SECTION 8. EXAMPLE

.01 Facts. A taxpayer that is a corporation files its tax return on a calendar year basis. The taxpayer has a vacation plan that is based on the calendar year. Under the terms of the vacation plan, vacation earned in one year vests at the end of the year and cannot be used during the year earned. Vested vacation time must be used in the year following the year in which earned, or it is forfeited. Beginning in 1992, the taxpayer purchases a letter of credit on March 15 of every taxable year to secure the portion of vacation pay accrued in the prior taxable year that is unpaid on that date. All of the accrued vacation pay secured by the letter of credit is paid during the taxable year following the taxable year it accrued because none of the vacation pay is forfeited. The taxpayer deducts for the taxable year the unpaid portion of the accrued vacation pay based on the securitization of the benefits during the first 2 ¹ ⁄2 months of the following taxable year. The amount of accrued and unpaid vacation benefits as of the end of the taxable year secured in the first 2 ¹ ⁄2 months of the following taxable year (the accelerated deduction) is

(d) Amended returns.

(i) In general. A taxpayer implementing an alternative-timing settlement under this revenue procedure is required to file amended returns to reflect the settlement for any affected taxable years covered by the settlement. The amended returns must include the adjustments to taxable income and any collateral adjustments to taxable income or tax liability resulting from the settlement necessary to reflect the settlement.

(ii) Years under examination. If the taxpayer is under examination at the time the closing agreement is executed, the Service will make the adjustments necessary to reflect the settlement to the taxpayer’s returns for the taxable years under examination and the taxpayer is required to file amended returns to reflect the settlement for any other affected taxable years covered by the settlement.

(a) Payment of specified amount. A taxpayer implementing a time-value of money settlement under this revenue procedure must pay the specified amount within 30 days of the date of the writing from the Service notifying the taxpayer of acceptance of the settlement. The payment must be sent to the Internal Revenue Service, Cincinnati Service Center, 201 W. River Center Blvd., Stop 31, Unit 21, Covington, KY 41019.

(b) Statement. The payment of the specified amount must be accompanied by the following information:

(i) the name, address, telephone number, and taxpayer identification number of the taxpayer;

(ii) a copy of the notification of acceptance from the Vacation Pay Issue Specialist described in section 7.02(3) of this revenue procedure; and

(iii) a statement that the taxpayer accepts the time-value-of-money settlement and agrees to the terms of this revenue procedure.

(c) Perjury statement. The information must be accompanied by the following declaration: “Under penalties of perjury, I declare that I have examined this information, including accompanying documents, and, to the best of my knowledge and belief, the information contains all the relevant facts relating to the request for the information, and such facts are true, correct, and complete.” This declaration must be signed by, or on behalf of, the taxpayer by an individual with the

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$10,000,000 for 1991, $12,000,000 for 1992, $15,000,000 for 1993, $13,000,000 for 1994, $16,000,000 for 1995, $16,000,000 for 1996, and $18,000,000 for 1997.

.02 Alternative-timing settlement. The taxpayer is examined for the 1992 and 1993 taxable years (1992 is the earliest open taxable year after which there is no closed taxable year). The taxpayer and the Service agree to settle the issue on the basis of the alternative-timing settlement in section 5 of this revenue procedure.

(1) The accelerated deduction for each taxable year is the amount of accrued and unpaid vacation benefits as of the end of the taxable year secured in the first 2 ¹ ⁄2 months of the following taxable year (Exhibit I, Column A).

(2) The amount of the accelerated deductions for prior taxable years that was actually received by employees during each taxable year is the accelerated deduction for the prior taxable year because the portion of the unpaid vacation pay secured by the letter of credit is paid in the taxable year following the taxable year it accrues (Exhibit I, Column B).

(3) The excess accelerated deduction for each taxable year covered by the settlement is the accelerated deduction for the taxable year less the accelerated deduction for the prior taxable year, except that the excess accelerated deduction for 1992 (the first taxable year covered by the settlement) is the accelerated deduction for the taxable year (Exhibit I, Column C).

(4) The Service will disallow 50 percent of the excess accelerated deduction for 1992 and 1993. (Exhibit I, Column D).

(5) The taxpayer is required to amend its returns for 1994, 1995, and 1997 to reflect the disallowance of 50 percent of the excess accelerated deduction for each of those taxable years. (Exhibit I, Column D)

(6) The taxpayer is required to change its method of accounting for 1998 (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 $9,000,000, determined as follows: 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) [$18,000,000], reduced by 50 percent of the aggregate of the excess accelerated deductions for the taxable years covered by the settlement

[$9,000,000] (Exhibit II).

(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.

.03 Time-value-of-money settlement. The taxpayer accepts the offer to settle the issue on the basis of the time-value-ofmoney settlement in section 6 of this revenue procedure. The specified amount would be deductible under § 163(a) by the taxpayer if it were treated as interest expense arising from an underpayment of tax.

