SECTION 11. EFFECTIVE — Internal Revenue Bulletin 2002-13

.01 In General . Except as provided in section 11.02 of this revenue procedure, this revenue procedure is effective for:

(1) examiner’s reports issued on or after July 1, 2002; and

(2) Forms 870AD and agreements executed on or after July 1, 2002 (regardless of when the underlying examiner’s report was issued).

.02 Transition Rule . The Service and the taxpayer may agree to apply this revenue procedure to agreements executed on or after March 14, 2002.

DRAFTING INFORMATION

The principal author of this revenue procedure is Grant Anderson of the Office of Associate Chief Counsel (Income Tax and Accounting). For further information regarding this revenue procedure, contact Mr. Anderson at (202) 622–4970 (not a toll-free call).

t = highest marginal tax rate

applicable to the taxpayer r = the applicable time-value

rate (computed for the overlap period) n = the number of days in the

taxpayer’s method in 1999, the Service will compute a § 481(a) adjustment of $1,000,000 (representing the $1,000,000 of the costs deducted in 1996). The Service will also disallow the deduction of $5,000,000 in 1999. The taxpayer’s basis in the property as of the beginning of 1999 will be increased by an additional $6,000,000 (representing the $1,000,000 § 481(a) adjustment and the disallowance of the $5,000,000 deduction in 1999). The method change (once final) is effective for 1999. Thus, the taxpayer is required to capitalize the costs in 1999 and all subsequent taxable years, unless the taxpayer obtains the consent of the Commissioner to change the method or the Service changes the taxpayer from the method on subsequent examination.

Assume that the examining agent disallows the deductions of $2,000,000 in each of 1997 and 1998 and computes the § 481(a) adjustment of $1,000,000, but does not label the § 481(a) adjustment or otherwise provide notice that the accounting method issue is being treated as an accounting method change. The taxpayer’s basis in the property as of the beginning of 1998 is increased by $5,000,000 (representing the $1,000,000 adjustment and the disallowance of the $2,000,000 of deductions in each of 1997 and 1998). The taxpayer’s current method of accounting for the costs is not changed. Thus, the taxpayer is required to continue to deduct the costs in 1999 and all subsequent taxable years, unless the taxpayer obtains the consent of the Commissioner to change the method or the Service changes the taxpayer from the method on subsequent examination. If the Service changes the taxpayer’s method in 1999, the Service will compute a § 481(a) adjustment of $0 (excluding the $1,000,000 of the costs deducted in 1998

overlap period $5,000,000 - .35 - {[1+(.065/ 365)] ⁶¹ -1} The $19,112 is reduced by 25% (the factor used by the appeals officer to reflect the hazards of litigation) to arrive at the interest credit of $14,334. The Service will treat the $14,334 as a payment toward the $100,000 of interest on the taxpayer’s deficiency for 1999.

.05 Default Procedures .

(1) Facts . The facts are the same as section 10.01 of this revenue procedure, except that the examining agent does not provide the notice required by section 7.01 of this revenue procedure. Specifically, the examining agent disallows the deductions of $2,000,000 in each of 1997 and 1998, but does not compute the § 481(a) adjustment of $1,000,000 or otherwise provide notice that the accounting method issue is being treated as an accounting method change.

(2) Effect . The taxpayer’s basis in the property as of the beginning of 1998 is increased by $4,000,000 (representing the disallowance of the $2,000,000 of deductions in each of 1997 and 1998). The taxpayer’s current method of accounting for the costs is not changed. Thus, the taxpayer is required to continue to deduct the costs in 1999 and all subsequent taxable years, unless the taxpayer obtains the consent of the Commissioner to change the method or the Service changes the taxpayer from the method on subsequent examination. If the Service changes the

April 1, 2002 691 2002-13 I.R.B.

APPENDIX A MODEL CLOSING AGREEMENT FOR SETTLEMENT ON ACCOUNTING METHOD CHANGE BASIS

Department of the Treasury Internal Revenue Service

Closing Agreement on Final Determination Covering Specific Matters

Under § 7121 of the Internal Revenue Code, [ Insert taxpayer’s name, address, telephone number, and identifying number ] (“the taxpayer”) and the Commissioner of Internal Revenue (“the Commissioner”) make the following closing agreement:

WHEREAS:

The accounting method issue covered by this agreement is the taxpayer’s method of accounting for [ identify subject: for example: “credit sales”];
The taxable year(s) covered by this closing agreement are [ insert taxable year(s) covered by the agreement ];
The taxpayer and the Commissioner relied on the following facts and representations in making this closing agreement:

[ insert any relevant facts ];

