ‘‘Hands-on assistance’’ means the

physical assistance of another personwithout which the individual would beunable to perform the ADL.(3) ‘‘Standby assistance’’ means the

presence of another person within arm’sreach of the individual that is necessary

5

to prevent, by physical intervention, in-jury to the individual while the indi-vidual is performing the ADL (such asbeing ready to catch the individual if theindividual falls while getting into or outof the bathtub or shower as part ofbathing, or being ready to remove foodfrom the individual’s throat if the indi-vidual chokes while eating).An individual is a chronically ill

individual under the ADL Trigger onlyif a licensed health care practitioner hascertified that the individual is unable toperform (without substantial assistancefrom another individual) at least 2 ADLsfor a period of at least 90 days due to aloss of functional capacity. This 90-dayrequirement does not establish a waitingperiod before which benefits may bepaid or before which services may con-stitute qualified long-term care services.Cognitive Impairment Trigger.For

purposes of the Cognitive ImpairmentTrigger, taxpayers may rely on either orboth of the following safe-harbor defini-tions—(1) ‘‘Severe cognitive impairment’’

means a loss or deterioration in intellec-tual capacity that is (a) comparable to(and includes) Alzheimer’s disease andsimilar forms of irreversible dementia,and (b) measured by clinical evidenceand standardized tests that reliably mea-sure impairment in the individual’s (i)short-term or long-term memory, (ii)orientation as to people, places, or time,and (iii) deductive or abstract reasoning.(2) ‘‘Substantial supervision’’ means

continual supervision (which may in-clude cuing by verbal prompting, ges-tures, or other demonstrations) by an-other person that is necessary to protectthe severely cognitively impaired indi-vidual from threats to his or her healthor safety (such as may result fromwandering).Under the Cognitive Impairment Trig-

ger, unlike the ADL Trigger, a qualifiedlong-term care insurance contract is notrequired to take any ADL into accountfor purposes of determining whether anindividual is a chronically ill individual.Safe-Harbor for Continuation of Pre-

1997 Insurance Standards.This safeharbor applies to post-1996 long-termcare insurance contracts (including anypre-1997 contracts not grandfathered un-der § 321(f)(2) and the grandfatherrules in this notice for certain pre-1997insurance contracts) issued by an insur-ance company with outstanding pre-1997 long-term care insurance contractsthat base eligibility for payments uponthe inability to perform any of the ADLs

(eating, toileting, transferring, bathing,dressing, and continence) or cognitiveimpairment. Insurance companies, poli-cyholders, and certificate holders mayrely on this safe harbor (as well as thesafe-harbor definitions above for theADL and Cognitive Impairment Trig-gers) to determine whether an individualis a chronically ill individual under bothor either the ADL Trigger and theCognitive Impairment Trigger for pur-poses of the definition of a ‘‘qualifiedlong-term care insurance contract,’’whether or not the post-1996 contractsgenerally incorporate the provisions of§ 7702B(c)(2). In order to rely on anyof these safe harbors for federal taxpurposes, contracts are not required toincorporate or refer to the safe harbors.In applying the ADL Trigger to its

post-1996 contracts, an insurance com-pany is permitted to use the samestandards that it uses to determinewhether an individual is unable to per-form an ADL for purposes of eligibilityfor benefit payments under its pre-1997contracts (‘‘pre-1997 ADL standards’’).If the insurance company makes deter-minations regarding an individual’s in-ability to perform an ADL under apost-1996 contract using its pre-1997ADL standards, the contract will bedeemed to satisfy the requirement underthe ADL Trigger that an individual isunable to perform (without substantialassistance from another person) thatADL due to a loss of functional capac-ity. For example, if an insurance com-pany has outstanding pre-1997 long-term care insurance contracts thatprovide for benefit payments if theinsured is unable to perform at least 2ADLs (whether or not the contractsrefer to substantial assistance), the com-pany may interpret ‘‘substantial assis-tance’’ for purposes of the ADL Triggeras requiring the same assistance as thecompany requires under its pre-1997contracts.In applying the Cognitive Impairment

Trigger to its post-1996 contracts, aninsurance company is permitted to usethe same standards that it uses to deter-mine whether an individual qualifies forbenefits due to cognitive impairmentunder its pre-1997 contracts (‘‘pre-1997cognitive impairment standards’’). If theinsurance company makes determina-tions regarding an individual’s cognitiveimpairment under a post-1996 contractusing its pre-1997 cognitive impairmentstandards, the contract will be deemedto satisfy the requirement under theCognitive Impairment Trigger that an

individual requires substantial supervi-sion to protect the individual fromthreats to health and safety due tosevere cognitive impairment.This safe harbor for continuation of

pre-1997 insurance standards appliesonly for purposes of determiningwhether an individual (1) is unable toperform (without substantial assistancefrom another person) an ADL due to aloss of functional capacity or (2) re-quires substantial supervision to protectthe individual from threats to health andsafety due to severe cognitive impair-ment. This safe harbor does not applyfor purposes of the other statutory re-quirements of § 7702B(c)(2), such as(1) the requirement that an individual’sloss of functional capacity apply to atleast 2 of 5 or 6 ADLs, (2) the require-ment for a certification by a licensedhealth care practitioner, and (3) the90-day requirement. These statutory re-quirements must be satisfied in order forthe individual to be a ‘‘chronically illindividual’’ under the ADL or CognitiveImpairment Trigger, whether or notsimilar requirements are imposed underthe insurance company’s pre-1997 con-tracts.

II. QUALIFIED LONG-TERM CAREINSURANCE

This section of the notice addressescertain issues relating to the consumerprotection provisions of §§ 7702B(b),7702B(g), and 4980C, rules for adjust-ments to nonforfeiture benefits under§ 7702B(g)(4), and the grandfather rulesfor certain pre-1997 insurance contracts.Taxpayers (including insurance compa-nies, employers, policyholders, and cer-tificate holders) may rely on this interimguidance for purposes of the definitionof ‘‘qualified long-term care insurancecontract’’ in § 7702B(b) and the re-quirements of § 4980C.Consumer Protections Applicable to

Long-Term Care Insurance.Under§§ 7702B(b)(1)(F), 7702B(g), and4980C, qualified long-term care insur-ance contracts and issuers of those con-tracts are required to satisfy certainrequirements of the Long-Term CareInsurance Model Act (Model Act) andLong-Term Care Insurance Model Regu-lation (Model Regulation) promulgatedby the National Association of InsuranceCommissioners (NAIC), as adopted asof January 1993. The requirements forqualified long-term care insurance con-tracts under §§ 7702B(b)(1)(F) and7702B(g) relate to guaranteed renewalor noncancellability, prohibitions on

6

limitations and exclusions, extension ofbenefits, continuation or conversion ofcoverage, discontinuance and replace-ment of policies, unintentional lapse,disclosure, prohibitions against post-claims underwriting, minimum stan-dards, inflation protection, prohibitionsagainst preexisting conditions and pro-bationary periods, and prior hospitaliza-tion. The requirements for qualifiedlong-term care insurance contracts under§ 4980C relate to application forms andreplacement coverage, reporting require-ments, filing requirements for market-ing, standards for marketing, appropri-ateness of recommended purchase,standard format outline of coverage,delivery of a shopper’s guide, right toreturn, outline of coverage, certificatesunder group plans, policy summary,monthly reports on accelerated deathbenefits, and incontestability period.Sections 7702B and 4980C reference

NAIC model provisions that specifyexact language (including punctuation),captions, format, and content that mustbe included in long-term care insurancecontracts, applications, outlines of cov-erage, policy summaries, and notices.See, e.g., §§ 10, 13, and 24 of theModel Regulation.In the case of a State that has adopted

all or any portion of the Model Act orModel Regulation, compliance with theapplicable requirement of State law isconsidered compliance with the parallelModel Act or Model Regulation require-ment specified in § 7702B(g) or§ 4980C, and failure to comply withthat requirement of State law is consid-ered failure to comply with the parallelModel Act or Model Regulation require-ment in § 7702B(g) or § 4980C. Forexample, if a particular State hasadopted Section 6C of the Model Act(relating to preexisting conditions), then,for a contract that is subject to thatState’s insurance laws, compliancewith that State law is considered com-pliance with § 7702B(g)(2)(A)(ii)(I) andfailure to comply with that State law isconsidered failure to comply with§ 7702B(g)(2)(A)(ii)(I). In accordancewith § 4980C(f), in the case of a Statethat imposes a requirement that is morestringent than the analogous requirementimposed by § 7702B(g) or § 4980C,compliance with the applicable require-ment of State law is considered compli-ance with the parallel Model Act orModel Regulation requirement in§ 7702B(g) or § 4980C.If a State has not adopted a provision

of the Model Act or Model Regulation

that is specified in § 7702B(g) or§ 4980C (and has not adopted a re-quirement that is more stringent than therequirement imposed by that provision),the language, caption, format, and con-tent requirements imposed by the ModelAct or Model Regulation provision withrespect to contracts, applications, out-lines of coverage, policy summaries, andnotices will be considered satisfied for acontract subject to the law of that Stateif the language, captions, format, andcontent are substantially identical in allmaterial respects to those required underthat Model Act or Model Regulationprovision.Adjustments to Nonforfeiture Benefits

Under Insurance Contracts.Section7702B(g)(4)(B)(ii) provides that theamount of a nonforfeiture benefit avail-able in the event of a default in pre-mium payments may be subsequentlyadjusted only as necessary to reflectchanges in claims, persistency, and inter-est that have been taken into account ina change in the premium rates forcontracts issued on the same contractform if the contract form has beenapproved by the Secretary of the Trea-sury. Solely for the purpose of makingsuch adjustments, approval by the Stateinsurance commissioner or other appli-cable State authority will be treated asapproval by the Secretary of the Trea-sury.Grandfather Rules for Certain Pre-

1997 Insurance Contracts.Section321(f)(2) of HIPAA provides that acontract issued before January 1, 1997,is treated as a qualified long-term careinsurance contract if the contract metthe ‘‘long-term care insurance require-ments of the State’’ in which the con-tract was sitused at the time it wasissued. For this purpose, the ‘‘long-termcare insurance requirements of theState’’ means the State laws (includingstatutory and administrative law) thatare intended to regulate insurance cover-age that constitutes ‘‘long-term care in-surance’’ (as defined in § 4 of theLong-Term Care Insurance Model Actas adopted by the NAIC in December,1995), regardless of the terminologyused by the State in describing theinsurance coverage.For purposes of applying the grandfa-

ther rule of § 321(f)(2) to a contractother than a group contract, the issuedate of a contract is generally the dateassigned to the contract by the insurancecompany, but in no event earlier thanthe date the application is signed. How-

ever, if the period between the date ofapplication and the date on which thecontract is actually placed in force issubstantially longer than under the in-surance company’s usual business prac-tice, then the issue date is the date thecontract is placed in force.For purposes of applying the grandfa-

ther rule of § 321(f)(2) to a groupcontract, the issue date of the contract isthe date the group contract was issued.Thus, insurance coverage under certifi-cates evidencing the addition, on or afterJanuary 1, 1997, of individuals to thecoverage available under a grand-fathered group contract is accorded thesame grandfather treatment under§ 321(f)(2) as the preexisting coverageunder the grandfathered group contract.A policyholder’s right to return a

long-term care insurance contract withina ‘‘free-look’’ period following delivery(with a refund of any premiums thathave been paid) is not taken into ac-count in determining the issue date ofthe contract.For purposes of applying the grandfa-

ther rule of § 321(f)(2), any materialchange in a contract will be consideredthe issuance of a new contract. Thisincludes any change in the terms of thecontract altering the amount or timing ofany item payable by the policyholder (orcertificate holder), the insured, or theinsurance company. For example, forpurposes of § 321(f)(2), any change inthe terms of a contract altering theamount or timing of benefits (includingnonforfeiture benefits) or premiums con-stitutes a material change that will beconsidered the issuance of a new con-tract. A substitution of the insured underan individual contract, or a change(other than an immaterial change) in theeligibility for membership in the groupcovered by a group contract, also consti-tutes a material change that will beconsidered the issuance of a new con-tract. However, the unilateral exercise ofan option or right granted to a policy-holder under the contract as in effect onDecember 31, 1996, will not constitute amaterial change. For this purpose, aunilateral exercise includes only achange that becomes effective withoutany consent or other non-ministerialaction by the issuer of the contract. Acontract issued in an exchange afterDecember 31, 1996, for an existingcontract is considered a contract issuedafter that date.

7

COMMENTS REQUESTED

The Internal Revenue Service andTreasury Department invite commentsconcerning the application of new§§ 7702B and 4980C, the amendmentsmade to § 213, and other federal in-come tax provisions relating to long-term care as enacted under HIPAA§§ 321 through 326, including the stan-dards and definitions in this notice.Comments are particularly requested on:(1) whether the relief provided for insur-ance contracts complying with the in-terim guidance provided in this noticeneeds to be extended beyond the effec-tive date of more definitive guidance;and (2) the types of disability thatshould be included in any regulationsthat may be prescribed under the SimilarLevel Trigger. Comments should be sub-mitted by August 4, 1997. Written com-ments should be sent to: Internal Rev-enue Service, P.O. Box 7604, BenFranklin Station, Attn: CC:CORP:T:R,Room 5228, Washington, DC 20044.Alternatively, submissions may be handdelivered between the hours of 8 a.m.and 5 p.m. to: CC:DOM:CORP:R (No-tice 97–31), Courier’s Desk, InternalRevenue Service, 1111 Constitution Av-enue, NW, Washington, DC. Finally,taxpayers may submit comments elec-tronically via the Internal RevenueService INTERNET site at: http://www.irs.ustreas.gov/prod/tax_regs/comments.html. All submitted commentswill be available for public inspectionand copying.

FURTHER INFORMATION

For further information, contact Ms.A. Kathie Jacob Kiss at (202) 622–4920regarding section I of this notice andMs. Katherine A. Hossofsky at (202)622–3970 regarding section II of thisnotice (not toll-free calls).

PROCEDURAL INFORMATION

This document serves as an ‘‘adminis-trative pronouncement’’ as that term isdefined in § 1.6661–3(b)(2) of the In-come Tax Regulations and may be reliedupon to the same extent as a revenueruling or a revenue procedure.

(Also Part I, sections 807, 812, 817A)

Modified Guaranteed Contracts

Notice 97–32

SUMMARY: This notice provides in-terim rules with regard to the interest

rate to be used in the determinationsunder §§ 807(c)(3), 807(d)(2)(B), and812 for a ‘‘modified guaranteed con-tract,’’ as defined in § 817A(d). It alsodescribes the manner in which § 811(d)is to be applied to these contracts.Section 817A was added by § 1612 ofthe Small Business Job Protection Actof 1996, Pub. L. 104–188, 110 Stat.1755. Section 817A is effective fortaxable years beginning after December31, 1995.SeeSmall Business Job Pro-tection Act § 1612(c)(1). This notice iseffective pending the publication of fur-ther guidance.

