SECTION 5. TERMS AND

CONDITIONS OF CHANGE

.01 In general. An accounting method change filed under this revenue procedure must be made pursuant to the terms and conditions provided in this revenue procedure.

.02 Year of change. The year of change is the taxable year designated on the application and for which the application is timely filed under section 6.02(2).

.03 Section 481(a) adjustment. Unless otherwise provided in this revenue procedure, a taxpayer making a change in method of accounting under this revenue procedure must take into account a § 481(a) adjustment in the manner provided in section 5.04 of this revenue procedure.

.04 Section 481(a) adjustment period.

(1) In general. Except as otherwise provided in section 5.04(3) or the APPENDIX of this revenue procedure, the § 481(a) adjustment period for positive and negative § 481(a) adjustments is four taxable years.

(2) Short period as a separate tax- able year. If the year of change, or any taxable year during the § 481(a) adjustment period, is a short taxable year, the § 481(a) adjustment must be included in income as if that short taxable year were a full 12-month taxable year. See Rev. Rul. 78–165, 1978–1 C.B. 276.

Example 1. A calendar year taxpayer received permission to change an accounting method beginning with the 1998 calendar year. The § 481(a) adjustment is $30,000 and the adjustment period is four taxable years. The taxpayer subsequently receives permission to change its annual accounting period to September 30, effective for the taxable year ending September 30, 1999. The taxpayer must include $7,500 of the § 481(a) adjustment in gross income for the short period from January 1, 1999, through September 30, 1999.

Example 2. Corporation X, a calendar year taxpayer, received permission to change an accounting method beginning with the 1998 calendar year. The § 481(a) adjustment is $30,000 and the adjustment period is four taxable years. On July 1, 2000, Corporation Z acquires Corporation X in a transaction to which § 381(a) applies. Corporation Z is a calendar year taxpayer that uses the same method of accounting to which Corporation X changed in 1998. Corporation X must include $7,500 of the § 481(a) adjustment in gross income for its short period income tax return for January 1, 2000, through June 30, 2000. In addition, Corporation Z must include $7,500 of the § 481(a) adjustment in gross income in its income tax return for calendar year 2000.

period in lieu of the § 481(a) adjustment period otherwise provided by this revenue procedure if the entire § 481(a) adjustment is less than $25,000 (either positive or negative). A taxpayer makes an election under this de minimis rule by so indicating on the application. For example, for a taxpayer filing a Form 3115, the taxpayer must complete the appropriate line on the Form 3115 to elect this de minimis rule.

(b) Cooperatives. A cooperative within the meaning of § 1381(a) generally must take the entire amount of a § 481(a) adjustment into account in computing taxable income for the year of change. See Rev. Rul. 79–45, 1979–1 C.B. 284.

(c) Ceasing to engage in the trade or business.

(i) In general. A taxpayer that ceases to engage in a trade or business or terminates its existence must take the remaining balance of any § 481(a) adjustment relating to the trade or business into account in computing taxable income in the taxable year of the cessation or termination. Except as provided in sections 5.04(3)(c)(iv) and (v) of this revenue procedure, a taxpayer is treated as ceasing to engage in a trade or business if the operations of the trade or business cease or substantially all the assets of the trade or business are transferred to another taxpayer. For this purpose, “substantially all” has the same meaning as in section 3.01 of Rev. Proc. 77–37, 1977–2 C.B. 568. (ii) Examples of transactions that are treated as the cessation of a trade or business. The following is a nonexclusive list of transactions that are treated as the cessation of a trade or business for purposes of accelerating the § 481(a) adjustment under section 5.04(3)(c) of this revenue procedure:

(A) the trade or business to which the § 481(a) adjustment relates is incorporated;

(B) the trade or business to which the § 481(a) adjustment relates is purchased by another taxpayer in a transaction to which § 1060 applies;

(C) the trade or business to which the § 481(a) adjustment relates is terminated or transferred pursuant to a taxable liquidation;

(D) a division of a corporation ceases to operate the trade or busi

Example 1. A calendar year taxpayer received permission to change an accounting method beginning with the 1998 calendar year. The § 481(a) adjustment is $30,000 and the adjustment period is four taxable years. The taxpayer subsequently receives permission to change its annual accounting period to September 30, effective for the taxable year ending September 30, 1999. The taxpayer must include $7,500 of the § 481(a) adjustment in gross income for the short period from January 1, 1999, through September 30, 1999.

(3) Shortened or accelerated adjust- ment periods. The § 481(a) adjustment period provided in section 5.04(1) or the APPENDIX of this revenue procedure will be shortened or accelerated in the following situations.

(a) De minimis rule. A taxpayer may elect to use a one-year adjustment

1998–51 I.R.B. 21 December 21, 1998

or future criminal investigation or proceeding concerning (1) directly or indirectly, any issue relating to the taxpayer’s federal tax liability, or (2) the possibility of false or fraudulent statements made by the taxpayer with respect to any issue relating to its federal tax liability.

.06 Change treated as initiated by the taxpayer. For purposes of § 481, a change in method of accounting made under this revenue procedure is a change in method of accounting initiated by the taxpayer.