SECTION 6. OPTION TWO: TIMEVALUE-OF-MONEY SETTLEMENT

.01 In General. The Service offers to settle the issue with taxpayers subject to

1999–24 I.R.B. 39 June 14, 1999

this revenue procedure in exchange for taxpayers paying the government 50 percent of the time-value-of-money benefit the taxpayer derived from deducting the accelerated deduction for a taxable year in the taxable year the benefits accrue instead of in the taxable year the benefits are actually received by the employee (if vacation pay) or in the taxable year in which or with which ends the employee’s taxable year in which the benefits were actually received (if benefits other than vacation pay).

.02 Terms of time-value-of-money set- tlement.

(1) The settlement will cover the taxpayer’s earliest open taxable year after which there is no closed taxable year and all subsequent taxable years ending on or before July 22, 1998.

(2) The taxpayer will pay the government a “specified amount” that approximates the time-value-of-money benefit the taxpayer has derived from deducting the accelerated deductions for each of the taxable years covered by the settlement in the taxable year the benefits accrue instead of in the taxable year the benefits are actually received by the employee (if vacation pay) or in the taxable year in which or with which ends the employee’s taxable year in which the benefits were actually received (if benefits other than vacation pay), reduced by 50 percent. The specified amount is not interest under § 163(a), and may not be deducted or capitalized under any provision of the Code.

(3) The specified amount equals the sum of the time-value-of-money benefit (detriment) computed with respect to each taxable year covered by the settlement, reduced by 50 percent. However, if the sum of the time-value-of-money 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-ofmoney benefit (detriment) with respect to each taxable year covered by the settlement equals the “hypothetical underpayment (overpayment), “ multiplied by the “applicable time-value rate,” compounded daily for the “applicable period.”

(a) Hypothetical underpayment (overpayment). The hypothetical underpayment (overpayment) for each taxable year covered by the settlement is equal to

the excess accelerated deductions for the taxable year, multiplied by the applicable tax rate for the taxable year of the underpayment (overpayment). The applicable tax rate is the highest rate of income tax applicable to the taxpayer (for example, the highest rate in effect under § 1 for individuals or § 11 for corporations).

(b) Applicable time-value rate. The applicable time-value rate generally equals the average of the quarterly underpayment (overpayment) 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 the average of the quarterly underpayment (overpayment) 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 due date of the taxpayer’s return (without regard to extensions) for its first taxable year ending after July 22, 1998.

(d) Time-value-of-money formula. The time-value-of-money benefit for each taxable year covered by the settlement is computed using the following formula:

U * {[1 + (R/365)]N – 1}

where U = hypothetical underpayment for the taxable year

R = the applicable time-value rate N = the number of days in the applica ble period

(4) The specified amount is not refundable or creditable against any federal tax liability of the taxpayer.

(5) The taxpayer’s method of accounting for the unpaid portion of accrued employee benefits that the taxpayer secured during the first 2 ¹ ⁄2 months of the following taxable year by purchasing a letter of credit or other similar financial instrument is not changed for the taxable years covered by the settlement.

(6) The taxpayer must change its method of accounting for its first taxable

year ending after July 22, 1998, to comply with § 404(a)(11).

(a) The § 481(a) adjustment resulting from the change will equal the aggregate of the excess accelerated deductions for all taxable years ending on or before July 22, 1998 (determined without regard to the special rule in section 3.02 for computing the excess accelerated deduction for the first taxable year covered by the settlement).

(b) The § 481(a) adjustment will be taken into account ratably over a 3-taxable-year period beginning with the first taxable year ending after July 22, 1998.

(7) The Service will not require the taxpayer to change its method of accounting for the unpaid portion of accrued employee benefits that the taxpayer secured during the first 2 ¹ ⁄2 months of the following taxable year by purchasing a letter of credit or other similar financial instrument, for taxable years ending on or before July 22, 1998.