BACKGROUND: Life insurance com-panies issue modified guaranteed annu-ity and life insurance contracts. A modi-fied guaranteed contract temporarilyguarantees a higher return than the per-manently guaranteed crediting rate, inexchange for shifting additional invest-ment risk to the policyholder in theform of a market value adjustment. Thetemporary guarantee may be a fixed rateor a rate based on bond or equity yields,such as a percentage of an increase inthe S&P 500 index. During the tempo-rary guarantee period, the amount paidto the policyholder upon surrender isincreased or decreased by the marketvalue adjustment, which is determinedby a formula in the modified guaranteedcontract. The market value adjustmentgenerally is based on a published bondindex. Modified guaranteed contractscan be issued out of a life insurancecompany’s general account or segre-gated account. Section 817A providesspecial tax treatment for certain modi-fied guaranteed contracts issued out of asegregated account.

For this purpose, the term ‘‘modifiedguaranteed contract’’ (‘‘MGC’’) is de-fined as an annuity, life insurance, orpension plan contract (other than a vari-able contract described in § 817) underwhich all or part of the amounts re-ceived under the contract are allocatedto a segregated account. Assets in thissegregated account must be valued fromtime to time with reference to marketvalues, and reserves must be valued atmarket for annual statement purposes.Further, an MGC must provide eitherfor a net surrender value or for apolicyholder’s fund (as defined in§ 807(e)(1)). If only a portion of acontract is not described in § 817, suchportion is treated as a separate contractfor purposes of applying § 817A.The tax reserves for an MGC are

computed under either § 807(c)(3) or

§ 807(d). Section 807(c)(3) providesthat reserves for obligations under insur-ance and annuity contracts not involvinglife, accident, or health contingenciesare computed using an appropriate rateof interest. The appropriate rate of inter-est is the highest (as of the time theobligation first did not involve life,accident, or health contingencies) of thefollowing rates: (1) the ‘‘applicable Fed-eral interest rate’’ (as defined in§ 807(d)(2)(B)(i)); (2) the ‘‘prevailingState assumed interest rate’’ (as definedin § 807(d)(2)(B)(ii)); or (3) the rate ofinterest assumed by the insurance com-pany to determine the contract’s guaran-teed benefit. Section 807(c) also pro-vides that the reserves computed under§ 807(c)(3) are never less than the netsurrender value of the contract.1

For an MGC that gives rise to lifeinsurance reserves, as defined in§ 816(b), reserves are computed under§ 807(d). Under § 807(d)(1), the lifeinsurance reserves for a contract cannotexceed the statutory reserves (as definedin § 809(b)(4)(B)) for the contract. Sub-ject to that cap, a contract’s life insur-ance reserves equal the greater of: (1)the contract’s net surrender value; or (2)the contract’s Federally prescribed re-serve determined under § 807(d)(2).Section 807(d)(2) provides that the

Federally prescribed reserves for a con-tract are determined using: (1) the taxreserve method applicable to the con-tract; (2) the greater of the applicableFederal interest rate or the prevailingState assumed interest rate in effect onthe date of the issuance of the contract;and (3) the prevailing commissioners’standard tables for mortality and mor-bidity. In the case of a life insurancecontract covered by the Commissioners’Reserve Valuation Method (‘‘CRVM’’)or an annuity contract covered by theCommissioners’ Annuities Reserve Valu-ation Method (‘‘CARVM’’), § 807(d)(3)provides that the tax reserve methodapplicable to a contract is the CRVM orCARVM prescribed by the National As-sociation of Insurance Commissioners(‘‘NAIC’’), which is in effect on thedate of the issuance of the contract.Section 811(d) imposes an additional

reserve computation restriction for con-tracts that guarantee beyond the end of1For contracts other than MGCs, § 807(e)(1) pro-vides that net surrender value is determined takinginto account any penalty or charge which wouldbe imposed upon surrender but ignoring anymarket value adjustment. The net surrender valuesof MGCs, however, take into account marketvalue adjustments. § 817A(a).

8

the taxable year payment or crediting ofamounts in the nature of interest inexcess of the greater of the prevailingstate assumed interest rate or the appli-cable Federal interest rate. In thosecircumstances, § 811(d) requires thatthe contract’s future guaranteed benefitsbe determined as though the interest inexcess of the greater of the prevailingstate assumed interest rate or the appli-cable Federal rate were guaranteed onlyto the end of the taxable year.Section 812 prorates the dividends

received deduction and the exclusion fortax exempt interest between a life insur-ance company and its policyholders toprevent the company from receiving adouble tax benefit for amounts added toreserves.See also§§ 805(a)(4), 807(a)and 807(b). The proration is based onthe company’s share of ‘‘net investmentincome’’ (as defined in § 812(c)) for thetaxable year. The company’s share ofnet investment income equals the ex-cess, if any, of the net investmentincome over the sum of the ‘‘policyinterest’’ (as defined in § 812(b)(2)) and‘‘gross investment income’s proportion-ate share of policyholder dividends’’ (asdefined in § 812(b)(3)) for the taxableyear. Policy interest includes ‘‘requiredinterest’’ (at the greater of the prevailingState assumed rate or the applicableFederal interest rate) on reserves under§ 807(c) (other than § 807(c)(2)).See§ 812(b)(2)(A). If neither the prevailingState assumed rate nor the applicableFederal interest rate is used, anotherappropriate rate is used to calculaterequired interest. Thus, for a contractdescribed in § 807(c)(3), if the rate ofinterest assumed by an insurance com-pany in determining the contract’s guar-anteed benefit exceeds the applicableFederal interest rate and the State as-sumed rate, required interest is com-puted using the assumed interest rate.Under § 817A(e)(2), the Service is

authorized to determine annually withregard to MGCs the interest rates appli-cable under §§ 807(c)(3), 807(d)(2)(B)and 812. The Service is authorized toexercise this authority by issuing a peri-odic announcement of the appropriatemarket interest rates or formula fordetermining such rates. H.R. Conf. Rept.No. 737, 104th Cong. 2d Sess. 313(1996). Section 817A(e) also authorizesthe Service to modify or waive theapplication of § 811(d) (relating to in-terest guaranteed beyond the end of thetaxable year), and to prescribe other

regulations that are necessary or appro-priate to carry out the purposes of§ 817A.The legislative history of § 817A in-

dicates that an appropriate interest rateis a current market rate. H.R. Conf. Rep.No. 737, at 313. The interest rate maybe determined, for example, using eithera rate that is appropriate for the obliga-tions under the contract to which thereserve relates or the yield on the assetsunderlying the MGCs.Id.

INTERIM RULES FOR MGCs: Pend-ing the publication of further guidance,an insurance company is required to de-termine under §§ 807(c)(3) or 807(d)(2)the reserves for a MGC using, withregard to the contract’s temporary guar-antee period, an annual interest rateequal to the greater of—(a) the interest rate assumed by the

insurance company to determine futureguaranteed benefits under the appli-cable tax reserve method for the con-tract or, for reserves computed under§ 807(c)(3), the interest rate assumed bythe company to determine the contract’sguaranteed benefit; or(b) the Moody’s Corporate Bond

Yield Average-Monthly Average Cor-porates (‘‘Moody’s rate’’) as publishedby Moody’s Investors Service, Inc., orany successor thereto, for the month thatincludes the last day of the taxable year,multiplied by:(i) 1.1 if the MGC provides for a

market value adjustment or a guaranteedreturn based in whole or in part on theperformance of stocks, other equity in-struments or equity-based derivatives,including but not limited to a contractwhich guarantees a return based on theS&P 500 index; and(ii) 1.0 for all other MGCs.With respect to an MGC’s temporary

guarantee period, section 811(d) shall beapplied by substituting the rate of inter-est applicable to the contract’s tempo-rary guarantee period under this noticefor the applicable Federal interest rateand the prevailing State assumed interestrate. During the temporary guaranteeperiod, the interest rate to be used todetermine required interest under§ 812(b)(2)(A) is the rate that applieswith regard to that period for purposesof §§ 807(c)(3) or 807(d)(2)(B).For periods outside the temporary

guarantee period, §§ 807(c)(3), 807(d)-(2), 811(d) and 812(b)(2)(A) continue toapply without modification.

EXAMPLE 1

IC, a life insurance company as de-fined in § 816, issued an MGC on July1, 1996. The MGC is an annuity con-tract that gives rise to life insurancereserves, as defined in § 816(b). IC is acalendar year taxpayer. The MGC guar-antees that interest will be credited at8% per year for the first 5 contractyears and 4% per year thereafter. Duringthe 5 year temporary guarantee period,the MGC provides for a market valueadjustment based on changes in a pub-lished bond index and not on the perfor-mance of stocks, other equity instru-ments or equity based derivatives. TheMoody’s rate for December 1996 is7.5%. The applicable Federal interestrate and the prevailing State assumedinterest rate for 1996 are 6.63% and5.75%, respectively.To determine under § 807(d)(2) the

end of year 1996 reserves for the MGC,IC must use a discount interest rate of8% (the interest rate assumed by theinsurance company to determine futureguaranteed benefits during the 5 yeartemporary guarantee period) with regardto the unexpired portion of the tempo-rary guarantee period. The discount rateapplicable to periods outside the 5 yeartemporary guarantee period is 6.63%.The interest rate to be used in comput-ing required interest under § 812(b)(2)-(A) for 1996 is 8%.

EXAMPLE 2

The facts are the same as in Example1, except that the MGC guarantees thatinterest will be credited at 7% per yearfor the first 5 contract years. To deter-mine under § 807(d)(2) the end of year1996 reserves for the MGC, IC must usea discount interest rate of 7.5%(Moody’s rate multiplied by 1.0) withregard to the unexpired portion of the 5year temporary guarantee period. Thediscount rate applicable to periods out-side the 5 year temporary guaranteeperiod is 6.63%. The interest rate to beused in computing required interest un-der § 812(b)(2)(A) for 1996 is 7.5%(Moody’s rate multiplied by 1.0).

COMMENTS REQUESTED: The Inter-nal Revenue Service invites commentsconcerning the application of new§ 817A and the application of this no-tice to various types of MGCs, includingequity indexed annuities and life insur-ance contracts. Specifically, commentsare requested regarding whether differ-ent interest rates should apply to equityindexed contracts based upon the differ-

9

ent participation rates, guarantees, mar-ket value adjustments, or other pertinentfactors under the contracts. Written com-ments should be sent to Internal Rev-enue Service, P.O. Box 7604, BenFranklin Station, Washington, DC20044. Alternatively, submissions maybe hand delivered between the hours of8 a.m. and 5 p.m. to: CC:DOM:CORP:R(Notice 97–32), Courier’s Desk, Inter-nal Revenue Service, 1111 Consti-tution Avenue, NW, Washington, DC.Finally, taxpayers may submit com-ments electronically via the InternalRevenue Service INTERNET site athttp://www.irs.ustreas.gov/prod/tax_regs/comments.html. All submitted commentswill be available for public inspectionand copying.

FURTHER INFORMATION: For furtherinformation regarding this notice, con-tact Ms. Katherine A. Hossofsky at(202) 622–3970 (not a toll-free call).

PROCEDURAL INFORMATION: Thisdocument serves as an ‘‘administrativepronouncement’’ as that term is definedin § 1.6661–3(b)(2) of the Income TaxRegulations and may be relied upon tothe same extent as a revenue ruling orrevenue procedure.

26 CFR 601.204: Changes in accounting periodsand in methods of accounting.(Also Part I, §§ 446, 481; 1.446–1, 1.481–1,1.481–4.)

Rev. Proc. 97–27

TABLE OF CONTENTSPAGE

SECTION 1. PURPOSE . . . . . . . . 11.01 In general. . . . . . . . . . . . . . . 11.02 Voluntary compliance. . . . . . 11.03 Significant changes. . . . . . . . 11

SECTION 2. BACKGROUND. . . 11.01 Change in method of

accounting defined. . . . . . . . 11.02 Securing permission to make

a method change. . . . . . . . . . 12.03 Terms and conditions of a

method change. . . . . . . . . . . 12.04 No retroactive method

change. . . . . . . . . . . . . . . . . . 12.05 Method change with a

§ 481(a) adjustment. . . . . . . 12(1) Need for adjustment. . . . 12(2) Adjustment period. . . . . 12

.06 Method change using acut-off method. . . . . . . . . . . . 12

.07 Consistency and clearreflection of income. . . . . . . 12

.08 Separate trades orbusinesses. . . . . . . . . . . . . . . 12

.09 Penalties. . . . . . . . . . . . . . . . 12

.10 Change made as part of anexamination. . . . . . . . . . . . . . 12

SECTION 3. DEFINITIONS . . . . 13.01 Taxpayer. . . . . . . . . . . . . . . . 13

(1) In general. . . . . . . . . . . . 13(2) Consolidated group. . . . 13

.02 Filed . . . . . . . . . . . . . . . . . . . 13

.03 Mailed. . . . . . . . . . . . . . . . . . 13

.04 Timely performance of acts. 13

.05 Year of change. . . . . . . . . . . 13

.06 Section 481(a) adjustmentperiod . . . . . . . . . . . . . . . . . . 13

.07 Under examination. . . . . . . . 13(1) In general . . . . . . . . . . . . 13(2) Partnerships and Scorporations subject toTEFRA. . . . . . . . . . . . . . . . . .13

.08 Issue under consideration. . 13(1) Under examination. . . . 13(2) Before an appeals office. . . . . . . . . . . . . . . . . . . . . . . . 14(3) Before a federal court . 14

.09 Change within the LIFOinventory method. . . . . . . . . 14

SECTION 4. SCOPE . . . . . . . . . . 14.01 Applicability . . . . . . . . . . . . . 14.02 Inapplicability . . . . . . . . . . . 14

(1) Automatic change. . . . . 14(2) Under examination. . . . 14(3) Before an appealsoffice . . . . . . . . . . . . . . . . . . 14(4) Before a federal court . 14(5) Consolidated groupmember . . . . . . . . . . . . . . . . 14(6) Partnerships and Scorporations. . . . . . . . . . . . . 14

SECTION 5. PROCEDURES FORTAXPAYERS NOT UNDEREXAMINATION . . . . . . . . . . . . . . 14.01 Submission of application. . 14

(1) In general . . . . . . . . . . . 14(2) Limited relief for lateapplication . . . . . . . . . . . . . . 14

