Part III. Administrative, Procedural, and Miscellaneous

Modification of Rev. Rul. 2001–4

Notice 2001–23

PURPOSE

This notice modifies Rev. Rul. 2001–4, 2001–3 I.R.B. 295, by extending the application of the automatic consent for change in accounting method provisions of Rev. Proc. 99–49, 1999–2 C.B. 725, to the taxpayer’s first or second taxable year ending after December 21, 2000.

BACKGROUND

On December 21, 2000, the Internal Revenue Service issued Rev. Rul. 2001–4, which holds, in part, that costs incurred by a taxpayer to perform work on its aircraft airframe as part of a heavy maintenance visit generally are deductible as ordinary and necessary business expenses under § 162 of the Internal Revenue Code. The APPLICATION section of Rev. Rul. 2001–4 provides that a taxpayer wanting to change its method of accounting to conform to the holding must follow the automatic change in accounting method provisions of Rev. Proc. 99–49, provided the change is made for the first taxable year ending after January 16, 2001. Thus, for example, a taxpayer using a calendar year may apply for automatic consent to change its method of accounting to conform to Rev. Rul. 2001–4 for the year 2001. The Service recognizes that the revenue ruling precludes a calendar year taxpayer from applying for automatic consent for the change for the year 2000, and greatly limits its ability to apply for consent for that year under the general procedures of Rev. Proc. 97–27, 1997–1 C.B. 680, due to the requirement that the application must have been submitted by December 31, 2000.

EXTENSION OF AUTOMATIC METHOD CHANGE PROCEDURES FOR 2000

To facilitate changes in method of accounting by taxpayers to conform to the holding of Rev. Rul. 2001–4 for the year 2000, the revenue ruling is modified to allow a taxpayer to apply for the change by following the automatic change in ac

Repeal of the Modification of the Installment Method for Accrual Method Taxpayers

Notice 2001–22

PURPOSE

This notice provides guidance on the application of the Installment Tax Correction Act of 2000, Pub. L. No. 106573, 114 Stat. 3061 (2000) (the “Installment Tax Correction Act”), to an accrual method taxpayer that disposed of property in an installment sale on or after December 17, 1999, and filed by April 16, 2001, a Federal income tax return reporting the gain on the disposition using an accrual method of accounting rather than the installment method.

BACKGROUND

An installment sale generally is defined in § 453(b) as a disposition of property where at least one payment is to be received after the close of the taxable year in which the disposition occurs. Section 453(a) provides the general rule that income from an installment sale must be taken into account under the installment method. However, § 536(a) of the Ticket to Work and Work Incentives Improvement Act of 1999, Pub. L. No. 106-170, 113 Stat. 1860 (1999), added former § 453(a)(2) to the Code, which provided that the installment method did not apply to income from an installment sale if the income would be reported under an accrual method of accounting without regard to § 453. Former § 453(a)(2) was effective for sales or other dispositions occurring on or after December 17, 1999, the date of enactment. On December 28, 2000, the Installment Tax Correction Act repealed § 453(a)(2) with respect to sales and other dispositions occurring on or after December 17, 1999. Section 2(b) of the Installment Tax Correction Act provides that the Code (including § 453) should be applied and administered as if § 453(a)(2) had not been enacted.

The installment method does not apply to any disposition for which the

taxpayer elects out of the installment method. Section 453(d)(1). A taxpayer that reports an amount realized equal to the selling price on the tax return filed for the taxable year in which the installment sale occurs is considered to have made an effective election out of the installment method. Section 15a.453– 1(d)(3)(i) of the temporary Income Tax Regulations. An election out of the installment method with respect to a disposition may be revoked only with the consent of the Secretary. Section 453(d)(3). A revocation is retroactive. Section 15a.453–1(d)(4).

APPLICATION

Consistent with the change in law effected by the Installment Tax Correction Act, an accrual method taxpayer that entered into an installment sale on or after December 17, 1999, and filed a Federal income tax return by April 16, 2001, reporting the sale on an accrual method (and, thus, an amount realized equal to the selling price) has the consent of the Secretary to revoke its effective election out of the installment method, provided the taxpayer files, within the applicable period of limitations, amended Federal income tax return(s) for the taxable year in which the installment sale occurred, and for any other affected taxable year, reporting the gain on the installment method. Thus, a taxpayer may not revoke its effective election out of the installment method if the taxable year in which any payment on the installment obligation was received has closed.

