SECTION 13. SHORT-TERM

OBLIGATIONS (§ 1281)

(1) Description of change and scope .

.01 Interest income on short-term obli- gations .

(1) Description of change and scope .

(a) This change applies to a taxpayer that wants to change its method of accounting to comply with § 1281 for interest income on short-term obligations.

(b) Under § 1281, a holder of certain short-term obligations, including a bank as defined in § 581, must include in gross income any accrued interest income

(a) Applicability . This change applies to a bank that uses the cash receipts and disbursements method of accounting as its overall accountingmethod and that wants to change its method of accounting from accruing stated interest on short-term loans made in the ordinary course of business to using the cash method for that interest. For example, see Security State Bank v. Commissioner, 214 F.3d 1254 (10th Cir. 2000), aff’g 111 T.C. 210 (1998), acq., 2001–5 I.R.B., and Security Bank Minne- sota v. Commissioner, 994 F.2d 432 (8th Cir. 1993), aff’g 98 T.C. 33 (1992), in which the courts held that § 1281 does not apply to short-term loans made by a cash method bank in the ordinary course of its business.

January 22, 2002 373 2002–3 I.R.B.

method of accounting different from the method used to compute taxable income for the preceding taxable year.

.05 To resolve disputes concerning whether the cost of smallwares should be accounted for as currently deductible expenses under § 162 or capital expenditures within the meaning of § 263(a), and to simplify the record keeping requirements with respect to smallwares, the Internal Revenue Service will permit a taxpayer engaged in the trade or business of operating a restaurant or tavern that complies with the requirements of this revenue procedure to account for the cost of smallwares using the smallwares method provided in section 5 of this revenue procedure.