.02 Terms and conditions ofchange . . . . . . . . . . . . . . . . . 14(1) In general . . . . . . . . . . . 14(2) Year of change. . . . . . . 14(3) Section 481(a)adjustment period. . . . . . . . 14(4) NOL carrybacklimitation for taxpayersubject to criminalinvestigation. . . . . . . . . . . . . 14(5) Change treated asinitiated by the taxpayer. . . 15

SECTION 6. PROCEDURES FORTAXPAYERS UNDEREXAMINATION, BEFORE ANAPPEALS OFFICE, OR BEFOREA FEDERAL COURT . . . . . . . . . . 15

.01 Taxpayer underexamination . . . . . . . . . . . . . 15(1) In general . . . . . . . . . . . 15(2) 90-day window period. 15(3) 120-day window period 15(4) Consent of districtdirector . . . . . . . . . . . . . . . . 15

.02 Taxpayer before an appealsoffice . . . . . . . . . . . . . . . . . . 15

.03 Taxpayer before a federalcourt . . . . . . . . . . . . . . . . . . . 15

.04 Terms and conditions ofchange . . . . . . . . . . . . . . . . . 15

SECTION 7. SECTION 481(a)ADJUSTMENT PERIOD . . . . . . . 16.01 In general . . . . . . . . . . . . . . 16.02 Short period as a separate

taxable year. . . . . . . . . . . . . 16.03 Shortened or accelerated

adjustment periods. . . . . . . 16(1) De minimis rule . . . . . . 16(2) Cooperatives. . . . . . . . . 16(3) Ceasing to engage in thetrade or business. . . . . . . . . 16

SECTION 8. GENERALAPPLICATION PROCEDURES . 17.01 Application—Service

discretion . . . . . . . . . . . . . . . 17.02 Terms and

conditions—Servicediscretion . . . . . . . . . . . . . . . 17

.03 Compliance with provisions 17

.04 Facts and circumstancesconsidered in processingapplications . . . . . . . . . . . . . 17

.05 Specific rules in connectionwith prior applications . . . . 17(1) Method change made. . 17(2) Method change notmade. . . . . . . . . . . . . . . . . . . 17

.06 Where to file . . . . . . . . . . . . 18

.07 User fee . . . . . . . . . . . . . . . . 18

.08 Signature requirements. . . . 18

.09 Incomplete Form 3115—21day rule . . . . . . . . . . . . . . . . 18

.10 Conference in the nationaloffice . . . . . . . . . . . . . . . . . . 18

.11 Consent Agreement. . . . . . . 18(1) In general . . . . . . . . . . . 18(2) Signature requirements. 18(3) 45-day requirement. . . . 18(4) Change in method ofaccounting not made by thetaxpayer . . . . . . . . . . . . . . . . 18

.12 Two or more trades orbusinesses. . . . . . . . . . . . . . 19(1) In general . . . . . . . . . . . 19(2) Information required. . . 19(3) Separate Forms 3115required . . . . . . . . . . . . . . . . 19

.13 Consolidated groups. . . . . . 19(1) In general . . . . . . . . . . . 19

10

(2) Separate Forms 3115not required . . . . . . . . . . . . . 19

.14 Applicability of Rev. Proc.97–1 and Rev Proc. 97–4. . 19

.15 Effect on other offices of theService . . . . . . . . . . . . . . . . . 19

SECTION 9. AUDITPROTECTION FOR TAXABLEYEARS PRIOR TO YEAR OFCHANGE . . . . . . . . . . . . . . . . . . . . 19.01 In general . . . . . . . . . . . . . . 19.02 Exceptions . . . . . . . . . . . . . . 19

(1) Change not made ormade improperly. . . . . . . . . 19(2) Change in sub-method. 19(3) Prior yearService-initiated change. . . 19(4) Criminal investigation . 19

SECTION 10. EFFECT OFCONSENT . . . . . . . . . . . . . . . . . . . 19.01 In general . . . . . . . . . . . . . . 19.02 Retroactive change or

modification . . . . . . . . . . . . . 20

SECTION 11. REVIEW BYDISTRICT DIRECTOR . . . . . . . . 20.01 In general . . . . . . . . . . . . . . 20.02 National office

consideration. . . . . . . . . . . . 20

SECTION 12. INQUIRIES . . . . 20

SECTION 13. EFFECTIVEDATE . . . . . . . . . . . . . . . . . . . . . . . 20.01 In general . . . . . . . . . . . . . . 20.02 Transition rules . . . . . . . . . . 20

(1) Currently pendingForms 3115 . . . . . . . . . . . . . 20(2) New Forms 3115. . . . . . 20(3) Open window periodsunder Rev. Proc. 92–20. . . . 20

SECTION 14. EFFECT ONOTHER DOCUMENTS . . . . . . . . 20.01 Rev. Proc. 92–20. . . . . . . . . 20.02 Rev. Proc. 93–48 (notional

principal contracts). . . . . . . 20.03 Notice 89–15 (long-term

contracts) . . . . . . . . . . . . . . . 20

SECTION 15. PAPERWORKREDUCTION ACT . . . . . . . . . . . . 20

DRAFTING INFORMATION . . . 21

SECTION 1. PURPOSE

.01 In general. This revenue proce-dure provides the general proceduresunder § 446(e) of the Internal RevenueCode and § 1.446–1(e) of the IncomeTax Regulations for obtaining the con-sent of the Commissioner of InternalRevenue to change a method of ac-counting for federal income tax pur-poses. This revenue procedure modifies

and supersedes Rev. Proc. 92–20,1992–1 C.B. 685..02 Voluntary compliance.(1) This revenue procedure pro-

vides incentives to encourage promptvoluntary compliance with proper taxaccounting principles. Under this ap-proach, a taxpayer generally receivesmore favorable terms and conditions(for example, a later year of change anda longer § 481(a) adjustment period fora positive adjustment) if the taxpayerfiles its request for a change in account-ing method before the Internal RevenueService contacts the taxpayer for exami-nation. A taxpayer that is contacted forexamination and required to change itsmethod of accounting by the Servicegenerally receives less favorable termsand conditions and may also be subjectto penalties.

(2) Although prompt voluntarycompliance can generally be encouragedthrough incentives, the Service recog-nizes that this approach may not beappropriate or effective in all cases. Forexample, a number of taxpayers havedeferred making changes required byamendments to the Internal RevenueCode or the Income Tax Regulations.Because it is generally not appropriateto permit changes on a basis morefavorable than applicable under the gov-erning statute or regulation, the Servicemay, in other published guidance, pro-vide special terms and conditions thatare designed to place the taxpayer in aposition no more favorable than if thetaxpayer had timely complied with therequired change. See, for example, Rev.Proc. 93–48, 1993–2 C.B. 580 (regard-ing changes in method of accounting fornotional principal contracts to complywith the requirements of § 1.446–3)..03 Significant changes. Many of the

complex rules and requirements of Rev.Proc. 92–20 have been simplified oreliminated. For example, the CategoryA, Category B, Designated A, and Des-ignated B classifications have beeneliminated, the 90–day window at thebeginning of an examination has beeneliminated, the 30-day window for tax-payers under continuous examinationhas been expanded to 90 days and thenumber of consecutive months the tax-payer is required to be under examina-tion has been reduced from 18 to 12, thedefinition of ‘‘under examination’’ hasbeen clarified, the consent requirementfor taxpayers before an appeals office ora federal court has been replaced with anotification procedure, the various§ 481(a) adjustment periods have been

replaced with a single 4-year § 481(a)adjustment period for both positive andnegative adjustments, and several of theterms and conditions relating to the§ 481(a) adjustment have been elimi-nated.

SECTION 2. BACKGROUND

.01 Change in method of accountingdefined.

(1) Section 1.446–1(e)(2)(ii)(a)provides that a change in method ofaccounting includes a change in theoverall plan of accounting for grossincome or deductions, or a change in thetreatment of any material item. A mate-rial item is any item that involves theproper time for the inclusion of the itemin income or the taking of the item as adeduction. In determining whether ataxpayer’s accounting practice for anitem involves timing, generally the rel-evant question is whether the practicepermanently changes the amount of thetaxpayer’s lifetime income. If the prac-tice does not permanently affect thetaxpayer’s lifetime income, but does orcould change the taxable year in whichincome is reported, it involves timingand is therefore a method of accounting.SeeRev. Proc. 91–31, 1991–1 C.B. 566.

(2) Although a method of account-ing may exist under this definition with-out a pattern of consistent treatment ofan item, a method of accounting is notadopted in most instances without con-sistent treatment. The treatment of amaterial item in the same way in deter-mining the gross income or deductionsin two or more consecutively filed taxreturns (without regard to any change instatus of the method as permissible orimpermissible) represents consistenttreatment of that item for purposes of§ 1.446–1(e)(2)(ii)(a). If a taxpayertreats an item properly in the first returnthat reflects the item, however, it is notnecessary for the taxpayer to treat theitem consistently in two or more con-secutive tax returns to have adopted amethod of accounting. If a taxpayer hasadopted a method of accounting underthese rules, the taxpayer may not changethe method by amending its prior in-come tax return(s).SeeRev. Rul. 90–38,1990–1 C.B. 57.

(3) A change in the characteriza-tion of an item may also constitute achange in method of accounting if thechange has the effect of shifting incomefrom one period to another. For ex-ample, a change from treating an itemas income to treating the item as a

11

deposit is a change in method of ac-counting.SeeRev. Proc. 91–31.

(4) A change in method of ac-counting does not include correction ofmathematical or posting errors, or errorsin the computation of tax liability (suchas errors in computation of the foreigntax credit, net operating loss, percentagedepletion, or investment credit).See§ 1.446–1(e)(2)(ii)(b)..02 Securing permission to make a

method change. Section 446(e) and§ 1.446–1(e) state that, except as other-wise provided, a taxpayer must securethe consent of the Commissioner beforechanging a method of accounting forfederal income tax purposes. Section1.446–1T(e)(3)(i) requires that, in orderto obtain the Commissioner’s consent toa method change, a taxpayer must file aForm 3115, Application for Change inAccounting Method, during the taxableyear in which the taxpayer desires tomake 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 thelimitations, terms, and conditionsdeemed necessary to permit a taxpayerto obtain consent to change a method ofaccounting in accordance with § 446(e).The terms and conditions the Commis-sioner may prescribe include the year ofchange, whether the change is to bemade with a § 481(a) adjustment or ona cut-off basis, and the § 481(a) adjust-ment period..04 No retroactive method change.

Unless specifically authorized by theCommissioner, a taxpayer may not re-quest, or otherwise make, a retroactivechange in method of accounting, regard-less of whether the change is from apermissible 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 beingduplicated or omitted to be taken intoaccount when the taxpayer’s taxableincome is computed under a method ofaccounting different from the methodused to compute taxable income for thepreceding taxable year. When there is achange in method of accounting towhich § 481(a) is applied, income forthe taxable year preceding the year ofchange must be determined under themethod of accounting that was thenemployed, and income for the year ofchange and the following taxable years

must be determined under the newmethod of accounting as if the newmethod had always been used.Example.A taxpayer that is not required to useinventories uses the overall cash receipts anddisbursements method and changes to an overallaccrual method. The taxpayer has $120,000 ofincome earned but not yet received (accountsreceivable) and $100,000 of expenses incurred butnot yet paid (accounts payable) as of the end ofthe taxable year preceding the year of change. Apositive § 481(a) adjustment of $20,000 ($120,000accounts receivable less $100,000 accounts pay-able) is required as a result of the change.

(2) Adjustment period. Section481(c) and §§ 1.446–1T(e)(3)(i) and1.481–4 provide that the adjustment re-quired by § 481(a) may be taken intoaccount in determining taxable incomein the manner and subject to the condi-tions agreed to by the Commissionerand the taxpayer. Generally, in the ab-sence of such an agreement, the§ 481(a) adjustment is taken into ac-count completely in the year of change,subject to § 481(b) which limits theamount of tax where the § 481(a) ad-justment is substantial. However, underthe Commissioner’s authority in§ 1.446–1(e)(3)(ii) to prescribe termsand conditions for changes in method ofaccounting, this revenue procedure pro-vides specific adjustment periods thatare intended to achieve an appropriatebalance between the goals of mitigatingdistortions of income that result fromaccounting method changes and provid-ing appropriate incentives for voluntarycompliance..06 Method change using a cut-off

method. The Commissioner may deter-mine that certain changes in method ofaccounting will be made without a§ 481(a) adjustment, using a ‘‘cut-offmethod.’’ Under a cut-off method, onlythe items arising on or after the begin-ning of the year of change (or otheroperative date) are accounted for underthe new method of accounting. Anyitems arising before the year of change(or other operative date) continue to beaccounted for under the taxpayer’sformer method of accounting. See, forexample, § 263A (which generally ap-plies to costs incurred after December31, 1986, for noninventory property),§ 461(h) (which generally applies toamounts incurred on or after July 18,1984), and § 1.446–3 (which applies tonotional principal contracts entered intoon or after December 13, 1993). Be-cause no items are duplicated or omittedfrom income when a cut-off method isused to effect a change in accountingmethod, no § 481(a) adjustment is nec-essary.

.07 Consistency and clear reflectionof income. Methods of accountingshould clearly reflect income on a con-tinuing basis, and the Service exercisesits discretion under §§ 446(e) and481(c) in a manner that generally mini-mizes distortions of income across tax-able years and on an annual basis.Accordingly, if a taxpayer requests tochange from a method of accountingthat clearly reflects income, the Service,in determining whether to consent to thetaxpayer’s request, will weigh the needfor consistency against the taxpayer’sreason for desiring to change its methodof accounting..08 Separate trades or businesses.(1) Sections 1.446–1(d)(1) and (2)

provide that when a taxpayer has two ormore separate and distinct trades orbusinesses, a different method of ac-counting may be used for each trade orbusiness, provided the method of ac-counting used for each trade or businessclearly reflects the overall income of thetaxpayer as well as that of each particu-lar trade or business. No trade or busi-ness is separate and distinct unless acomplete and separable set of books andrecords is kept for that trade or business.