EFFECT ON OTHER DOCUMENTS

Notice 2000–26, 2000–17 I.R.B. 954, is modified to remove Q&As 1 through 9.

DRAFTING INFORMATION

The principal author of this notice is Merrill D. Feldstein of the Office of Associate Chief Counsel (Income Tax & Accounting). For further information regarding this notice, contact Ms. Feldstein at (202) 622-4950 (not a toll-free call).

2001–12 I.R.B. 911 March 19, 2001

counting method provisions of Rev. Proc. 99–49, provided the change is for the first or second taxable year ending after December 21, 2000.

If a taxpayer filed an application with the national office under Rev. Proc. 97–27 to change its method of accounting to conform to Rev. Rul. 2001–4, and the application is pending with the national office on February 16, 2001, the taxpayer may change its method under Rev. Proc. 99–49. However, the national office will process the application in accordance with the procedure under which it was filed unless, prior to the later of April 1, 2001, or the issuance of the letter ruling granting or denying consent to the change, the taxpayer notifies the national office that it wants to change its method under Rev. Proc. 99–49. If the taxpayer timely notifies the national office that it wants to change its method under Rev. Proc. 99–49, the taxpayer must make appropriate modifications to the application to comply with the applicable provisions of Rev. Proc. 99–49. In addition, any user fee that was submitted with the application will be returned to the taxpayer.

EFFECT ON OTHER DOCUMENTS

Rev. Rul. 2001–4 and Rev. Proc. 99–49 are modified.

DRAFTING INFORMATION

The principal author of this notice is Merrill Feldstein of the Office of Associate Chief Counsel (Income Tax & Accounting). For further information regarding this notice contact Ms. Feldstein at (202) 622-4950 (not a toll-free call).

Differential Earnings Rate for Mutual Life Insurance Companies

Notice 2001–24

This notice publishes a tentative determination under § 809 of the Internal Revenue Code of the “differential earnings rate” for 2000 and the rate that is used to calculate the “recomputed differential earnings amount” for 1999. (The latter rate is referred to in this notice as the “recomputed differential earnings rate” for 1999.) These rates are used by mutual life insurance companies to calculate their

federal income tax liability for taxable years beginning in 2000.

BACKGROUND

Section 809(a) provides that, in the case of any mutual life insurance company, the amount of the deduction allowable under § 808 for policyholder dividends is reduced (but not below zero) by the “differential earnings amount.” Any excess of the differential earnings amount over the amount of the deduction allowable under § 808 is taken into account as a reduction in the closing balance of reserves under subsections (a) and (b) of § 807. The “differential earnings amount” for any taxable year is the amount equal to the product of (a) the life insurance company’s average equity base for the taxable year multiplied by (b) the “differential earnings rate” for that taxable year. The “differential earnings rate” for the taxable year is the excess of (a) the “imputed earnings rate” for the taxable year over (b) the “average mutual earnings rate” for the second calendar year preceding the calendar year in which the taxable year begins. The “imputed earnings rate” for any taxable year is the amount that bears the same ratio to 16.5 percent as the “current stock earnings rate” for the taxable year bears to the “base period stock earnings rate.”

Section 809(f) provides that, in the case of any mutual life insurance company, if the “recomputed differential earnings amount” for any taxable year exceeds the differential earnings amount for that taxable year, the excess is included in life insurance gross income for the succeeding taxable year. If the differential earnings amount for any taxable year exceeds the recomputed differential earnings amount for that taxable year, the excess is allowed as a life insurance deduction for the succeeding taxable year. The “recomputed differential earnings amount” for any taxable year is an amount calculated in the same manner as the differential earnings amount for that taxable year, except that the average mutual earnings rate for the calendar year in which the taxable year begins is substituted for the average mutual earnings rate for the second calendar year preceding the calendar year in which the taxable year begins.

