The IRS has issued new guidance on automatic accounting method changes. Revenue Procedure 2009-39 provides certain additions, modifications and clarifications to Revenue Procedures 2008-52 and 97-27 (as modified, amplified and clarified by various other revenue procedures). Revenue Procedure 2008-52 provides procedures for taxpayers to obtain automatic consent for certain changes in method of accounting; Revenue Procedure 97-27 provides general procedures for obtaining IRS consent to change a method of accounting.
In large part, Revenue Procedure 2009-39 continues the IRS’ trend of expanding the number of accounting method changes that taxpayers may make automatically as long as certain procedures are followed. However, Revenue Procedure 2009-39 also makes modifications to both the automatic and nonautomatic method change procedures by including new definitions and providing amendments and changes to the accounting method changes included in the appendix to Revenue Procedure 2008-52.
Effective Date and Transition Rules
In general, for Forms 3115, Application for Change in Accounting Method, filed under Revenue Procedure 2008-52, Revenue Procedure 2009-39 is effective if the taxpayer files Form 3115 on or after Aug. 27, 2009, for a year of change ending on or after Dec. 31, 2008. For Forms 3115 filed under Revenue Procedure 97-27, Revenue Procedure 2009-39 is effective if the taxpayer files Form 3115 on or after Aug. 27, 2009, for a year of change ending on or after Aug. 27, 2009.
Revenue Procedure 2009-39 provides transition rules related to the general effective date provisions. Specifically, if a taxpayer had not filed Form 3115 by Aug. 27, 2009, for a year of change ending on or after Dec. 31, 2008, and on or before July 31, 2009, the taxpayer may choose not to apply many of the additions and modifications provided by Revenue Procedure 2009-39. Notably, this transition rule does not apply to a taxpayer attempting to use the automatic provisions of Revenue Procedure 2008- 52 to change to a method that excludes certain payments from income as nontaxable contributions to capital under IRC § 118(a), a change identified in the appendix to Revenue Procedure 2008-52.
If before Aug. 27, 2009, a taxpayer timely filed Form 3115 under Revenue Procedure 97-27 for a year of change ending on or after Dec. 31, 2008, requesting consent for a change in method of accounting described in the appendix of Revenue Procedure 2008-52, as revised by Revenue Procedure 2009-39, and the Form 3115 was pending with the National Office on Aug. 27, 2009, the taxpayer may choose to convert the Form 3115 to make the change under Revenue Procedure 2008-52. The taxpayer must notify the IRS National Office of its intent to convert the Form 3115 prior to the later of Oct. 26, 2009, or the issuance of a letter ruling granting or denying consent for the change filed under Revenue Procedure 97-27.
If before Aug. 27, 2009, a taxpayer properly filed Form 3115 under Revenue Procedure 2008-52 for a year of change that is the taxpayer’s first tax year ending on or after Dec. 31, 2008, the taxpayer may choose to file an amended application for that year of change under Revenue Procedure 2008-52, as revised by Revenue Procedure 2009-39, if the taxpayer files an original or amended return using the new method of accounting under Revenue Procedure 2008-52 within six months of the due date (excluding any extensions) of the tax return. For years ending on Dec. 31, 2008, this means a taxpayer must modify Form 3115 by Sept. 15, 2009.
Additions and Revisions to General Procedures and Filing Requirements
Revenue Procedure 2009-39 provides numerous procedural modifications, which affect both the automatic procedures of Revenue Procedure 2008-52 and the advance consent procedures of Revenue Procedure 97-27. The following are some of the more significant revisions, which relate to certain foreign corporations, a taxpayer with a claim subject to review by the Joint Committee on Taxation, and a taxpayer participating in the Compliance Assurance Process:
- As to when certain foreign corporations would be considered to be under examination or have an issue under consideration, the new rules provide that a foreign corporation that is not required to file a federal income tax return is under examination if any of its controlling domestic shareholder(s) are under examination for a tax year in which it was a U.S. shareholder of the foreign corporation. In addition, for a controlled foreign corporation (CFC) or a noncontrolled IRC § 902 corporation (10/50 corporation), a foreign corporation’s method of accounting for an item is an issue under consideration if any of the corporation’s controlling domestic shareholders receive notification that the treatment of a distribution or deemed distribution from the foreign corporation, or the amount of its earnings and profits or foreign taxes deemed paid, is an issue under consideration.