(2) Section 1.446–1(d)(3) providesthat if, by reason of maintaining differ-ent methods of accounting, there is acreation or shifting of profits or lossesbetween the trades or businesses of thetaxpayer (for example, through inven-tory adjustments, sales, purchases, orexpenses) so that income of the taxpayeris not clearly reflected, the trades orbusinesses of the taxpayer are not sepa-rate and distinct..09 Penalties. Any otherwise appli-

cable penalty for the failure of a tax-payer to change its method of account-ing (for example, the accuracy-relatedpenalty under § 6662 or the fraud pen-alty under § 6663) may be imposed ifthe taxpayer does not timely file arequest to change a method of account-ing. See § 446(f). Additionally, the tax-payer’s return preparer may also besubject to the preparer penalty under§ 6694. However, penalties will not beimposed when a taxpayer changes froman impermissible method of accountingto a permissible one by complying withall the appropriate provisions of thisrevenue procedure..10 Change made as part of an ex-

amination. Section 446(b) and § 1.446–1(b)(1) provide that if a taxpayer doesnot regularly employ a method of ac-counting that clearly reflects its income,the computation of taxable income must

12

be made in a manner that, in the opinionof the Commissioner, does clearly re-flect income. If a taxpayer under exami-nation is not eligible to change anaccounting method under this revenueprocedure, the change may be made bythe district director. A change resultingin a positive § 481(a) adjustment willordinarily be made in the earliest tax-able year under examination with aone-year § 481(a) adjustment period.

SECTION 3. DEFINITIONS

.01 Taxpayer.(1) In general. The term ‘‘tax-

payer’’ has the same meaning as theterm ‘‘person’’ defined in § 7701(a)(1)(rather than the meaning of the term‘‘taxpayer’’ defined in § 7701(a)(14)).

(2) Consolidated group. For pur-poses of (a) sections 3.07(1), 3.08(1),4.02(2) and 6.01 (taxpayer under exami-nation), (b) sections 3.08(2), 4.02(3) and6.02 (taxpayer before an appeals office),or (c) sections 3.08(3), 4.02(4) and 6.03(taxpayer before a federal court), theterm ‘‘taxpayer’’ includes a consolidatedgroup..02 Filed. Any form (including a

Form 3115), statement, or other docu-ment required to be filed under thisrevenue procedure is filed on the date itis mailed to the proper address (or anaddress similar enough to complete de-livery). If the form, statement, or otherdocument is not mailed (or the date it ismailed cannot be reasonably deter-mined), it is filed on the date it isdelivered to the Service..03 Mailed. The date of mailing will

be determined under the rules of§ 7502. For example, the date of mail-ing is the date of the U.S. postmark orthe applicable date recorded or markedby a designated delivery service.SeeNotice 97–26, 1997–17 I.R.B. 6..04 Timely performance of acts. The

rules of § 7503 apply when the last dayfor the taxpayer’s timely performance ofany act (for example, filing a Form3115, submitting additional information,returning a Consent Agreement (see sec-tion 8.11 of this revenue procedure), orholding a conference) falls on a Satur-day, Sunday, or legal holiday. The per-formance of any act is timely if the actis performed on the next succeeding daythat is not a Saturday, Sunday, or a legalholiday..05 Year of change. The year of

change is the taxable year for which achange in method of accounting is ef-fective, that is, the first taxable year the

new method is to be used, even if noaffected items are taken into account forthat year. The year of change is also thefirst taxable year for complying with allthe terms and conditions set forth in theConsent Agreement..06 Section 481(a) adjustment period.

The § 481(a) adjustment period is theapplicable number of taxable years fortaking into account the § 481(a) adjust-ment required as a result of the changein method of accounting. The year ofchange is the first taxable year in theadjustment period and the § 481(a) ad-justment is taken into account ratablyover the number of taxable years in theadjustment period. The applicable ad-justment periods are set forth in sections5.02(3) and 6.04 of this revenue proce-dure..07 Under examination.(1) In general.(a) Except as provided in section

3.07(2) of this revenue procedure, anexamination of a taxpayer with respectto a federal income tax return begins onthe date the taxpayer is contacted in anymanner by a representative of the Ser-vice for the purpose of scheduling anytype of examination of the return. Anexamination ends:

(i) in a case in which theService accepts the return as filed, onthe date of the ‘‘no change’’ letter sentto the taxpayer;

(ii) in a fully agreed case, onthe earliest of the date the taxpayerexecutes a waiver of restrictions onassessment or acceptance of overassess-ment (for example, Form 870, 4549, or4605), the date the taxpayer makes apayment of tax that equals or exceedsthe proposed deficiency, or the date ofthe ‘‘closing’’ letter (for example, Letter891 or 987) sent to the taxpayer; or

(iii) in an unagreed or a par-tially agreed case, on the earliest of thedate the taxpayer (or its representative)is notified by Appeals that the case hasbeen referred to Appeals from Examina-tion, the date the taxpayer files a peti-tion in the Tax Court, the date on whichthe period for filing a petition with theTax Court expires, or the date of thenotice of claim disallowance.

(b) An examination does not endas a result of the early referral of anissue to Appeals under the provisions ofRev. Proc. 96–9, 1996–1 C.B. 575.

(c) An examination resumes onthe date the taxpayer (or its representa-tive) is notified by Appeals (or other-wise) that the case has been referred toExamination for reconsideration.

(2) Partnerships and S corpora-tions subject to TEFRA. For an entity(including a limited liability company),treated as a partnership or an S corpora-tion for federal income tax purposes,that is subject to the TEFRA unifiedaudit and litigation provisions for part-nerships and S corporations, an exami-nation begins on the date of the noticeof the beginning of an administrativeproceeding sent to the Tax MattersPartner/Tax Matters Person (TMP). Anexamination ends:

(a) in a case in which the Ser-vice accepts the partnership or S corpo-ration return as filed, on the date of the‘‘no adjustments’’ letter or the ‘‘nochange’’ notice of final administrativeadjustment sent to the TMP;

(b) in a fully agreed case, whenall the partners, members, or sharehold-ers execute a Form 870–P, 870–L, or870–S; or

(c) in an unagreed or a partiallyagreed case, on the earliest of the datethe TMP (or its representative) is noti-fied by Appeals that the case has beenreferred to Appeals from Examination,the date the TMP (or a partner, member,or shareholder) requests judicial review,or the date on which the period forrequesting judicial review expires.But see section 4.02(6) of this rev-

enue procedure for certain rules thatpreclude an entity from requesting achange in accounting method. Also notethat S corporations are not subject to theTEFRA unified audit and litigation pro-visions for taxable years beginning afterDecember 31, 1996. See Small BusinessJob Protection Act of 1996, Pub. L. No.104–188, § 1317(a), 110 Stat. 1755,1787 (1996)..08 Issue under consideration.(1) Under examination. A taxpay-

er’s method of accounting for an item isan issue under consideration for thetaxable years under examination if thetaxpayer receives written notification(for example, by examination plan, in-formation document request (IDR), ornotification of proposed adjustments orincome tax examination changes) fromthe examining agent(s) specifically cit-ing the treatment of the item as an issueunder consideration. For example, a tax-payer’s method of pooling under thedollar-value, last-in first-out LIFO in-ventory method is an issue under con-sideration as a result of an examinationplan that identifies LIFO pooling as amatter to be examined, but it is not anissue under consideration as a result ofan examination plan that merely identi-

13

fies LIFO inventories as a matter to beexamined. Similarly, a taxpayer’smethod of determining inventoriablecosts under § 263A is an issue underconsideration as a result of an IDR thatrequests documentation supporting thecosts included in inventoriable costs, butit is not an issue under consideration asa result of an IDR that requests docu-mentation supporting the amount of costof goods sold reported on the return.The question of whether a method ofaccounting is an issue under consider-ation may be referred to the nationaloffice as a request for technical adviceunder the provisions of Rev. Proc. 97–2,1997–1 I.R.B. 64 (or any successor).

(2) Before an appeals office. Ataxpayer’s method of accounting for anitem is an issue under consideration forthe taxable years before an appealsoffice if the treatment of the item isincluded as an item of adjustment in theexamination report referred to Appealsor is specifically identified in writing tothe taxpayer by Appeals.

(3) Before a federal court. A tax-payer’s method of accounting for anitem is an issue under consideration forthe taxable years before a federal courtif the treatment of the item is includedin the statutory notice of deficiency, thenotice of claim disallowance, the noticeof final administrative adjustment, thepleadings (for example, the petition,complaint, or answer) or amendmentsthereto, or is specifically identified inwriting to the taxpayer by the counselfor the government..09 Change within the LIFO inven-

tory method. A change within the LIFOinventory method is a change from oneLIFO inventory method or sub-methodto another LIFO inventory method orsub-method. A change within the LIFOinventory method does not include achange in method of accounting thatcould be made by a taxpayer that doesnot use the LIFO inventory method (forexample, a method governed by § 471or § 263A).

SECTION 4. SCOPE

.01 Applicability. Except as specifi-cally provided in other published guid-ance or in section 4.02 of this revenueprocedure, this revenue procedure ap-plies to all taxpayers requesting theCommissioner’s consent to change amethod of accounting for federal incometax purposes.

.02 Inapplicability. This revenue pro-cedure does not apply in the followingsituations:

(1) Automatic change. If thechange in method of accounting is re-quired to be made pursuant to a pub-lished automatic change procedure. Tax-payers are encouraged to review theautomatic change procedures listed insection 9.03 of Rev. Proc. 97–1, 1997–1I.R.B. 11, 37 (or any successor), beforesubmitting a Form 3115 pursuant to thisrevenue procedure;

(2) Under examination. If the tax-payer is under examination, except asprovided in sections 6.01(2) (90-daywindow), 6.01(3) (120-day window),and 6.01(4) (district director consent) ofthis revenue procedure;

(3) Before an appeals office. If thetaxpayer is before an appeals office withrespect to any income tax issue and theaccounting method to be changed is anissue under consideration by the appealsoffice;

(4) Before a federal court. If thetaxpayer is before a federal court withrespect to any income tax issue and theaccounting method to be changed is anissue under consideration by the federalcourt; or

(5) Consolidated group member. Acorporation that is (or was formerly) amember of a consolidated group is un-der examination, before an appeals of-fice, or before a federal court (forpurposes of sections 4.02(2), (3), and (4)of this revenue procedure) if the con-solidated group is under examination,before an appeals office, or before afederal court for a taxable year(s) thatthe corporation was a member of thegroup.

(6) Partnerships and S corpora-tions. For an entity (including a limitedliability company) treated as a partner-ship or an S corporation for federalincome tax purposes, if the entity’saccounting method to be changed is anissue under consideration in an examina-tion of a partner, member, or sharehold-er’s federal income tax return or anissue under consideration by an appealsoffice or by a federal court with respectto a partner, member, or shareholder’sfederal income tax return.

SECTION 5. PROCEDURES FORTAXPAYERS NOT UNDEREXAMINATION

.01 Submission of application.(1) In general.

(a) A Form 3115 must be filedduring the year of change, as providedin § 1.446–1T(e)(3)(i). If the taxableyear is a short period, the Form 3115must be filed no later than the last dayof the short taxable year.

(b) The Service recommendsthat the Form 3115 be filed as early aspossible during the year of change toprovide the Service adequate time torespond to the Form 3115 prior to theoriginal due date of the taxpayer’s re-turn for the year of change.

(2) Limited relief for late applica-tion. A taxpayer that fails to file a Form3115 during the year of change asprovided in section 5.01(1) of this rev-enue procedure will not be granted anextension of time to file under§ 301.9100 of the Procedure and Ad-ministration Regulations, except in un-usual and compelling circumstances.See§ 301.9100–3T(c)(2)(i)..02 Terms and conditions of change.(1) In general. Except as specifi-

cally provided in other published guid-ance, an accounting method change filedunder this revenue procedure, if granted,must be made pursuant to the terms andconditions provided in this revenue pro-cedure (including sections 8.02 and13.02 of this revenue procedure).

(2) Year of change. The year ofchange is the taxable year with respectto which the Form 3115 is timely filedunder section 5.01 of this revenue pro-cedure. However, Rev. Proc. 93–48 (re-garding notional principal contracts) isan example of other published guidancethat provides for a different year ofchange.

(3) Section 481(a) adjustment pe-riod.

(a) In general. Except as pro-vided in sections 5.02(3)(b) and 7.03 ofthis revenue procedure, the § 481(a)adjustment period for positive and nega-tive § 481(a) adjustments is four taxableyears.

(b) Changes within the LIFOmethod. Any change within the LIFOinventory method must be made using acut-off method. However, Announce-ment 91–173, 1991–47 I.R.B. 29 (re-garding LIFO taxpayers changing theirmethod of accounting for certain bulkbargain purchases of inventory to com-ply with Hamilton Industries, Inc. v.Commissioner, 97 T.C. 120 (1991)) isan example of other published guidancethat requires a § 481(a) adjustment.

(4) NOL carryback limitation fortaxpayer subject to criminal investiga-tion. Generally, no portion of any net

14

operating loss that is attributable to anegative § 481(a) adjustment may becarried back to a taxable year prior tothe year of change that is the subject ofany pending or future criminal investi-gation or proceeding concerning (a) di-rectly or indirectly, any issue relating tothe taxpayer’s federal tax liability, or (b)the possibility of false or fraudulentstatements made by the taxpayer withrespect to any issue relating to itsfederal tax liability.

(5) Change treated as initiated bythe taxpayer. For purposes of § 481, anaccounting method change filed underthis revenue procedure, if granted, is achange in method of accounting initiatedby the taxpayer.

SECTION 6. PROCEDURES FORTAXPAYERS UNDEREXAMINATION, BEFORE ANAPPEALS OFFICE, OR BEFORE AFEDERAL COURT

.01 Taxpayer under examination.(1) In general. A taxpayer that is

under examination may not file a Form3115 to request a change in accountingmethod under this revenue procedure,except as provided in sections 6.01(2)(90-day window), 6.01(3) (120-day win-dow), and 6.01(4) (district director con-sent) of this revenue procedure. A tax-payer that files a Form 3115 beyond thetime periods provided in the 90-day and120-day windows will not be granted anextension of time to file under§ 301.9100, except in unusual and com-pelling circumstances.

(2) 90-day window period.(a) A taxpayer may file a Form

3115 to request a change in accountingmethod during the first 90 days of anytaxable year (‘‘90-day window’’) if thetaxpayer has been under examination forat least 12 consecutive months as of thefirst day of the taxable year. This 90-daywindow is not available if the method ofaccounting the taxpayer is requesting tochange is an issue under considerationat the time the Form 3115 is filed or isan issue the examining agent(s) hasplaced in suspense at the time the Form3115 is filed.

(b) A taxpayer requesting achange under this 90-day window mustprovide a copy of the Form 3115 to theexamining agent(s) at the same time itfiles the original Form 3115 with thenational office. The Form 3115 mustcontain the name(s) and telephone num-ber(s) of the examining agent(s). Thetaxpayer must attach to the Form 3115 a

separate statement signed by the tax-payer certifying that, to the best of thetaxpayer’s knowledge, the same methodof accounting is not an issue underconsideration or an issue placed in sus-pense by the examining agent(s).

