SECTION 2. BACKGROUND

.01 Section 1315 of the Small Business Job Protection Act of 1996, Pub. L. No. 104–188, 110 Stat. 1755, amended § 1361(b)(2) to allow banks (as defined in § 581) that do not use the reserve method of accounting for bad debts to qualify as small business corporations (and therefore qualify to elect S corporation status), effective for tax years beginning after December 31, 1996. .02 Notice 97–5, 1997–2 I.R.B. 25, states that the Service will issue additional guidance granting permission for an automatic change in method of accounting for banks that change from the reserve method of accounting.

.03 Except as otherwise expressly provided, a bank must obtain the consent of the Commissioner of Internal Revenue to change a method of accounting for federal income tax purposes. To obtain this consent, a Form 3115 (Application for Change in Accounting Method) generally must be filed within 180 days after the beginning of the tax year in which the proposed change is to be made. Section 446(e) and § 1.446–1(e)(2)(i) and (3)(i) of the Income Tax Regulations.

.04 The Commissioner is authorized to prescribe administrative procedures setting forth the limitations, terms, and conditions the Commissioner deems necessary to obtain consent for effecting a change in method of accounting and to prevent amounts from being duplicated or omitted, including the tax year

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or years in which the § 481(a) adjustment is to be taken into account. Section 1.446–1(e)(3)(ii). .05 In computing taxable income, § 481(a) requires a bank to take into account those adjustments necessary to prevent amounts from being duplicated or omitted when the bank’s taxable income is computed under a method of accounting different from the method used to compute taxable income for the preceding tax year.