SECTION 7. PREPAID

SUBSCRIPTION INCOME (§ 455)

.01 Timing of incurring liabilities for employee compensation.

(1) Description of change and scope .

(a) Applicability . This change applies to an accrual method taxpayer that wants to change its method of accounting to treat bonuses or self-insured medical benefits as follows:

(i) Bonuses . If the obligation to pay a bonus becomes fixed and certain by the end of the taxable year ( see Rev. Rul. 61–127, 1961–2 C.B. 36), and the bonus is otherwise deductible, but the bonus is paid after the 15th day of the third calendar month after the end of that taxable year, to treat the bonus as deductible in the taxable year of the employer in which or with which ends the taxable year of the employee in which the bonus is includible in the gross income of the employee; or

(ii) Self-insured medical bene- fits . If the obligation to pay an employee’s medical expenses is neither insured nor paid from a welfare benefit fund within the meaning of § 419(e), to treat the liability as incurred in the taxable year in which the employee files the claim with the employer. See United States v. General Dynamics Corp., 481 U.S. 239 (1987), 1987–2 C.B. 134.

(b) Inapplicability . This change does not apply to a taxpayer that is subject to § 263A and that is required to capitalize the costs with respect to which the taxpayer wants to change its method of ac

.01 Series E or EE U.S. savings bonds.

(1) Description of change and scope. This change applies to a cash method taxpayer that wants to change its method of accounting for interest income on Series E or EE U.S. savings bonds. However, this change only applies to a taxpayer that has previously made an election under § 454 to report as interest income the increase in redemption price on a bond occurring in a taxable year, and that now wants to report this income in the taxable year in which the bond is redeemed, disposed of, or finally matures, whichever is earliest.

(2) Manner of making the change.

(a) This change is made using a

.01 Prepaid subscription income.

(1) Description of change and scope . This change applies to an accrual method taxpayer that wants to change its method of accounting for prepaid subscription income to the method described in § 455 and the regulations thereunder, including an eligible taxpayer that wants to make the “within 12 months” election under § 1.455–2. (2) Manner of making the change .

(a) This change is made using a cut-off method and does not apply to any prepaid subscription income received before the first taxable year to which the change applies. Any prepaid subscription income arising prior to the year of change is accounted for under the taxpayer’s former method of accounting. See section

1999–52 I.R.B. 749 December 27, 1999

counting under section 8.01 of this APPENDIX, if the taxpayer is not capitalizing the costs as required.

(2) Amounts taken into account . Applicable provisions of the Code, regulations, and other published guidance prescribe the manner in which a liability that has been incurred is taken into account. For example, for a taxpayer with inventories, direct labor costs must be included in inventory costs and may be recovered through cost of goods sold. See § 1.263A–1(e)(2)(i)(B). A taxpayer may not rely on the provisions of section 8.01 of this APPENDIX to take a current year deduction.

.02 Timing of incurring liabilities for real property taxes.

(1) Description of change . An accrual method taxpayer generally incurs a liability in the taxable year that all the events have occurred that establish the fact of the liability, the amount of the liability can be determined with reasonable accuracy, and economic performance has occurred with respect to the liability. See § 1.446–1(c)(1)(ii). Under § 1.461–4(g)(6), if the liability of the taxpayer is to pay a tax, economic performance occurs as the tax is paid to the government authority that imposed the tax.

For example, for a taxpayer with inventories, certain real property taxes must be included in inventory costs and may be recovered through cost of goods sold. See § 1.263A–1(e)(3)(ii)(L). A taxpayer may not rely on the provisions of section 8.02 of this APPENDIX to take a current year deduction.

.03 Timing of incurring liabilities under a workers’ compensation act, tort, breach of contract, or violation of law.

(1) Description of change and scope .

8.03 of this APPENDIX to take a current year deduction.

.04 Timing of incurring liabilities for payroll taxes .

(1) Applicability . This change applies to:

(a) an accrual method employer that wants to change its method of accounting for

(i) FICA and FUTA taxes to a method consistent with the holding in Rev. Rul. 96–51, 1996–2 C.B. 36 (Rev. Rul. 96–51 holds that, under the all events test of § 461, an accrual method employer may deduct in Year 1 its otherwise deductible FICA and FUTA taxes imposed with respect to year-end wages properly accrued in Year 1, but paid in Year 2, if the requirements of the recurring item exception are met); and

(ii) state unemployment taxes and, in the event the taxpayer is an employer within the meaning of the Railroad Retirement Tax Act ( see § 3231(a)), railroad retirement taxes to a method under which the taxpayer may deduct in Year 1 its otherwise deductible state unemployment taxes and railroad retirement taxes (if applicable) imposed with respect to year-end wages properly accrued in Year 1, but paid in Year 2, if the requirements of the recurring item exception are met (including the requirement that, as of the end of the taxable year, all events have occurred that establish the fact of the liability and the amount of the liability can be determined with reasonable accuracy, see § 1.461–5(b)); or

(b) an accrual method employer that utilizes a method of accounting for FICA and FUTA taxes that is consistent with the holding in Rev. Rul. 96–51, 1996–2 C.B. 36 and wishes to change its method of accounting for state unemployment taxes and, in the event the employer is an employer within the meaning of the Railroad Retirement Tax Act ( see § 3231(a)), railroad retirement taxes to a method under which the taxpayer may deduct in Year 1 its otherwise deductible state unemployment taxes and railroad retirement taxes (if applicable)imposed with respect to year-end wages properly accrued in Year 1, but paid in Year 2, if the requirements of the recurring item exception are met (including the requirement that, as of the end of the taxable year, all events have occurred that establish the fact of the lia

(2) Scope .