(3) 120-day window period.(a) A taxpayer may file a Form

3115 to request a change in accountingmethod during the 120-day period fol-lowing the date an examination ends(‘‘120-day window’’) regardless ofwhether a subsequent examination hascommenced. This 120-day window isnot available if the method of account-ing the taxpayer is requesting to changeis an issue under consideration at thetime the Form 3115 is filed or is anissue the examining agent(s) has placedin suspense at the time the Form 3115 isfiled.

(b) A taxpayer requesting achange under this 120-day window mustprovide a copy of the Form 3115 to theexamining agent(s) for any examinationthat is in process at the same time itfiles the original Form 3115 with thenational office. The Form 3115 mustcontain the name(s) and telephone num-ber(s) of the examining agent(s). Thetaxpayer must attach to the Form 3115 aseparate statement signed by the tax-payer certifying that, to the best of thetaxpayer’s knowledge, the same methodof accounting is not an issue underconsideration or an issue placed in sus-pense by the examining agent(s).

(4) Consent of district director.(a) A taxpayer under examina-

tion may request to change an account-ing method under this revenue proce-dure if the district director consents tothe filing of the request. The districtdirector will consent to the filing of theForm 3115 unless, in the opinion of thedistrict director, the method of account-ing to be changed would ordinarily beincluded as an item of adjustment in theyear(s) for which the taxpayer is underexamination. For example, the districtdirector will consent to the filing of aForm 3115 to change from a clearlypermissible method of accounting. Thedistrict director will also consent to thefiling of a Form 3115 to change from animpermissible method of accountingwhere the impermissible method wasadopted subsequent to the years underexamination. The question of whetherthe method of accounting from whichthe taxpayer is changing is permissibleor was adopted subsequent to the yearsunder examination may be referred tothe national office as a request for

technical advice under the provisions ofRev. Proc. 97–2 (or any successor).

(b) A taxpayer requesting achange with the consent of the districtdirector must attach to the Form 3115 astatement from the district director con-senting to the taxpayer filing the Form3115. The taxpayer must provide a copyof the Form 3115 to the district directorat the same time it files the original ofthat form with the national office. TheForm 3115 must contain the name(s)and telephone number(s) of the examin-ing agent(s)..02 Taxpayer before an appeals of-

fice. A taxpayer that is before an appealsoffice with respect to any income taxissue may request a change in account-ing method if the accounting method tobe changed is not an issue under consid-eration by the appeals office. The tax-payer must attach to the Form 3115 aseparate statement signed by the tax-payer certifying that, to the best of thetaxpayer’s knowledge, the same methodof accounting is not an issue underconsideration by the appeals office. Thetaxpayer must provide a copy of theForm 3115 to the appeals officer at thesame time it files the original Form3115 with the national office. The Form3115 must contain the name and tele-phone number of the appeals officer..03 Taxpayer before a federal court.

A taxpayer that is before a federal courtwith respect to any income tax issuemay request a change in accountingmethod if the accounting method to bechanged is not an issue under consider-ation by the federal court. The taxpayermust attach to the Form 3115 a separatestatement signed by the taxpayer certify-ing that, to the best of the taxpayer’sknowledge, the same method of ac-counting is not an issue under consider-ation by the federal court. The taxpayermust provide a copy of the Form 3115to the counsel for the government at thesame time it files the original Form3115 with the national office. The Form3115 must contain the name and tele-phone number of the counsel for thegovernment..04 Terms and conditions of change.

For a taxpayer under examination filinga Form 3115 during the 90-day or120-day window, or with the consent ofthe district director, or for a taxpayerbefore an appeals office or a federalcourt, the terms and conditions are thesame as those provided in section 5.02of this revenue procedure for taxpayersnot under examination.

15

SECTION 7. SECTION 481(a)ADJUSTMENT PERIOD

.01 In general. The § 481(a) adjust-ment periods are provided in sections5.02(3) and 6.04 of this revenue proce-dure..02 Short period as a separate tax-

able year. If the year of change, or anytaxable year during the § 481(a) adjust-ment period, is a short taxable year, the§ 481(a) adjustment must be included inincome as if that short taxable year werea full 12-month taxable year.SeeRev.Rul. 78–165, 1978–1 C.B. 276.Example 1.A calendar year taxpayer receivedpermission to change an accounting method begin-ning with the 1997 calendar year. The § 481(a)adjustment is $30,000 and the adjustment period isfour taxable years. The taxpayer subsequentlyreceives permission to change its annual account-ing period to September 30, effective for thetaxable year ending September 30, 1998. Thetaxpayer must include $7,500 of the § 481(a)adjustment in gross income for the short periodfrom January 1, 1998, through September 30,1998.Example 2.CorporationX, a calendar year tax-payer, received permission to change an account-ing method beginning with the 1997 calendar year.The § 481(a) adjustment is $30,000 and theadjustment period is four taxable years. On July 1,1999, CorporationZ acquires CorporationX in atransaction to which § 381(a) applies. CorporationZ is a calendar year taxpayer that uses the samemethod of accounting to which CorporationXchanged in 1997. CorporationX must include$7,500 of the § 481(a) adjustment in gross incomefor its short period income tax return for January1, 1999, through June 30, 1999. In addition,Corporation Z must include $7,500 of the§ 481(a) adjustment in gross income in its incometax return for calendar year 1999.

.03 Shortened or accelerated adjust-ment periods. The four-year § 481(a)adjustment period provided in sections5.02(3) and 6.04 of this revenue proce-dure will be shortened or accelerated inthe following situations.

(1) De minimis rule. A taxpayermay elect to use a one-year adjustmentperiod in lieu of the § 481(a) adjust-ment period otherwise provided by thisrevenue procedure if the entire § 481(a)adjustment is less than $25,000 (eitherpositive or negative). The taxpayer mustcomplete the appropriate line on theForm 3115 to elect thisde minimisrule.

(2) Cooperatives. A cooperativewithin the meaning of § 1381(a) gener-ally must take the entire amount of a§ 481(a) adjustment into account incomputing taxable income for the yearof change.SeeRev. Rul. 79–45, 1979–1C.B. 284.

(3) Ceasing to engage in the tradeor business.

(a) In general. A taxpayer thatceases to engage in a trade or business

or terminates its existence must take theremaining balance of any § 481(a) ad-justment relating to the trade or businessinto account in computing taxable in-come in the taxable year of the cessa-tion or termination. Except as providedin sections 7.03(3)(d) and (e) of thisrevenue procedure, a taxpayer is treatedas ceasing to engage in a trade orbusiness if the operations of the trade orbusiness cease or substantially all theassets of the trade or business aretransferred to another taxpayer. For thispurpose, ‘‘substantially all’’ has thesame meaning as in section 3.01 of Rev.Proc. 77–37, 1977–2 C.B. 568.

(b) Examples of transactionsthat are treated as the cessation of atrade or business. The following is anonexclusive list of transactions that aretreated as the cessation of a trade orbusiness for purposes of accelerating the§ 481(a) adjustment under this section7.03(3):

(i) the trade or business towhich the § 481(a) adjustment relates isincorporated;

(ii) the trade or business towhich the § 481(a) adjustment relates ispurchased by another taxpayer in atransaction to which § 1060 applies;

(iii) the trade or business towhich the § 481(a) adjustment relates isterminated or transferred pursuant to ataxable liquidation;

(iv) a division of a corpora-tion ceases to operate the trade orbusiness to which the § 481(a) adjust-ment relates; or

(v) the assets of a trade orbusiness to which the § 481(a) adjust-ment relates are contributed to a partner-ship.

(c) Conversion to or from S cor-poration status.

(i) In general. Except as pro-vided in sections 7.03(3)(c)(ii) and (iii)of this revenue procedure, no accelera-tion of a § 481(a) adjustment is re-quired under this section 7.03(3)(c)when a C corporation elects to betreated as an S corporation or an Scorporation terminates its S election andis then treated as a C corporation.

(ii) S election effective foryear of LIFO discontinuance. If a Ccorporation elects to be treated as an Scorporation for the taxable year inwhich it discontinues use of the LIFOinventory method, § 1363(d) requires anincrease in the taxpayer’s gross incomefor the LIFO recapture amount (as de-fined in § 1363(d)(3)) for the taxableyear preceding the year of change (the

taxpayer’s last taxable year as a Ccorporation), and a corresponding ad-justment to the basis of the taxpayer’sinventory as of the end of the taxableyear preceding the year of change. Anyincrease in income tax as a result of theinclusion of the LIFO recapture amountis payable in four equal installments,beginning with the taxpayer’s last tax-able year as a C corporation as providedin § 1363(d)(2). Any corresponding ba-sis adjustment is taken into account incomputing the § 481(a) adjustment (ifany) that results upon the discontinuanceof the LIFO method by the corporation.

(iii) S election effective for ayear after LIFO discontinuance. If a Ccorporation elects to be treated as an Scorporation for a taxable year after thetaxable year in which it discontinueduse of the LIFO inventory method, theremaining balance of any positive§ 481(a) adjustment must be included inits gross income in its last taxable yearas a C corporation. If this inclusionresults in an increase in tax for its lasttaxable year as a C corporation, thisincrease in tax is payable in four equalinstallments, beginning with the taxpay-er’s last taxable year as a C corporationas provided in § 1363(d)(2), unless thetaxpayer is required to take the remain-ing balance of the § 481(a) adjustmentinto account in the last taxable year as aC corporation under another accelerationprovision in section 7.03(3) of this rev-enue procedure.

(d) Certain transfers to which§ 381(a) applies. No acceleration of the§ 481(a) adjustment is required underthis section 7.03(3) when a taxpayertransfers substantially all the assets ofthe trade or business that gave rise tothe § 481(a) adjustment to another tax-payer in a transfer to which § 381(a)applies and the accounting method (thechange to which gave rise to the§ 481(a) adjustment) is a tax attributethat is carried over and used by theacquiring corporation immediately afterthe transfer pursuant to § 381(c). Theacquiring corporation is subject to anyterms and conditions imposed on thetransferor (or any predecessor of thetransferor) as a result of its change inmethod of accounting.

(e) Certain transfers pursuant to§ 351 within a consolidated group.

(i) In general. No accelerationof the § 481(a) adjustment is requiredunder this section 7.03(3) when onemember of an affiliated group filing aconsolidated return transfers substan-tially all the assets of the trade or

16

business that gave rise to the § 481(a)adjustment to another member of thesame consolidated group in an exchangequalifying under § 351 and the trans-feree member adopts and uses the samemethod of accounting (the change towhich gave rise to the § 481(a) adjust-ment) used by the transferor member.The transferor member must continue totake the § 481(a) adjustment into ac-count pursuant to the terms and condi-tions set forth in its Consent Agreement(as provided in section 8.11 of thisrevenue procedure). The transferormember must take into account activi-ties of the transferee member (or anysuccessor) in determining whether accel-eration of the § 481(a) adjustment isrequired. For example, except as pro-vided in the following sentence, thetransferor member must take any re-maining § 481(a) adjustment into ac-count in computing taxable income inthe taxable year in which the transfereemember ceases to engage in the trade orbusiness to which the § 481(a) adjust-ment relates. The § 481(a) adjustment isnot accelerated when the transfereemember engages in a transaction de-scribed in section 7.03(3)(d) or section7.03(3)(e)(i) of this revenue procedure.

(ii) Exception. The provisionsof section 7.03(3)(e)(i) of this revenueprocedure cease to apply and thetransferor member must take any re-maining balance of the § 481(a) adjust-ment into account in the taxable yearimmediately preceding any of the fol-lowing: (A) the taxable year thetransferor member ceases to be a mem-ber of the group; (B) the taxable yearany transferee member owning substan-tially all the assets of the trade orbusiness which gave rise to the § 481(a)adjustment ceases to be a member of thegroup; or (C) a separate return year ofthe common parent of the group. Inapplying the preceding sentence, therules of paragraphs (j)(2), (j)(5), and(j)(6) of § 1.1502–13 apply, but only ifthe method of accounting to which thetransferor member changed and towhich the § 481(a) adjustment relates isadopted, carried over, or used by anytransferee member acquiring the assetsof the trade or business that gave rise tothe § 481(a) adjustment immediately af-ter acquisition of such assets. For ex-ample, the transferor member is notrequired to accelerate the § 481(a) ad-justment if a transferee member ceasesto be a member of a consolidated groupby reason of an acquisition to which§ 381(a) applies and the acquiring cor-

poration (A) is a member of the samegroup as the transferor member, and (B)continues, under § 381(c)(4) and theregulations thereunder, to use the samemethod of accounting as that used bythe transferor member with respect tothe assets of the trade or business towhich the § 481(a) adjustment relates.

SECTION 8. GENERALAPPLICATION PROCEDURES

.01 Application—Service discretion.The Service reserves the right to declineto process any Form 3115 filed underthis revenue procedure in situations inwhich it would not be in the bestinterest of sound tax administration topermit the requested change. In thisregard, the Service will considerwhether the change in method of ac-counting would clearly and directly frus-trate compliance efforts of the Servicein administering the income tax laws..02 Terms and conditions—Service

discretion. Except as specifically pro-vided in other published guidance, achange in method of accounting filedunder this revenue procedure, if granted,must be made pursuant to the terms andconditions provided in this revenue pro-cedure. Notwithstanding this generalrule, the Service may determine that,based on the unique facts of a particularcase and in the interest of sound taxadministration, terms and conditions thatdiffer from those provided in this rev-enue procedure are more appropriate fora change made under this revenue pro-cedure..03 Compliance with provisions. If a

taxpayer changes its method of account-ing without authorization or withoutcomplying with all the provisions of thisrevenue procedure, the taxpayer has ini-tiated a change in method of accountingwithout obtaining the consent of theCommissioner required by § 446(e).Upon examination, a taxpayer that hasinitiated an unauthorized change inmethod of accounting may be requiredto effect the change in an earlier or latertaxable year and may be denied thebenefit of spreading the § 481(a) adjust-ment over the number of taxable yearsotherwise prescribed by this revenueprocedure..04 Facts and circumstances consid-

ered in processing applications. In pro-cessing an application for a change inmethod of accounting, the Service willconsider all the facts and circumstances,including:

(1) if the method of accountingrequested is consistent with the Code,regulations, revenue rulings, revenueprocedures, and decisions of the UnitedStates Supreme Court;

(2) if the use of the method ofaccounting requested will clearly reflectincome;

(3) if the present method of ac-counting clearly reflects income;

(4) the need for consistency in theaccounting area (see section 2.07 of thisrevenue procedure);

(5) the taxpayer’s reason(s) for thechange;

(6) the tax effect of the § 481(a)adjustment;

(7) if the taxpayer’s books andrecords and financial statements willconform to the proposed method ofaccounting; and

(8) if the taxpayer previously re-quested to change its method of ac-counting for the same item but did notmake the change..05 Specific rules in connection with

prior applications.(1) Method change made.(a) In general. If the taxpayer

changed its method of accounting forthe same item within the four taxableyears preceding the year of change(under either an automatic change pro-cedure or a procedure requiring advanceconsent), a copy of the application forthe previous change, the signed ConsentAgreement (see section 8.11 of thisrevenue procedure) if applicable, andany other correspondence from the Ser-vice, must be attached to the Form 3115filed for the subsequent taxable year. Anexplanation must be furnished statingwhy the taxpayer is again requesting tochange its method of accounting for thesame item. The Service will consider theexplanation in determining whether thesubsequent request for change in methodof accounting will be granted.