(1) The taxpayer must pay the specified amount of $994,379, computed as follows:

(a) The hypothetical underpayment of tax for 1992 is $4,080,000, computed as follows: the excess accelerated deduction of $12,000,000 multiplied by the applicable tax rate of 34%. The applicable time-value rate for 1992 is 5.46%, which is computed as follows. The applicable period for 1992 is March 15, 1993 (the due date of the return without extensions) to March 15, 1999. The underpayment rates in effect for the applicable period are 7%, 7%, 7%, 7%, 7%, 7%, 8%, 9%, 9%,10%, 9%, 9%, 9%, 8%, 9%, 9%, 9%, 9%, 9%, 9%, 9%, 8%, 8%, 8%, 7%. The average underpayment rate in effect for the applicable period is 8.28% [(7+7+7+7+7+7+8+9+9+10+ 9+ 9+9+8+9+9+9+9+9+9+9+8+8+8+7)/25]. The applicable after-tax time-value rate is 5.46%, computed by multiplying the average underpayment rate by one minus the applicable tax rate [8.28% * (1–.34)]. The time-value-of-money benefit for 1992 is $1,582,254, computed as follows: $4,080,000 * {[1 + (.0546/365)] ²¹⁹¹ - 1}.

(b) The hypothetical underpayment of tax for 1993 is $1,050,000, computed as follows: the excess accelerated deduction of $3,000,000 multiplied by the applicable tax rate of 35%. The applicable time-value rate for 1993 is 5.54%, which is computed as follows. The applicable period for 1993 is March 15, 1994 (the due date of the return without

extensions) to March 15, 1999. The underpayment rates in effect for the applicable period are 7%, 7%, 8%, 9%, 9%,10%, 9%, 9%, 9%, 8%, 9%, 9%, 9%, 9%, 9%, 9%, 9%, 8%, 8%, 8%, 7%. The average underpayment rate in effect for the applicable period is 8.52% [(7+7+ 8+9+9+10+ 9+ 9+9+8+9+9+9+9+9+9+ 9+8+8+8+7)/21]. The applicable aftertax time-value rate is 5.54%, computed by multiplying the average underpayment rate by one minus the applicable tax rate

[8.52% * (1–.35)]. The time-value-ofmoney benefit for 1993 is $335,306, computed as follows: $1,050,000 * {[1 + (.0554/365)] ¹⁸²⁶ - 1}.

(c) The hypothetical overpayment of tax for 1994 is $700,000, computed as follows: the excess accelerated deduction of ($2,000,000) multiplied by the applicable tax rate of 35%. The applicable timevalue rate for 1994 is 5.01%, which is computed as follows. The applicable period for 1994 is March 15, 1995 (the due date of the return without extensions) to March 15, 1999. The overpayment rates in effect for the applicable period are 8%,9%, 8%, 8%, 8%, 7%, 8%, 8%, 8%, 8%, 8%, 8%, 8%, 7%, 7%, 7%, 6%. The average overpayment rate in effect for the applicable period is 7.71% [(8+9+8+ 8+8+7+8+8+8+8+8+8+8+7+7+7+6)/17]. The applicable after-tax time-value rate is 5.01%, computed by multiplying the average overpayment rate by one minus the applicable tax rate [7.71% * (1–.35)]. The time-value-of-money detriment for 1994 is $155,430, computed as follows: $700,000 * {[1 + (.0501/365)] ¹⁴⁶¹ - 1}.

(d) The hypothetical underpayment of tax for 1995 is $1,050,000, computed as follows: the excess accelerated deduction of $3,000,000 multiplied by the applicable tax rate of 35%. The applicable time-value rate for 1995 is 5.55%, which is computed as follows. The applicable period for 1995 is March 15, 1996 (the due date of the return without extensions) to March 15, 1999. The underpayment rates in effect for the applicable period are 9%, 8%, 9%, 9%, 9%, 9%, 9%, 9%, 9%, 8%, 8%, 8%, 7%. The average underpayment rate in effect for the applicable period is 8.54% [(9+8+9+ 9+9+9+9+9+9+8+8+ 8+7)/13]. The applicable after-tax time-value rate is 5.55%, computed by multiplying the average underpayment rate by one minus

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the applicable tax rate [8.54% * (1–.35)]. The time-value-of-money benefit for 1995 is $190,206, computed as follows: $1,050,000 * {[1 + (.0555/365)] ¹⁰⁹⁵ - 1}.

(e) There is no time-value-ofmoney benefit or detriment in 1996.

(f) The hypothetical underpayment of tax for 1997 is $700,000, computed as follows: the excess accelerated deduction of $2,000,000 multiplied by the applicable tax rate of 35%. The applicable time-value rate for 1997 is 5.2%, which is computed as follows. The applicable period for 1997 is March 15, 1998 (the due date of the return without extensions) to March 15, 1999. The underpayment rates in effect for the applicable period are 9%, 8%, 8%, 8%, 7%. The average underpayment rate in effect for the applicable period is 8% [(9+8+8+ 8+7)/5]. The applicable after-tax timevalue rate is 5.2%, computed by multiplying the average underpayment rate by one minus the applicable tax rate [8% * (1.35)]. The time-value-of-money benefit for 1997 is $37,360, computed as follows: $700,000 * {[1 + (.052/365)] ³⁶⁵ - 1}.

(g) The sum of the time-value-ofmoney benefit (detriment) computed with respect to each taxable year covered by the settlement is $1,989,696, computed as follows: $1,582,254+$335,306– $155,430+$190,206+$37,360.

(h) The specified amount is $994,848, computed as follows: $1,989,696 times 50 percent.

(2) The taxpayer is required to change its method of accounting for 1998 (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 $18,000,000, 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) (Exhibit II).

(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.