SECTION 6. CHANGING TO OR

ADOPTING SERVICE WARRANTY INCOME METHOD

.01 Automatic change. A taxpayer wanting to change its method of accounting to the service warranty income method must follow the provisions of Rev. Proc. 97–37.

.02 Adoption of method. A qualifying taxpayer may adopt the service warranty income method in any taxable year ending on or after August 18, 1997 by attaching a statement to its timely filed original federal income tax return (including extensions) for the year of adoption.

.03 Statement. The statement referred to in section 6.02 of this revenue procedure should be identified at the top as follows: “ELECTION OF THE SERVICE WARRANTY INCOME METHOD UNDER REV. PROC. 97–38.” The statement should set forth:

(1) a paragraph stating that the taxpayer is electing the service warranty income method for all advance payments (as defined in this revenue procedure) received in the current taxable year and to be received in subsequent taxable years;

(2) a paragraph stating that the taxpayer agrees to all the terms and conditions of this Rev. Proc. 97–38, and specifically stating that the taxpayer agrees to include in gross income all imputed income amounts necessary at the applicable interest rate determined in accordance with section 5.04 of this revenue procedure so that the net present value of gross income inclusions in taxable years to which qualified advance payment amounts are being deferred equals the amount of qualified advance payment

August 18, 1997 46 1997–33 I.R.B.

amounts received in earlier taxable years;

(3) a description of the service warranty contracts sold during the taxable year the service warranty income method is elected;

(4) the aggregate amount of the qualified advance payment amounts received for each class (3-year contracts, 4-year contracts, etc.) of service warranty contracts sold during the taxable year of election;

(5) the future value factors that are to be applied to the aggregate qualified advance payment amounts for each class of service warranty contracts sold during the election year; and

(6) the signature by or on behalf of the taxpayer making the election by an individual with the authority to bind the taxpayer in such matters. For example, an officer must sign on behalf of a corporation, a general partner on behalf of a state law partnership, a member-manager on behalf of a limited liability company, a trustee on behalf of a trust, or an individual taxpayer on behalf of a sole proprietorship. If the taxpayer is a member of a consolidated group, the statement submitted on behalf of the taxpayer must be signed by a duly authorized officer of the common parent. See section 6.02(4) of Rev. Proc. 97–37.

.04 Annual reporting requirement. Upon election of the service warranty income method of accounting, a taxpayer must satisfy an annual reporting requirement. For each taxable year after election of the service warranty income method, the taxpayer must attach a statement to its timely filed original federal income tax return setting forth:

(1) a description of the service warranty contracts sold during the taxable year;

(2) the aggregate amount of the qualified advance payment amounts received for each class of service warranty contracts sold during the taxable year; and

(3) the future value factors that are to be applied to the aggregate qualified advance payment amounts for each class of service warranty contracts sold during the taxable year.