(b) LIFO inventory methodchange. If a taxpayer previously re-ceived permission from the Commis-sioner to change from the LIFO inven-tory method, the Commissioner will notconsent to the taxpayer’s readoption ofthe LIFO inventory method for fivetaxable years (beginning with the tax-able year the taxpayer changed from theLIFO inventory method), in the absenceof a showing of unusual and compellingcircumstances.

(2) Method change not made. If aprior Form 3115 (filed under either anautomatic change procedure or a proce-dure requiring advance consent) was

17

withdrawn, not perfected, or denied, orif a Consent Agreement (see section8.11 of this revenue procedure) was sentto the taxpayer but was not signed andreturned to the Service, or if the changewas not made, and the taxpayer filesanother application to change the sameitem for a year of change within fourtaxable years of the prior application, acopy of the earlier application (that is,the first Form 3115), together with anycorrespondence from the Service, mustbe attached to the Form 3115 filed forthe subsequent taxable year. An explana-tion must be furnished stating why theearlier application was withdrawn or notperfected, or why the change was notmade. The Service will consider theexplanation in determining whether thesubsequent request for change in methodof accounting will be granted..06 Where to file. A taxpayer, other

than an exempt organization, applyingfor a change in accounting method pur-suant to this revenue procedure mustcomplete and file a current Form 3115,together with the appropriate user fee,with the Commissioner of Internal Rev-enue, Attention: CC:DOM:CORP:T, P.O.Box 7604, Benjamin Franklin Station,Washington, DC 20044. An exempt or-ganization must complete and file acurrent Form 3115, together with theappropriate user fee, with the AssistantCommissioner (Employee Plans and Ex-empt Organizations), Attention: E:EO,P.O. Box 120, Benjamin Franklin Sta-tion, Washington, DC 20044..07 User fee. Taxpayers are required

to pay user fees for requests for changesin accounting method made under thisrevenue procedure. Rev. Proc. 97–1 (orany successor) contains the schedule ofuser fees and provides guidance foradministering the user fee requirements..08 Signature requirements. The Form

3115 must be signed by, or on behalf of,the taxpayer requesting the change byan individual with authority to bind thetaxpayer in such matters. For example,an officer must sign on behalf of acorporation, a general partner on behalfof a state law partnership, a member-manager on behalf of a limited liabilitycompany, a trustee on behalf of a trust,or an individual taxpayer on behalf of asole proprietorship. If the taxpayer is amember of a consolidated group, a Form3115 submitted on behalf of the tax-payer must be signed by a duly autho-rized officer of the common parent. Seethe signature requirements set forth inthe General Instructions attached to acurrent Form 3115 regarding those who

are to sign. If an agent is authorized torepresent the taxpayer before the Ser-vice, receive the original or a copy ofthe correspondence concerning the re-quest, or perform any other act(s) re-garding the Form 3115 filed on behalfof the taxpayer, a power of attorneyreflecting such authorization(s) must beattached to the Form 3115. A taxpayer’srepresentative without a power of attor-ney to represent the taxpayer as indi-cated in this section will not be givenany information regarding the Form3115..09 Incomplete Form 3115—21 day

rule. If the Service receives a Form3115 that is not properly completed inaccordance with the instructions on theForm 3115 and the provisions of thisrevenue procedure, or if supplementalinformation is needed, the Service willnotify the taxpayer. The notification willspecify the information that needs to beprovided, and the taxpayer will be per-mitted 21 days from the date of thenotification to furnish the necessary in-formation. The Service reserves the rightto impose shorter reply periods if subse-quent requests for additional informationare made. If the required information isnot submitted to the Service within thereply period, the Form 3115 will not beprocessed. An additional period, not toexceed 15 days, to furnish informationmay be granted to a taxpayer. Therequest for an extension of time must bemade in writing and submitted withinthe 21-day period. If the extension re-quest is denied, there is no right ofappeal..10 Conference in the national office.

The taxpayer must complete the appro-priate line on the Form 3115 to requesta conference of right if an adverseresponse is contemplated by the Service.If the taxpayer does not complete theappropriate line on the Form 3115 orrequest a conference in a later writtencommunication, the Service will pre-sume that the taxpayer does not desire aconference. If requested, a conferencewill be arranged in the national officeprior to the Service’s formal reply to thetaxpayer’s Form 3115. For taxpayersother than exempt organizations, seesection 11 of Rev. Proc. 97–1 (or anysuccessor). For exempt organizations,see section 12 of Rev. Proc. 97–4,1997–1 I.R.B. 96 (or any successor)..11 Consent Agreement.(1) In general. Unless otherwise

specifically provided, the Commission-er’s permission to change a taxpayer’smethod of accounting for a specific

taxable year will be set forth in a rulingletter (original and one copy) from thenational office that identifies the item oritems being changed, the § 481(a) ad-justment (if any), and the terms andconditions under which the change is tobe effected for the taxable year specifiedin the ruling letter. See §§ 1.446–1(e)(3)and 1.481–4. If the taxpayer agrees tothe terms and conditions contained inthe ruling letter, the taxpayer must signand date the agreement copy of theruling letter in the appropriate space.The signed copy of the ruling letter willconstitute an agreement (Consent Agree-ment) within the meaning of § 481(c)and as required by § 1.481–4(b). TheConsent Agreement must be returned tothe address provided in the ConsentAgreement within 45 days of the date ofits issuance. In addition, a copy of theConsent Agreement must be attached tothe taxpayer’s income tax return for theyear of change. If a taxpayer signs andreturns the Consent Agreement, the tax-payer must implement the change inaccounting method in accordance withthe terms and conditions provided in theConsent Agreement and this revenueprocedure.See§ 1.481–4(b).

(2) Signature requirements. TheConsent Agreement must be signed by,or on behalf of, the taxpayer making therequest. The individual signing the Con-sent Agreement must have the authorityto bind the taxpayer in such matters (ingeneral, it may not be signed by thetaxpayer’s representative).

(3) 45-day requirement. If the tax-payer does not return the signed Con-sent Agreement within 45 days of thedate of its issuance, the ruling lettergranting permission for the change willbe null and void.

(4) Change in method of account-ing not made by the taxpayer.

(a) If the taxpayer decides not toeffect the change in accordance with theterms and conditions of the ruling letter,the taxpayer must so indicate by return-ing the ruling letter and the unsignedConsent Agreement to the national of-fice addressed as follows: Commissionerof Internal Revenue, Attention: [Indi-vidual whose name and symbols appearat the top of the Consent Agreement],P.O. Box 14095, Benjamin Franklin Sta-tion, Washington, DC 20044, with anexplanation of why the accountingmethod change will not be effected.

(b) If the taxpayer disagreeswith the terms and conditions of theruling letter, the taxpayer must expressthe disagreement together with an expla-

18

nation of the reason(s) within the 45-dayperiod set forth above. The Service willconsider the reason(s) for disagreementand notify the taxpayer whether theoriginal ruling letter will be modified. Ifthe ruling letter is not modified, thetaxpayer will be notified and given 15days from the date of the notificationeither to accept the original ruling letterby signing and returning the ConsentAgreement, or to reject the change byreturning the ruling letter and the un-signed Consent Agreement to the ad-dress in section 8.11(4)(a) of this rev-enue procedure..12 Two or more trades or busi-

nesses.(1) In general. Sections 1.446–

1(d)(1) and (2) permit different methodsof accounting to be used for each tradeor business of a taxpayer. However, inconsidering whether to grant an account-ing method change for one of the tradesor businesses of a taxpayer, the Servicewill consider whether the change willresult in the creation or shifting ofprofits or losses between the trades orbusinesses, and whether the proposedmethod will clearly reflect the taxpay-er’s income as required under § 446and the regulations thereunder.

(2) Information required. A tax-payer requesting a change in method ofaccounting for one of its trades orbusinesses must identify all other tradesor businesses by name and the methodof accounting used by each trade orbusiness for the particular item that isthe subject of the requested change inmethod of accounting.

(3) Separate Forms 3115 required.If a taxpayer operates two or moreseparate and distinct trades or businessesand has kept separable books andrecords (and employed different meth-ods of accounting for the businesses), aForm 3115 and separate user fee isrequired for each separate trade or busi-ness should the taxpayer desire tochange the methods of accounting of theseparate trades or businesses..13 Consolidated groups.(1) In general. Section 1.1502–

17(a) permits separate methods of ac-counting to be used by each member ofa consolidated group, subject to theprovisions of § 446 and the regulationsthereunder. However, in consideringwhether to grant accounting methodchanges to group members, the Servicewill consider the effects of the changeson the income of the group. A commonparent requesting a change in method ofaccounting on behalf of a member of

the consolidated group must submit anyinformation necessary to permit the Ser-vice to evaluate the effect of the re-quested change on the income of theconsolidated group. Except as providedin section 8.13(2) of this revenue proce-dure, a Form 3115 and separate user feemust be submitted for each member ofthe group for which a change in ac-counting method is requested pursuantto this revenue procedure.

(2) Separate Forms 3115 not re-quired. A common parent may requestan identical accounting method changeon a single Form 3115 on behalf ofmore than one member of a consoli-dated group at a reduced user fee. Toqualify, the taxpayers in the consolidatedgroup must be members of the sameaffiliated group under § 1504(a) thatjoin in the filing of a consolidated taxreturn, and they must be requesting tochange from the identical presentmethod of accounting to the identicalproposed method of accounting. All as-pects of the requested accountingmethod change, including the presentand proposed methods, the underlyingfacts, and the authority for the request,must be identical, except for the§ 481(a) adjustment. See section15.07(1) and (3) of Rev. Proc. 97–1 at48–49 (or any successor) for the infor-mation required to be submitted with theForm 3115..14 Applicability of Rev. Proc. 97–1

and Rev Proc. 97–4. Rev. Proc. 97–1and Rev. Proc. 97–4 (or any successors),respectively, are applicable to a Form3115 filed under this revenue procedure,unless specifically excluded or overrid-den by other published guidance (in-cluding the special procedures in thisdocument)..15 Effect on other offices of the

Service. The provisions of this revenueprocedure are not intended to precludean appropriate representative of the Ser-vice (for example, an appeals officialwith delegated settlement authority)from settling a particular taxpayer’s caseinvolving an accounting method issueby agreeing to terms and conditions thatdiffer from those provided in this rev-enue procedure when it is in the bestinterest of the government to do so.

SECTION 9. AUDIT PROTECTIONFOR TAXABLE YEARS PRIOR TOYEAR OF CHANGE

.01 In general. Except as provided insection 9.02 of this revenue procedure,when a taxpayer timely files a Form

3115 pursuant to this revenue procedure,the Service will not require the taxpayerto change its method of accounting forthe same item for a taxable year prior tothe year of change..02 Exceptions.(1) Change not made or made im-

properly. The Service may change ataxpayer’s method of accounting forprior taxable years if (a) the taxpayerwithdraws or does not perfect its re-quest, (b) the national office denies therequest, (c) the taxpayer declines toimplement the change in method ofaccounting pursuant to the terms andconditions of the Consent Agreementand this revenue procedure, (d) thetaxpayer implements the change butdoes not comply with the terms andconditions contained in the ConsentAgreement and this revenue procedure,or (e) the national office modifies orrevokes the ruling retroactively becausethere has been a misstatement or anomission of material facts. See section10.02(2) of this revenue procedure.

(2) Change in sub-method. TheService may change a taxpayer’s meth-od of accounting for prior taxable yearsif the taxpayer is changing a sub-methodof accounting within the method. Forexample, an examining agent may pro-pose to terminate the taxpayer’s use ofthe LIFO inventory method during aprior taxable year even though the tax-payer changes its method of valuingincrements in the current year.

(3) Prior year Service-initiatedchange. The Service may make adjust-ments to the taxpayer’s returns for thesame item for taxable years prior to therequested year of change to reflect aprior year Service-initiated change.

(4) Criminal investigation. TheService may change a taxpayer’smethod of accounting for the same itemfor taxable years prior to the requestedyear of change if there is any pendingor future criminal investigation or pro-ceeding concerning (a) directly or indi-rectly, any issue relating to the taxpay-er’s federal tax liability for any taxableyear prior to the year of change, or (b)the possibility of false or fraudulentstatements made by the taxpayer withrespect to any issue relating to itsfederal tax liability for any taxable yearprior to the year of change.

SECTION 10. EFFECT OF CONSENT

.01 In general. A taxpayer thatchanges to a method of accountingpursuant to this revenue procedure may

19

be required to change or modify thatmethod of accounting for the followingreasons:

(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 rul-

ing, revenue procedure, notice, or otherstatement published in the Internal Rev-enue Bulletin;

(5) the issuance of written noticeto the taxpayer that the change inmethod of accounting was granted inerror or is not in accord with the currentviews of the Service; or

(6) a change in the material factson which the consent was based..02 Retroactive change or modifica-

tion. Except in rare or unusual circum-stances, if a taxpayer that changes itsmethod of accounting under this revenueprocedure is subsequently required un-der this section 10 to change or modifythat method of accounting, the requiredchange or modification will not be ap-plied retroactively provided that:

(1) the taxpayer complied with allthe applicable provisions of the ConsentAgreement and this revenue procedure;

(2) there has been no misstatementor omission of material facts;

(3) there has been no change in thematerial facts on which the consent wasbased;

(4) there has been no change in theapplicable law; and

(5) the taxpayer to whom consentwas granted acted in good faith inrelying on the consent, and applying thechange or modification retroactivelywould be to the taxpayer’s detriment.

