SECTION 2. BACKGROUND

.01 Rev. Proc. 99–49 provides the procedures by which a taxpayer may obtain automatic consent to change a method of accounting described in the Appendix to Rev. Proc. 99–49. Under section 13.02 of the Appendix to Rev. Proc. 99–49, a cash method bank in the Eighth Circuit can automatically change its method of accounting for stated interest on short-term loans made in the ordinary course of business from an accrual method under § 1281 of the Internal Revenue Code to the cash receipts and disbursements method of accounting. In Security Bank Minnesota v. Commissioner, 994 F.2d 432 (8th Cir. 1993), aff’g 98 T.C. 33 (1992), the U.S. Circuit Court of Appeals for the Eighth

Circuit held that § 1281 does not require a cash method bank to include in gross income stated interest on short-term loans made in the ordinary course of business as that interest accrues. Because the Internal Revenue Service was litigating the § 1281 issue in other circuits, section 13.02 of the Appendix was limited to cash method banks in the Eighth Circuit.

.02 In Security State Bank v. Commis- sioner, 214 F.3d 1254 (10th Cir. 2000), aff’g 111 T.C. 210 (1998), acq., 2001–5 I.R.B., and U.S. Bancorp v. Commis- sioner, T.C.M. 1998–381, the courts similarly held that § 1281 does not require a cash method bank to include in gross income stated interest on short-term loans made in the ordinary course of business as that interest accrues. In light of the decisions in Security Bank Minnesota, Secu- rity State Bank, and U.S. Bancorp, the Service will no longer litigate the § 1281 issue in the context of short-term loans

2001–12 I.R.B. 913 March 19, 2001

made in the ordinary course of a cash method bank’s business. Accordingly, section 13.02 of the Appendix to Rev. Proc. 99–49 is modified to apply to all cash method banks.