(a) Applicability . This change applies to an accrual method taxpayer that wants to change its method of accounting to:

(i) treat a liability for real property taxes (for which the all events test of § 461(h)(4) is otherwise met) as incurred in the taxable year in which the taxes are paid, under §§ 461 and 1.461–4(g)(6);

(ii) account for real property taxes under the recurring item exception to the economic performance rules under §§ 461(h)(3) and 1.461–5(b)(1); or

(iii) revoke an election under § 461(c) (ratable accrual election). (b) Inapplicability . This change does not apply to a taxpayer that is subject to § 263A and that is required to capitalize the costs with respect to which the taxpayer wants to change its method of accounting under section 8.02 of this APPENDIX, if the taxpayer is not capitalizing the costs as required.

(3) Amounts taken into account. Applicable provisions of the Code, regulations, and other published guidance prescribe the manner in which a liability that has been incurred is taken into account.

(a) Applicability . This change applies to an accrual method taxpayer that wants to change its method of accounting for self-insured liabilities (including any amounts not covered by insurance, such as a “deductible” amount under an insurance policy) arising under any workers’ compensation act or out of any tort, breach of contract, or violation of law, to treating the liability for the workers’ compensation, tort, breach of contract, or violation of law as being incurred in the taxable year in which all the events have occurred which establish the fact of the liability, the amount of the liability can be determined with reasonable accuracy, and payment is made to the person to which the liability is owed. See §§ 461 and 1.461–4(g)(2). (b) Inapplicability . This change does not apply:

(i) to a taxpayer that is subject to § 263A and that is required to capitalize the costs with respect to which the taxpayer wants to change its method of accounting under section 8.03 of this APPENDIX, if the taxpayer is not capitalizing the costs as required;

(ii) if payment is made to a third party rather than to the person to which the liability is owed. See § 1.461–4(g)(1); or

(iii) if payment is made by a third party.

(2) Amounts taken into account . Applicable provisions of the Code, regulations, and other published guidance prescribe the manner in which a liability that has been incurred is taken into account. For example, for a taxpayer with inventories, certain employee benefit costs (including workers’ compensation) must be included in inventory costs and may be recovered through costs of goods sold. See § 1.263A– 1(e)(3)(ii)(D). A taxpayer may not rely on the provisions of section

December 27, 1999 750 1999–52 I.R.B.

bility and the amount of the liability can be determined with reasonable accuracy, see § 1.461–5(b)).

(2) Inapplicability . This change does not apply to a taxpayer that is subject to § 263A and that is required to capitalize the costs with respect to which the taxpayer wants to change its method of accounting under section 8.04 of this APPENDIX, if the taxpayer is not capitalizing the costs as required.

(3) Recurring item exception . A taxpayer that previously has not changed to or adopted the recurring item exception for FICA, FUTA, state unemployment taxes and railroad retirement taxes (if applicable) must change to the recurring item exception method for FICA, FUTA, state unemployment taxes and railroad retirement taxes (if applicable) as specified in § 461(h)(3) as part of this change.

(4) Amounts taken into account . Applicable provisions of the Code, regulations, and other published guidance prescribe the manner in which a liability that has been incurred is taken into account. For example, for a taxpayer with inventories, certain taxes must be included in inventory costs and may be recovered through cost of goods sold. See § 1.263A– 1(e)(3)(ii)(L). A taxpayer may not rely on the provisions of section 8.04 of this APPENDIX to take a current year deduction.

change. However, if the taxpayer is under examination, before an appeals office, or before a federal court, the taxpayer must provide a copy of the application to the examining agent(s), appeals officer, or counsel for the government, as appropriate, at the same time that it files the copy of the application with the national office. The application must contain the name(s) and telephone number(s) of the examining agent(s), appeals officer, or counsel for the government, as appropriate.

(4) Manner of making the change. This change is made using a cut-off method and applies only to rental agreements described in § 1.467–9(a)(2). See section 2.06 of this revenue procedure. For purposes of this paragraph (4), a rental agreement is entered into on its agreement date (within the meaning of § 1.467–1(h)(1) and, if applicable, § 1.467–1(f)(1)(i)). .03 Change to comply with regulation project IA–292–84.

(1) Description of the change. This change applies to a taxpayer that wants to change its method of accounting for any rental agreement described in § 1.467–9(c) to comply with the provisions of regulation project IA–292–84 (1996–2 C.B. 462).

(2) Requirements . This change must be made for the taxpayer’s first taxable year ending after May 18, 1999.

(3) Scope limitations inapplicable. The scope limitations in section 4.02 of this revenue procedure are not applicable to this change. However, if the taxpayer is under examination, before an appeals office, or before a federal court, the taxpayer must provide a copy of the application to the examining agent(s), appeals officer, or counsel for the government, as appropriate, at the same time that it files the copy of the application with the national office. The application must contain the name(s) and telephone number(s) of the examining agent(s), appeals officer, or counsel for the government, as appropriate.