SECTION 11. REVIEW BY DISTRICTDIRECTOR

.01 In general. The district directormust apply a ruling obtained under thisrevenue procedure in determining thetaxpayer’s liability unless the districtdirector recommends that the rulingshould be modified or revoked. Thedistrict director will ascertain if:

(1) the representations on whichthe ruling was based reflect an accuratestatement of the material facts;

(2) the amount of the § 481(a)adjustment was properly determined;

(3) the change in method of ac-counting was implemented as proposedin accordance with the terms and condi-tions of the Consent Agreement and thisrevenue procedure;

(4) there has been any change inthe material facts on which the rulingwas based during the period the methodof accounting was used; and

(5) there has been any change inthe applicable law during the period themethod of accounting was used..02 National office consideration. If

the district director recommends that theruling (other than the amount of the§ 481(a) adjustment) should be modi-fied or revoked, the district director willforward the matter to the national officefor consideration before any further ac-tion is taken. Such a referral to thenational office will be treated as arequest for technical advice, and theprovisions of Rev. Proc. 97–2 (or anysuccessor) will be followed.

SECTION 12. INQUIRIES

Inquiries regarding this revenue pro-cedure may be addressed to the Com-missioner of Internal Revenue, Atten-tion: CC:DOM:IT&A, 1111 ConstitutionAvenue, NW, Washington, DC 20224.

SECTION 13. EFFECTIVE DATE

.01 In general. Except as provided insection 13.02(1) of this revenue proce-dure, this revenue procedure is effectivefor Forms 3115 filed on or after May15, 1997..02 Transition rules.(1) Currently pending Forms 3115.

If a taxpayer filed a Form 3115 underRev. Proc. 92–20 for a taxable yearending on or after May 15, 1997, andthe Form 3115 is pending with thenational office on May 15, 1997, thetaxpayer may apply the terms and con-ditions (exclusive of the year of change)in this revenue procedure. However, thenational office will apply the terms andconditions in Rev. Proc. 92–20, unless,prior to the later of June 15, 1997, orthe issuance of the letter ruling grantingor denying consent to the change, thetaxpayer notifies the national office thatit requests to apply the terms and condi-tions (exclusive of the year of change)in this revenue procedure.

(2) New Forms 3115. Except asprovided in section 13.02(3) of thisrevenue procedure, a taxpayer that filesa Form 3115 under this revenue proce-dure on or before December 31, 1997,may apply the terms and conditions(exclusive of the year of change) in Rev.Proc. 92–20. The taxpayer must affirma-tively state in an attachment to the Form3115 (a) that it requests to apply theterms and conditions (exclusive of the

year of change) in Rev. Proc. 92–20,and (b) the applicable § 481(a) adjust-ment period and the authority therefor.

(3) Open window periods underRev. Proc. 92–20. If, on May 15, 1997,a taxpayer is within a window periodprovided in Rev. Proc. 92–20, the tax-payer may file a Form 3115 under thisrevenue procedure during the remainderof that window period and apply theterms and conditions in Rev. Proc.92–20 for the applicable window period.The taxpayer must affirmatively state inan attachment to the Form 3115 (a) thatit agrees to apply the terms and condi-tions of the applicable window period inRev. Proc. 92–20, and (b) the applicable§ 481(a) adjustment period and the au-thority therefor.

SECTION 14. EFFECT ON OTHERDOCUMENTS

.01 Rev. Proc. 92–20. Except as pro-vided in section 14.02 of this revenueprocedure, Rev. Proc. 92–20 is modifiedand, as modified, is superseded..02 Rev. Proc. 93–48 (notional prin-

cipal contracts). The Designated Amethod provisions of Rev. Proc. 92–20continue to apply to changes in methodof accounting for notional principal con-tracts made pursuant to the requirementsof § 1.446–3 and Rev. Proc. 93–48..03 Notice 89–15 (long-term con-

tracts). Q&A 13 of Notice 89–15,1989–1 C.B. 634, 637, regardingchanges in method of accounting for long-term contracts under § 460, is mod-ified and, as modified, is superseded.

SECTION 15. PAPERWORKREDUCTION ACT

The collections of information con-tained in this revenue procedure havebeen reviewed and approved by theOffice of Management and Budget inaccordance with the Paperwork Reduc-tion Act (44 U.S.C. 3507) under controlnumber 1545–1541.An agency may not conduct or spon-

sor, and a person is not required torespond to, a collection of informationunless the collection of information dis-plays a valid OMB control number.The collections of information in this

revenue procedure are in sections 6, 8,and 13. This information is required todetermine whether the taxpayer’s pro-posed method of accounting is permis-sible. This information will be used bythe Service to determine whether toconsent to a change in accountingmethod and the appropriate terms and

20

conditions for the change. The collec-tions of information are required toobtain consent to the accounting methodchange. The likely respondents are thefollowing: individuals, farms, businessor other for-profit organizations, non-profit institutions, and small businessesor organizations.The estimated total annual reporting

burden is 9,633 hours.The estimated annual burden per re-

spondent varies from 1/4 of an hour to 5

hours, depending on individual circum-stances, with an estimated average of31/4 hours. The estimated number ofrespondents is 3,000.The estimated annual frequency of

responses is occasional.Books or records relating to a collec-

tion of information must be retained aslong as their contents may become ma-terial in the administration of any inter-nal revenue law. Generally tax returnsand tax return information are confiden-

tial, as required by 26 U.S.C. 6103.

DRAFTING INFORMATION

The author of this revenue procedureis Robert A. Testoff of the Office ofAssistant Chief Counsel (Income Taxand Accounting). For further informationregarding this revenue procedure, con-tact Mr. Testoff on (202) 622–4990 (nota toll-free call).

21

Part IV. Items of General InterestExtension of Test of EmploymentTax Early Referral Procedures forAppeals

Announcement 97–52

SUMMARY: This document extends thetest of the employment tax early referralprocedures set forth in Announcement96–13, 1996–12 I.R.B. 33, for an addi-tional one-year period beginning onMay 27, 1997, the date this Announce-ment is published in the Internal Rev-enue Bulletin.

FOR FURTHER INFORMATION CON-TACT: Thomas Carter Louthan, Direc-tor, Office of Dispute Resolution andSpecialty Programs, National Office Ap-peals, (202) 401–4098 (not a toll-freenumber).

EXTENSION OF TEST OFEMPLOYMENT TAX EARLYREFERRAL PROCEDURES FORAPPEALS

Summary: This Announcement is part ofthe Internal Revenue Service’s strategydesigned to improve employment taxadministration for all taxpayers, includ-ing those who are small business own-ers. The purpose of early referral foremployment tax issues is to resolvethem more expeditiously through simul-taneous action by the District and Ap-peals. Announcement 96–13 describesthe method by which a taxpayer re-quests early referral of one or moreunagreed employment tax issues fromthe District to Appeals. A taxpayer mayrequest early referral of any developed,unagreed employment tax issue, includ-ing the application of section 530 of theRevenue Act of 1978, that is under thejurisdiction of the District Director aris-ing from an audit.This document extends the test of theprocedure set forth in Announcement96–13 for an additional one-year periodbeginning on May 27, 1997, the datethis Announcement is published in theInternal Revenue Bulletin.Background: Section 530 of the Rev-enue Act of 1978 provides businesseswith relief from federal employment taxobligations if certain requirements aremet. It terminates the business’s, not theworker’s, employment tax liability underInternal Revenue Code Subtitle C (Fed-eral Insurance Contributions Act andFederal Unemployment Tax Act taxes,federal income tax withholding, and

Railroad Retirement Tax Act taxes) andany interest or penalties attributable tothe liability for employment taxes (Rev.Proc. 85–18, 1985–1 C.B. 518).

Section 530(e)(3) of the Revenue Act of1978, as amended by the Small BusinessJob Protection Act of 1996, generallyeffective after December 31, 1996, clari-fies that the first step in any caseinvolving whether the business has theemployment tax obligations of an em-ployer with respect to workers is deter-mining whether the business meets therequirements of section 530. If so, thebusiness will not have an employmenttax liability with respect to the workersat issue. As a result, IRS examiners willnow consider the taxpayer’s eligibilityfor relief under section 530 of theRevenue Act of 1978 before initiatingany examination of the relationship be-tween a business and a worker.

The application of section 530 of theRevenue Act of 1978 is considered anappropriate issue for early referral undersection 2.02 of Announcement 96–13.Taxpayers that disagree with the Dis-trict’s determination regarding the appli-cation of section 530 of the RevenueAct of 1978 have the option of immedi-ately requesting early referral of theissue from the District to Appeals. Ap-peals will try to resolve the section 530issue following the procedures set forthin Announcement 96–13 and RevenueProcedure 96–9, 1996–1 C.B. 575. Seesection 6 of Announcement 96–13. Ifthe section 530 issue remains unre-solved, or if it is determined that thetaxpayer is not eligible for relief undersection 530, the case will be returned tothe District for consideration of theworker classification issue(s).

A one-year test of the employment taxearly referral procedure concluded onMarch 18, 1997. During the additionalone-year test period, Appeals will tryemployment tax early referral in morecases so that the program can be furtherevaluated.

Effective Date: This Announcement ex-tends the test of the employment taxearly referral procedure set forth inAnnouncement 96–13 for an additionalone-year period beginning May 27,1997.

For further information contact: ThomasCarter Louthan, Director, Office of Dis-pute Resolution and Specialty Programs,

National Office Appeals, (202) 401–4098 (not a toll-free number).

Foundations Status of CertainOrganizations

Announcement 97–53

The following organizations havefailed to establish or have been unableto maintain their status as public chari-ties or as operating foundations. Accord-ingly, grantors and contributors may not,after this date, rely on previous rulingsor designations in the Cumulative Listof Organizations (Publication 78), or onthe presumption arising from the filingof notices under section 508(b) of theCode. This listing doesnot indicate thatthe organizations have lost their statusas organizations described in section501(c)(3), eligible to receive deductiblecontributions.Former Public Charities. The follow-

ing organizations (which have beentreated as organizations that are notprivate foundations described in section509(a) of the Code) are now classifiedas private foundations:African American Business Council ofNiagara County Inc., Niagara Falls,NY

Alameda High School AlumniAssociation, Inc., Alameda, CA

Alaska Firebirds, Inc., Anchorage, AKAlaska Youth Ready for Work, Inc.,Anchorage, AK

Alta District Hospital FoundationIncorporated, Dinuba, CA

Alliance of the Holy Family Inc.,Hillsborough, CA

American Association of VietnamVeterans, Inc., Santa Rosa, CA

American College of Productivity &Enterprise, San Francisco, CA

Barron Area Educational FoundationInc., Barron, WI

Bethel Alumni Association of NorthAmerica, Inc., Monterey Park, CA

Beyond Survival, Irvine, CAB. King Productions Inc., New York,NY

Black Knights Drum Corps, Burbank,CA

Blossom Valley Pony Baseball, SanJose, CA

Blue Ridge Resource Conservation andDevelopment Council, Jefferson, NC

Cumberland CommunitiesCommunications Corporation, Duff,TN

221997–21 I.R.B.

Cumberland County Scholarship Fund,Inc., Burkesville, KY

Cypress Creek Community Chorale Inc.,Spring, TX

Dominic J. Bruno Education Trust, WestRoxbury, MA

Doulos Ministry Inc., La Mirada, CAEastern Carolina Orchestra and ChamberMusic Association, Greenville, NC

East Texas Hope Center, Longview, TXFire District No. 7 Services, Newport,WA

Flora Foundation, Kailua Kona, HIFlorence Housing DevelopmentAuthority, Florence, AL

Foothills Audubon Club, Longmont, COFor Children Only, Denver, COForest Lake Wavemakers, Inc., ForestLake, MN

Fort Collins Wildlife Coalition, FortCollins, CO

Fort Dix Academy Inc., Morristown, NJGenesis-A-Sanctuary for the Arts, SanJose, CA

George Snively Research Foundation,Odessa, TX

Hedges and Highways, Compton, CAHelp Resources Group, El Paso, TXHelp Services, Kirkland, WAHeritage Theatre Group, Grand Rapids,MI

High Desert Aids Outreach, Victorville,CA

Highland Park Non Profit HousingCorp., Highland Park, MI

Hillcrest Group Home Inc., Trenton, NJHolland Turner Foster Family Home,Round Rock, TX

Inner City Action Ministries, Inc., GrandIsland, NY

Institute for Environmental Systems andTechnologies, Reseda, CA

Institute for Transportation and theEnvironment, Seattle, WA

Institute of Chinese Medicine forImmunodeficiency Disorders, LongBeach, CA

Institute of Communication forUnderstanding, Berkeley, CA

Jesus Never Fails Pentacostal Church,Chicago, IL

Jochua House Home for Boys, SanBernardino, CA

John Hazelton Day Center Inc., Viroqua,WI

J-Spar Foundation, Oceanside, CAJumelage, Inc., Winchester, MAKanesville, Inc., Council Bluffs, IAKa Ohana Punana Leo O. Kaua I, Inc.,Puhi, HI

Leap Imagination in Learning, SanFrancisco, CA

Lees Transitional Housing & EmergencyShelter, Los Angeles, CA

Leo D. Lagasse Society, Los Angeles,CA

Leonard Mendoza Jr. Foundation Inc.,Commerce, CA

Lewis Residential Care Inc., Stockton,CA

Life Saviors Rescue and RecoveryExchange, Mira Loma, CA

Light Evangelical Mission, Bellflower,CA

Linda Vista Multi-Cultural Fair Inc., SanDiego, CA

Mayors Committee for a BetterCommunity, Las Vegas, NV

Medical Supplies for Zambia Inc.,Wildomar, CA

Medjugorje Connection Inc., Boise, IDMetropolitan Education Foundation,New Orleans, LA

Mexican American Bar Foundation, LosAngeles, CA

New Life International Missions to Indiaand to the World Inc., Long Beach,CA

New Voice Club of the Valleys, StudioCity, CA

New York State Tenents &Neighborhood Coalition RochesterChapter, Rochester, NY

Nipomo Football League, Nipomo, CANonprofit Community Network, Seattle,WA

Pikes Peak Childrens Advocates Inc.,Colorado Springs, CO

Pillar Incorporated, Abita Springs, LAPlant Closures Project, San Francisco,CA

Polemical Success International, Inc.,Boca Raton, FL

Pomona Mission Transitional Shelter,Chino, CA

Rapid City Teen Center, Rapid City, SDRobert E. Lee Project, Sacramento, CARobert Ford Memorial ScholarshipFund, Freeport, NY

Roberts Family Foundation, BainbridgeIsland, WA

Rocky Mountain CFS Association, Inc.,Aurora, CO

SAARC Foundation USA, New York,NY

SCIO District 95 C Scholarships, Inc.,Scio, OR

Seneca Hill Manor Inc., Oswego, NYShakan Group Homes, South Bend, INShare Christmas, Elyria, OHSHDC No. 2 Inc., Honolulu, HI

Sherman Group Home Inc., Bakersfield,CA

Silver Cane Foundation, Santa Barbara,CA

Silver Foxes Theatrical Troupe,Streamwood, IL

Siskiyou Child Abuse PreventionCouncil, Yreka, CA

Temple Community & EconomicDevelopment Corporation,Philadelphia, PA

Tiger Aquatics Boosters Club, Stockton,CA

Topdog Wrestling Club, Inc., Sandpoint,ID

United Bicolandia Los Angeles, LosAngeles, CA

Valley Air Trust Incorporated,Jamestown, CA

Valley Oak Soccer Club—VOSC,Fresno, CA

Valley Voice Youth Choir, Kent, WAVeterans Helping Veterans, Los Angeles,CA

Vietnam and the World Foundation Inc.,Huntingdon Beach, CA

Vietnam Community, Amarillo, TXVietnam Museum in Hawaii, Honolulu,HI

Vietnam Veterans United for Aid andAssistance, San Jose, CA

Who is My Neighbor Foundation,Valencia, CA

Widowed Persons Service of InlandValley Inc., Oceanside, CA

Wildcat Booster Club, Vacaville, CAWilikina Park, Honolulu, HIWilliam Roberts Memorial SocialServices Foundation, Inc., Chicago,IL

Willow Area Seniors Incorporated,Willow, AK

Windmill Media Productions, LosAngeles, CA

Wings Club Scholarship Fund, Inc.,New York, NYIf an organization listed above sub-

mits information that warrants the re-newal of its classification as a publiccharity or as a private operating founda-tion, the Internal Revenue Service willissue a ruling or determination letterwith the revised classification as tofoundation status. Grantors and con-tributors may thereafter rely upon suchruling or determination letter as pro-vided in section 1.509(a)–7 of theIncome Tax Regulations. It is notthe practice of the Service to announcesuch revised classification of foundationstatus in the Internal Revenue Bulletin.