The stock earnings rates and mutual earnings rates taken into account under

§ 809 generally are determined by dividing statement gain from operations by the average equity base. For this purpose, the term “statement gain from operations” means “the net gain or loss from operations required to be set forth in the annual statement, determined without regard to Federal income taxes, and ... properly adjusted for realized capital gains and losses....” See § 809(g)(1). The term “equity base” is defined as an amount determined in the manner prescribed by regulations equal to surplus and capital increased by the amount of nonadmitted financial assets, the excess of statutory reserves over the amount of tax reserves, the sum of certain other reserves, and 50 percent of any policyholder dividends (or other similar liability) payable in the following taxable year. See § 809(b)(2), (3), (4), (5) and (6). Section 1.809–10 of the Income Tax Regulations provides that the equity base includes both the asset valuation reserve and the interest maintenance reserve for taxable years ending after December 31, 1991.

Section 1.809–9(a) of the regulations provides that neither the differential earnings rate under § 809(c) nor the recomputed differential earnings rate that is used in computing the recomputed differential earnings amount under § 809(f)(3) may be less than zero.

Rev. Rul. 99–3, 1999–1 C.B. 313, provides that a life insurance subsidiary of a mutual holding company is not a mutual life insurance company for which the deduction for policyholder dividends is reduced pursuant to §§ 808(c)(2) and 809.

As described above, the differential earnings rate for 2000 and the recomputed differential earnings rate for 1999 affect the income and deductions reported by mutual life insurance companies on their federal income tax returns for the 2000 taxable year.

Data necessary to determine the tentative differential earnings rate for 2000 and the tentative recomputed differential earnings rate for 1999 have been compiled from returns filed by mutual life insurance companies and certain stock life insurance companies. The Internal Revenue Service is currently examining these returns. This examination will not be completed before the March 15, 2001, due date for filing 2000 calendar year returns.

March 19, 2001 912 2001–12 I.R.B.

NOTICE OF TENTATIVE RATES

This notice publishes a tentative determination of the differential earnings rate for 2000 and of the recomputed differential earnings rate for 1999. This notice also publishes a tentative determination of the rates on which the calculation of the differential earnings rate for 2000 and the recomputed differential earnings rate for 1999 are based. The final determination of these rates is expected to be published before September 1, 2001.

The tentative determination of the differential earnings rate for 2000 and the

tentative determination of the recomputed differential earnings rate for 1999 that are published in this notice should be used by mutual life insurance companies to calculate the amount of tax liability for taxable years beginning in 2000 (in the case of companies that file returns before publication of the final determination of these rates) or to calculate the amount of estimated unpaid tax liability for taxable years beginning in 2000 (in the case of companies that are allowed an extension of time to file returns). Companies that file returns before publication of the final determination of these rates should file

Notice 2001–24 Table 1

amended returns after the final determination of these rates is published. If there is a failure to pay tax for a taxable year beginning in 2000 and the failure is attributable to a difference between (a) the tentative determination of the differential earnings rate for 2000 and recomputed differential earnings rate for 1999 and (b) the final determination of these rates, then any such failure through September 17, 2001, will be treated as due to reasonable cause and will not give rise to any addition to tax under § 6651.

The tentative determination of the rates is set forth in Table 1.

Tentative Determination of Rates To Be Used For Taxable Years Beginning in 2000

Differential earnings rate for 2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0 Recomputed differential earnings rate for 1999 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0 Imputed earnings rate for 1999 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15.815 Imputed earnings rate for 2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15.358 Base period stock earnings rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18.221 Current stock earnings rate for 2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16.960 Stock earnings rate for 1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19.321 Stock earnings rate for 1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15.836 Stock earnings rate for 1999 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15.724 Average mutual earnings rate for 1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16.011 Average mutual earnings rate for 1999 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16.164

DRAFTING INFORMATION

The principal author of this notice is Katherine A. Hossofsky of the Office of the Associate Chief Counsel (Financial Institutions and Products). For further information regardingthis notice, contact Ms. Hossofsky at (202) 622-3477 (not a toll-free call).

26 CFR 601.204: Changes in accounting periods and in methods of accounting. (Also Part I, sections 446, 1281; 1.446–1.)

Rev. Proc. 2001–25