- If an examination of a taxpayer involves a refund or credit in excess of the statutory sum that is subject to review by the Joint Committee on Taxation under IRC § 6405, then the taxpayer is under examination while it has a refund or credit under review by the Joint Committee on Taxation and continues to be under examination until Joint Committee on Taxation review procedures and any necessary follow-up are complete.
- A taxpayer participating in the Compliance Assurance Process (CAP) is considered to be under examination as of the date the taxpayer executes the memorandum of understanding for the CAP.
- The definition of “issue pending” has been modified to add that written notification indicating an adjustment is being made or will be proposed for the taxpayer’s method of accounting may result from an inquiry by the Joint Committee on Taxation.
Additions and Revisions of Specific Accounting Method Changes
Revenue Procedure 2009-39 provides numerous additions and modifications to the appendix to Revenue Procedure 2008-52, which provides a listing of the changes in methods of accounting for which automatic consent is granted. The following are some of the more significant additions and revisions:
Materials and supplies. A taxpayer may change its method of accounting for materials and supplies on hand to the method of treating the cost of materials and supplies as a deferred expense to be taken into account in the tax year in which they are actually consumed and used in operation consistent with Treas. Reg. § 1.162-3. However, a taxpayer may not change its method of accounting in reliance upon the rules contained in the proposed regulations related to the capitalization of expenditures related to tangible property.
Repair and maintenance costs. A taxpayer generally may change its method of accounting from capitalizing, under IRC § 263(a), costs paid or incurred to repair and maintain tangible property (including network assets) to treating the repair and maintenance costs as ordinary and necessary business expenses under IRC § 162 and Treas. Reg. § 1.162-4. The change also applies to a taxpayer that wants to change the unit of property it uses to determine the deductibility of repair and maintenance costs to a unit of property that is permissible under applicable legal authority. To make the change, the taxpayer, among other things, must provide several specific statements regarding the repair and maintenance costs at issue. However, a taxpayer may not change its method of accounting in reliance upon the rules contained in the proposed regulations related to the capitalization of expenditures related to tangible property.
Also, there is an important exclusion from the automatic change procedure for property (including expenditures) subject to a repair allowance election under Treas. Reg. § 1.167(a)-11(d)(2); a taxpayer proposing to file a repair method change for a unit of property that may include costs subject to a repair allowance election should carefully consider the applicability rules of the new automatic procedure.
Tenant construction allowances. A taxpayer may change its method of accounting for tenant construction allowances from improperly treating the taxpayer as having a depreciable interest in the property subject to the tenant construction allowances to properly treating the taxpayer as not having a depreciable interest in such property. Conversely, a taxpayer may change its method of accounting for tenant construction allowances from improperly treating the taxpayer as not having a depreciable interest in the property subject to the tenant construction allowances to properly treating the taxpayer as having a depreciable interest in such property. The taxpayer must submit various statements with the taxpayer’s Form 3115 and will not receive audit protection in connection with the change.
Dispositions of structural components of a building. A taxpayer may change to a unit of property that is permissible under applicable legal authority for determining when the taxpayer has disposed of a building and its structural components. To make the change, the taxpayer, among other things, must provide several specific statements regarding the repair and maintenance costs at issue. The taxpayer must also file an additional copy of the completed Form 3115 with the IRS.
Disposition of tangible depreciable assets. A taxpayer may change to a unit of property that is permissible under applicable legal authority for determining when the taxpayer has disposed of an IRC § 1245 property or a depreciable land improvement for depreciation purposes. In order to make the change, the taxpayer, among other things, must provide several detailed descriptions regarding the repair and maintenance costs at issue. The taxpayer must also file an additional copy of the completed Form 3115 with the IRS.