23 1997–21 I.R.B.

Definition of TermsRevenue rulings and revenue procedures(hereinafter referred to as ‘‘rulings’’)that have an effect on previous rulingsuse the following defined terms to de-scribe the effect:Amplified describes a situation where

no change is being made in a priorpublished position, but the prior positionis being extended to apply to a variationof the fact situation set forth therein.Thus, if an earlier ruling held that aprinciple applied to A, and the newruling holds that the same principle alsoapplies to B, the earlier ruling is ampli-fied. (Compare withmodified, below).Clarified is used in those instances

where the language in a prior ruling isbeing made clear because the languagehas caused, or may cause, some confu-sion. It is not used where a position in aprior ruling is being changed.Distinguished describes a situation

where a ruling mentions a previouslypublished ruling and points out an es-sential difference between them.Modified is used where the substance

of a previously published position isbeing changed. Thus, if a prior rulingheld that a principle applied to A but notto B, and the new ruling holds that itapplies to both A and B, the prior ruling

is modified because it corrects a pub-lished position. (Compare withamplifiedandclarified, above).Obsoleteddescribes a previously pub-

lished ruling that is not considered de-terminative with respect to future trans-actions. This term is most commonlyused in a ruling that lists previouslypublished rulings that are obsoleted be-cause of changes in law or regulations.A ruling may also be obsoleted becausethe substance has been included in regu-lations subsequently adopted.Revoked describes situations where

the position in the previously publishedruling is not correct and the correctposition is being stated in the newruling.Supersededdescribes a situation

where the new ruling does nothing morethan restate the substance and situationof a previously published ruling (orrulings). Thus, the term is used torepublish under the 1986 Code andregulations the same position publishedunder the 1939 Code and regulations.The term is also used when it is desiredto republish in a single ruling a series ofsituations, names, etc., that were previ-ously published over a period of time inseparate rulings. If the new ruling does

more than restate the substance of aprior ruling, a combination of terms isused. For example,modifiedand super-seded describes a situation where thesubstance of a previously published rul-ing is being changed in part and iscontinued without change in part and itis desired to restate the valid portion ofthe previously published ruling in a newruling that is self contained. In this casethe previously published ruling is firstmodified and then, as modified, is su-perseded.Supplementedis used in situations in

which a list, such as a list of the namesof countries, is published in a ruling andthat list is expanded by adding furthernames in subsequent rulings. After theoriginal ruling has been supplementedseveral times, a new ruling may bepublished that includes the list in theoriginal ruling and the additions, andsupersedes all prior rulings in the series.Suspendedis used in rare situations to

show that the previous published rulingswill not be applied pending some futureaction such as the issuance of new oramended regulations, the outcome ofcases in litigation, or the outcome of aService study.

AbbreviationsThe following abbreviations in current use andformerly used will appear in material published inthe 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 Procedural 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.

24

Numerical Finding List1

Bulletin 1997–1 through 1997–20Announcements:

97–1, 1997–2 I.R.B.6397–2, 1997–2 I.R.B.6397–3, 1997–2 I.R.B.6397–4, 1997–3 I.R.B.1497–5, 1997–3 I.R.B.1597–6, 1997–4 I.R.B.1197–7, 1997–4 I.R.B.1297–8, 1997–4 I.R.B.1297–9, 1997–5 I.R.B.2797–10, 1997–10 I.R.B.6497–11, 1997–6 I.R.B.1997–12, 1997–7 I.R.B.5597–13, 1997–8 I.R.B.3897–14, 1997–8 I.R.B.3897–15, 1997–9 I.R.B.2397–16, 1997–9 I.R.B.2397–17, 1997–9 I.R.B.2397–18, 1997–10 I.R.B.6797–19, 1997–10 I.R.B.6897–20, 1997–11 I.R.B.2297–21, 1997–11 I.R.B.2397–22, 1997–12 I.R.B.4797–23, 1997–11 I.R.B.2397–24, 1997–11 I.R.B.2497–25, 1997–12 I.R.B.4797–26, 1997–12 I.R.B.4897–27, 1997–13 I.R.B.3097–28, 1997–14 I.R.B.1597–29, 1997–14 I.R.B.1697–30, 1997–14 I.R.B.1697–31, 1997–14 I.R.B.1697–32, 1997–14 I.R.B.1797–33, 1997–15 I.R.B.897–34, 1997–15 I.R.B.897–35, 1997–15 I.R.B.997–36, 1997–15 I.R.B.1097–37, 1997–15 I.R.B.1097–38, 1997–15 I.R.B.1097–39, 1997–16 I.R.B.2797–40, 1997–16 I.R.B.2897–41, 1997–16 I.R.B.2897–42, 1997–17 I.R.B.1997–43, 1997–17 I.R.B.1997–44, 1997–17 I.R.B.1997–45, 1997–17 I.R.B.2097–46, 1997–18 I.R.B.5397–47, 1997–19 I.R.B.9497–48, 1997–20 I.R.B.897–49, 1997–20 I.R.B.897–50, 1997–20 I.R.B.897–51, 1997–20 I.R.B.9

Notices:

97–1, 1997–2 I.R.B.2297–2, 1997–2 I.R.B.2297–3, 1997–1 I.R.B.897–4, 1997–2 I.R.B.2497–5, 1997–2 I.R.B.2597–6, 1997–2 I.R.B.2697–7, 1997–1 I.R.B.897–8, 1997–4 I.R.B.797–9, 1997–2 I.R.B.3597–10, 1997–2 I.R.B.4197–11, 1997–2 I.R.B.5097–12, 1997–3 I.R.B.1197–13, 1997–6 I.R.B.13

Notices—Continued

97–14, 1997–8 I.R.B.2397–15, 1997–8 I.R.B.2397–16, 1997–9 I.R.B.1597–17, 1997–10 I.R.B.3497–18, 1997–10 I.R.B.3597–19, 1997–10 I.R.B.4097–20, 1997–10 I.R.B.5297–21, 1997–11 I.R.B.997–22, 1997–13 I.R.B.997–23, 1997–14 I.R.B.897–24, 1997–16 I.R.B.697–25, 1997–16 I.R.B.897–26, 1997–17 I.R.B.697–27, 1997–17 I.R.B.797–28, 1997–18 I.R.B.4597–29, 1997–20 I.R.B.697–30, 1997–20 I.R.B.6

Proposed Regulations:

REG–209332–80, 1997–14 I.R.B.9REG–209040–88, 1997–7 I.R.B.34REG–209121–89, 1997–11 I.R.B.15REG–208288–90, 1997–11 I.R.B.14REG–209494–90, 1997–8 I.R.B.24REG–208172–91, 1997–10 I.R.B.59REG–209672–93, 1997–6 I.R.B.15REG–209709–94 1997–13 I.R.B.12REG–209729–94, 1997–11 I.R.B.19REG–209762–95, 1997–3 I.R.B.12REG–209785–95, 1997–18 I.R.B.46REG–209817–96, 1997–7 I.R.B.41REG–209824–96, 1997–11 I.R.B.19REG–254394–96, 1997–14 I.R.B.14REG–209823–96, 1997–18 I.R.B.47REG–209828–96, 1997–6 I.R.B.15REG–209830–96, 1997–15 I.R.B.7REG–209834–96, 1997–4 I.R.B.9REG–209839–96, 1997–8 I.R.B.26REG–242996–96, 1997–9 I.R.B.18REG–246018–96, 1997–8 I.R.B.30REG–247678–96, 1997–6 I.R.B.17REG–247862–96, 1997–8 I.R.B.32REG–248770–96, 1997–8 I.R.B.33REG–249819–96, 1997–7 I.R.B.50REG–252231–96, 1997–7 I.R.B.52REG–252233–96, 1997–9 I.R.B.19REG–252665–96, 1997–12 I.R.B.46REG–253578–96, 1997–19 I.R.B.93

Public Law:

105–2, 1997–18 I.R.B.14

Revenue Procedures:

97–1, 1997–1 I.R.B.1197–2, 1997–1 I.R.B.6497–3, 1997–1 I.R.B.8497–4, 1997–1 I.R.B.9697–5, 1997–1 I.R.B.13297–6, 1997–1 I.R.B.15397–7, 1997–1 I.R.B.18597–8, 1997–1 I.R.B.18797–9, 1997–2 I.R.B.5697–10, 1997–2 I.R.B.5997–11, 1997–6 I.R.B.1397–12, 1997–4 I.R.B.797–13, 1997–5 I.R.B.1897–14, 1997–5 I.R.B.2097–15, 1997–5 I.R.B.2197–16, 1997–5 I.R.B.2597–17, 1997–9 I.R.B.15

Revenue Procedures—Continued

97–18, 1997–10 I.R.B.5397–19, 1997–10 I.R.B.5597–20, 1997–11 I.R.B.1097–21, 1997–12 I.R.B.4497–22, 1997–13 I.R.B.997–23, 1997–17 I.R.B.797–24, 1997–16 I.R.B.1097–24A, 1997–20 I.R.B.797–25, 1997–17 I.R.B.897–26, 1997–17 I.R.B.17

Revenue Rulings:

97–1, 1997–2 I.R.B.1097–2, 1997–2 I.R.B.797–3, 1997–2 I.R.B.597–4, 1997–3 I.R.B.697–5, 1997–4 I.R.B.597–6, 1997–4 I.R.B.497–7, 1997–5 I.R.B.1497–8, 1997–7 I.R.B.497–9, 1997–9 I.R.B.497–10, 1997–10 I.R.B.3197–11, 1997–10 I.R.B.597–12, 1997–11 I.R.B.597–13, 1997–16 I.R.B.497–14, 1997–11 I.R.B.597–15, 1997–12 I.R.B.4297–16, 1997–13 I.R.B.497–17, 1997–14 I.R.B.597–18, 1997–15 I.R.B.497–19, 1997–18 I.R.B.1197–20, 1997–19 I.R.B.497–21, 1997–18 I.R.B.897–22, 1997–20 I.R.B.5

Social Security Domestic Coverage Threshold

1997–9, I.R.B.17

Tax Conventions:

1997–17 I.R.B.5

Treasury Decisions:

8688, 1997–3 I.R.B.78689, 1997–3 I.R.B.98690, 1997–5 I.R.B.58691, 1997–5 I.R.B.168692, 1997–3 I.R.B.48693, 1997–6 I.R.B.98694, 1997–6 I.R.B.118695, 1997–4 I.R.B.58696, 1997–6 I.R.B.48697, 1997–2 I.R.B.118698, 1997–7 I.R.B.298699, 1997–6 I.R.B.48700, 1997–7 I.R.B.58701, 1997–7 I.R.B.238702, 1997–8 I.R.B.48703, 1997–8 I.R.B.188704, 1997–8 I.R.B.128705, 1997–8 I.R.B.168706, 1997–9 I.R.B.118707, 1997–7 I.R.B.178708, 1997–10 I.R.B.148709, 1997–9 I.R.B.58710, 1997–13 I.R.B.48711, 1997–12 I.R.B.358712, 1997–12 I.R.B.48713, 1997–14 I.R.B.48714, 1997–15 I.R.B.58715, 1997–18 I.R.B.58716, 1997–19 I.R.B.5

1A cumulative list of all Revenue Rulings,Revenue Procedures, Treasury Decisions, etc.,published in Internal Revenue Bulletins 1996–27through 1996–53 will be found in InternalRevenue Bulletin 1997–1, dated January 6, 1997.

25

Finding List of Current Action onPreviously Published Items1

Bulletin 1997–1 through 1997–20

*Denotes entry since last publication

Revenue Procedures:

66–3Modified by97–11, 1997–6 I.R.B.13

87–21Modified by97–11, 1997–6 I.R.B.13

92–20Modified by97–1, 1997–1 I.R.B.11

92–20Modified by97–10, 1997–2 I.R.B.59

92–90Superseded by97–1, 1997–1 I.R.B.11

94–52Revoked by97–11, 1997–6 I.R.B.13









96–2496–24ASuperseded by97–24, 1997–16 I.R.B.10

96–37Obsoleted by97–26, 1997–17 I.R.B.17

97–2Amplified by97–21, 1997–12 I.R.B.44

Revenue Procedures—Continued

97–3Amplified by97–23, 1997–17 I.R.B.7

Revenue Rulings:

70–480Revoked by97–6, 1997–4 I.R.B.4

72–527Obsoleted by8704, 1997–8 I.R.B.12

74–59Revoked by8708, 1997–10 I.R.B.14

92–19Supplemented in part by97–2, 1997–2 I.R.B.7


96–13Modified by97–1, 1997–1 I.R.B.11






1A cumulative finding list for previously publisheditems mentioned in Internal Revenue Bulletins1996–27 through 1996–53 will be found in Inter-nal Revenue Bulletin 1997–1, dated January 6,1997.

26