SECTION 6. APPEALS AND

COUNSEL FOR THE GOVERNMENT DISCRETION TO RESOLVE TIMING ISSUES

(4) Time-value of money.

.01 Authority to resolve timing issues. An appeals officer or counsel for the government may resolve a timing issue when it is in the interest of the government to do so.

.02 Types of resolutions.

(1) In general. An appeals officer or counsel for the government, to reflect the hazards of litigation, may resolve a timing issue by changing the taxpayer’s method of accounting using compromise terms and conditions, or on a nonaccountingmethod-change basis using either an alternative-timing or a time-value-of-money resolution. See sections 10.02 through 10.04 of this revenue procedure for examples of the application of section 6 of this revenue procedure.

(2) Accounting method change with compromise terms and conditions.

(a) Treating a timing issue as a method change. An appeals officer or counsel for the government resolving a timing issue may treat the issue as a change in method of accounting.

(b) Requirement to apply the law to the facts. An appeals officer or counsel for the government changing a taxpayer’s method of accounting will properly apply the law to the facts without taking into account the hazards of litigation when determining the new method of accounting.

(c) Using a § 481(a) adjustment or a cut-off method. An appeals officer or counsel for the government changing a taxpayer’s method of accounting may make the change using a § 481(a) adjustment or a cut-off method.

(d) Terms and conditions of change.

(i) In general. An appeals officer or counsel for the government changing a taxpayer’s method of accounting may agree to terms and conditions that differ from those applicable to an Examination-initiated accounting method change. The appeals officer or counsel for the government may compromise the year of change (for example, by agreeing to a later year of change), the amount of the § 481(a) adjustment (for example, by agreeing to a reduced § 481(a) adjustment), or the § 481(a) adjustment period (for example, by agreeing to a longer § 481(a) adjustment period). If an appeals officer or counsel for the government agrees to compromise the amount of the § 481(a) adjustment, the agreement must be in writing.

(ii) Limitation on year of change. An appeals officer or counsel for the government changing a taxpayer’s method of accounting ordinarily will not defer the year of change to later than the most recent taxable year under examination on the date of the agreement finalizing the change, and, in no event, will defer the year of change to later than the taxable year that includes the date of the agreement finalizing the change.

(3) Alternative timing. An appeals officer or counsel for the government may resolve a timing issue by not changing the taxpayer’s method of accounting, and by the Service and the taxpayer agreeing to alternative timing for all or some of the items arising during, or prior to and during, the taxable years before Appeals or a federal court. The resolution of a timing issue on an alternative-timing basis for certain items will not affect the taxpayer’s method of accounting for any items not covered by the resolution. For example, the Service and the taxpayer may agree that the taxpayer will capitalize the inventoriable costs incurred during 1995 that were deducted under the taxpayer’s method of accounting. The taxpayer’s inventoriable costs covered by the agreement must be capitalized and accounted

(a) In general. An appeals officer or counsel for the government may resolve a timing issue by not changing the taxpayer’s method of accounting, and by the Service and the taxpayer agreeing that the taxpayer will pay the government a “specified amount” that approximates the time-value-of-money benefit the taxpayer has derived from using its method of accounting for the taxable years before appeals or a federal court (instead of the method of accounting determined by the appeals officer or counsel for the government to be the proper method of accounting), reduced by an appropriate factor to reflect the hazards of litigation. The specified amount is not interest under § 163(a), and may not be deducted or capitalized under any provision of the Code.

(b) Computation of specified amount.

(i) In general. An appeals officer or counsel for the government may use any reasonable manner to compute the specified amount, including the sample computation described in section 6.02(4)(b)(ii) of this revenue procedure. (ii) Sample computation. Under the sample computation, the specified amount equals the sum of the timevalue-of-money benefit (detriment) computed with respect to each taxable year before Appeals or a federal court. However, if the sum of the time-value-ofmoney benefit (detriment) computed with respect to each taxable year is negative, the specified amount will be zero and no refund will be made to the taxpayer. The time-value-of- money benefit (detriment) with respect to each taxable year before Appeals or a federal court equals the “hypothetical underpayment (overpayment)” (as defined in section 6.02(4)(b)(ii)(A) of this revenue procedure), multiplied by the “applicable time-value rate” (as defined in section 6.02(4)(b)(ii)(B) of this revenue procedure), compounded daily for the “applicable period” (as defined in section 6.02(4)(b)(ii)(C) of this revenue procedure).

1998–22 I.R.B. 15 June 1, 1998

(j) the adjustments to taxable income necessary to reflect the new method (including the § 481(a) adjustment required as a result of the change), and any collateral adjustments to taxable income or tax liability resulting from the change for each of the taxable years covered by the agreement;

(k) the taxable years that are covered by the audit protection provided in section 7.04(3) of this revenue procedure;

(l) if appropriate, a condition requiring the taxpayer to file amended returns to reflect the change for any affected succeeding taxable years for which a federal income tax return has been filed as of the date of the closing agreement; and

(m) any other appropriate conditions for implementing the closing agreement, including any requirements for waiving restrictions on assessment and collection, paying any tax, abating any overassessment, or refunding or crediting any tax overpayment.

.03 Implementing a Service-initiated method change.

(1) Years before the Service. The Service will make the adjustments necessary to effect a Service-initiated accounting method change to the taxpayer’s returns for the taxable years under examination, before Appeals, or before a federal court. These adjustments include the adjustments to taxable income necessary to reflect the new method (including the § 481(a) adjustment required as a result of the change), and any collateral adjustments to taxable income or tax liability resulting from the change.

(A) Hypothetical underpay- ment (overpayment). The hypothetical underpayment (overpayment) for each taxable year before Appeals or a federal court is equal to the net increase or decrease in taxable income (including the § 481(a) adjustment) that would have been reflected on the return for the taxable year if the Service had changed the taxpayer’s method of accounting (in the earliest taxable year before Appeals or a federal court, or, if later, the first taxable year the method is considered impermissible), multiplied by the applicable tax rate for the taxable year of the underpayment (overpayment). For this purpose, only adjustments associated with the change are taken into account. The applicable tax rate is the highest rate of income tax applicable to the taxpayer (for example, the highest rate in effect under section 1 for individuals or section 11 for corporations).

(B) Applicable time-value rate. The applicable time-value rate generally equals an average of the quarterly underpayment rates in effect under § 6621(a) for the applicable period. However, for a taxpayer that would be entitled to a deduction under § 163(a) for the specified amount if the specified amount were treated as interest arising from the underpayment of tax, the applicable timevalue rate is computed at a reduced rate equaling an average of the quarterly underpayment rates in effect under § 6621(a) for the applicable period, multiplied by the excess of 100% over the applicable tax rate for the taxable year of the underpayment (overpayment).

(C) Applicable period. The applicable period begins on the due date (without regard to extensions) of the return for the taxable year of the underpayment (overpayment) and ends on the date on which the specified amount is paid.