Nonshareholder contributions to capital under IRC § 118. A regulated public utility described in section 118(c) may change its method of accounting for payments received from customers as customer connection fees from excluding the payments from gross income as nontaxable contributions to capital under section 118 to including the payments in gross income under section 61. In addition, a regulated public utility described in section 118(c) may change its method of accounting for payments or property that are contributions in aid of construction from including the payments or the fair market value (FMV) of the property in gross income to excluding the payments or the FMV of the property as nontaxable contributions to capital. For other payments or property received, a taxpayer may only change its method of accounting for payments or property received that do not constitute contributions to capital of the taxpayer within the meaning of section 118 from excluding the payments or FMV of the property from gross income to including the payments or the FMV of the property in gross income.
Debt issuance costs. A taxpayer may change its method of accounting for capitalized debt issuance costs to comply with Treas. Reg. § 1.446-5, which provides rules for allocating the costs over the term of the debt.
Advance payments. The applicable change includes a change by a taxpayer that changes the way it recognizes advance payments in revenues in its applicable financial statement (AFS) and wants to change its method of accounting to use its new AFS in determining the extent to which advance payments are included in gross income under Revenue Procedure 2004-34.
Self-insured employee medical benefits. The applicable change includes self-insured liabilities resulting from medical services provided to retirees and to employees who have filed claims under a workers’ compensation act that are not paid from an IRC § 419(e) welfare benefit fund.
Pool split and partial termination. If a taxpayer must remove goods from a pool because those goods are not within the scope of that pool, and if the taxpayer wants to change from the LIFO inventory method for those removed goods, the taxpayer may split the pool and change from the LIFO method under various sections of the appendix to Revenue Procedure 2008-52.
Other. Revenue Procedure 2009-39 also makes numerous modifications to existing changes currently listed in the appendix to Revenue Procedure 2008-52, including changes related to:
- Certain UNICAP methods used by resellers and reseller-producers;
- Certain UNICAP methods used by producers and reseller-producers;
- The overall cash method to an accrual method;
- Retainages;
- Bonuses;
- Vacation pay;
- Inclusion of rental income or expense in accordance with the rent allocation;
- Cash discounts;
- Impermissible methods of inventory valuation;
- Permissible methods of inventory identification and valuation;
- The inventory price index computation method; and
- Dollar-value pools of manufacturers.
Implications
Taxpayers and their advisers must carefully review the modifications to Revenue Procedures 2008-52 and 97-27 contained in Revenue Procedure 2009-39 and determine their impact, if any, especially for pending applications. Among the most notable procedural changes provided in Revenue Procedure 2009-39 is the modification of the definition of when a taxpayer is considered to be under examination, and the ability of certain taxpayers to file an accounting method change under both Revenue Procedures 2008-52 and 97-27. Specifically, the provisions concerning when a taxpayer is under examination were modified to include foreign corporations that have a controlling domestic shareholder under examination, a taxpayer with a refund or credit that is under review by the Joint Committee on Taxation, and a taxpayer participating in the CAP program. The addition of information related to situations in which these taxpayers are considered to be under examination provides written guidance for situations that previously were unclear.
As noted above, Revenue Procedure 2009-39 expands the list of accounting method changes for which a taxpayer may receive automatic consent. Two of the most anticipated automatic changes provided by Revenue Procedure 2009-39 are changes related to repairs and maintenance costs and changes with respect to the retirement of depreciable property.
In addition, the revenue procedure clarifies that concurrent changes to deduct repairs and maintenance costs as well as to revise the unit of property for the retirement of depreciable property must be filed as two separate method change requests, settling an issue that has been the topic of much debate over the past year. If a taxpayer previously filed an accounting method change request for the treatment of repairs and maintenance expenses and/or the retirement of depreciable assets and the request is still pending with the IRS National Office, consideration should be given to whether the taxpayer would like to request that the change be converted to an automatic method change request (the procedure for this conversion request is discussed above).
In general, Revenue Procedure 2009-39 is effective for changes filed on or after Aug. 27, 2009. However, transition rules were provided that may assist taxpayers who are unable to take into account or revise current plans with respect to currently pending or contemplated accounting method change requests.
Beth Benko is with Ernst & Young LLP in Washington, DC.
This article originally appeared in the January 2010 issue of The Tax Adviser, the AICPA’s monthly journal of tax planning, trends and techniques. AICPA members can subscribe to The Tax Adviser for a discounted price. Call 800-513-3037 or e-mail taxsection@aicpa.org for a subscription to the magazine or to become a member of the Tax Section.