Under the taxpayer’s present method of accounting for [ identify subject: for example, “credit sales”], the taxpayer [ describe in detail the method of accounting being changed: for example, “includes income from credit sales in gross income when payment is received”];
[ If applicable, insert: ] The taxpayer has filed an amended return(s) for the taxable year(s) ended [ insert applicable affected succeeding taxable year(s) for which a federal income tax return has been filed as of the date of the closing agreement ] to reflect the change in method of accounting for [ insert subject: for example, “credit sales”] described in this closing agreement;
[ If applicable, insert: ] A stipulated decision has been entered by the [ insert name of federal court ] with respect to the taxable year(s) ended [ insert date(s) ] that reflects taxable income for such year(s) computed using the new method of accounting for

[ insert subject: for example, “credit sales”].

NOW IT IS HEREBY DETERMINED AND AGREED for federal income tax purposes that:

The Service is changing the taxpayer’s method of accounting for [ insert subject: for example, “credit sales”] to the method of [ describe the method of accounting to which the taxpayer is being changed: for example, “including income from credit sales in gross income when all the events have occurred that fix the right to receive such income and the amount thereof can be determined with reasonable accuracy (an accrual method)”];
The change in method of accounting for [ insert subject: for example, “credit sales”] is to be effected for the taxable year ended [ insert date ] (the year of change);
[ Insert if applicable ] An adjustment to income is required under § 481(a) of the Internal Revenue Code in the amount of $

[ insert amount in numbers ] ([ insert amount in words ] dollars), [ if applicable, insert computed by taking into account the limitations under § 481(b),] as of the beginning of the year of change ([ insert date ]), for [ describe the adjustment: for example, “credit sales”], which amount previously has not been included in the taxpayer’s gross income. [ Alternatively, insert ] The change in method of accounting for [ insert subject: for example, “credit sales”] is to made on a cut-off basis;

[ Insert if applicable ] The § 481(a) adjustment will be taken into account [ insert § 481(a) adjustment spread period: for example, “entirely in the year of change.”]
[ Insert if applicable ] The adjustment(s) to tax attributable to the adjustment(s) to taxable income resulting from the change in the method of accounting for [ insert subject: for example, “credit sales”] (including the § 481(a) adjustment, current year adjustment(s), and any collateral adjustments to taxable income or tax liability resulting fom the change) for each taxable year covered by the closing agreement are as follows: [ insert the adjustments to each taxable year covered by the closing agreement in table form ], and;
The change in method of accounting for [ insert subject: for example, “credit sales”] is a change in method of accounting within the meaning of Rev. Proc. 2002–18. As such, the provisions of section 446 of the Code, and the regulations thereunder, apply to the new method of accounting for [ insert subject: for example, “credit sales.”];
The Service is not precluded from changing the taxpayer’s method of accounting for [ insert subject: for example, “credit sales”] from the new method of accounting if the Service determines that the new method does not clearly reflect the taxpayer’s income. However, under section 7.04(3) of Rev. Proc. 2002–18, the Service will not require the taxpayer to change its method of accounting for [ insert subject: for example, “credit sales”] from the new method for [ insert taxable year(s) for which a federal income tax return has been filed as of the date of this closing agreement ], provided that:

(a) the taxpayer has complied with all the applicable provisions of this closing agreement;

2002-13 I.R.B. 692 April 1, 2002

(b) there has been no taxpayer fraud, malfeasance, or misrepresentation of a material fact; (c) there has been no change in the material facts on which this closing agreement was based; and (d) there has been no change in the applicable law on which this closing agreement was based;

[ Insert if applicable: ] The following additional conditions also apply: [ insert, for example, conditions with respect to waiv- ing restrictions on assessment and collection, paying any tax, abating any overassessment, or refunding or crediting any tax over- payment ];
The taxpayer accepts this settlement and agrees to the applicable terms of Rev. Proc. 2002–18. This agreement is final and conclusive except:

(1) The matter it relates to may be reopened in the event of fraud, malfeasance, or misrepresentation of a material fact;

(2) It is subject to the Internal Revenue Code sections that expressly provide that effect be given to their provisions (including any stated exception for § 7122) notwithstanding any law or rule of law; and

(3) If it relates to a tax period ending after the date of this agreement, it is subject to any law enacted after the agreement date, that applies to the tax period.

By signing, the parties certify that they have read and agreed to the terms of this document.

Your signature Date:

Spouse’s signature if joint return: Date:

Taxpayer’s representative: Date: Taxpayer (other than an individual): Date: Title:

Commissioner of Internal Revenue: By: Date: Title:

Instructions

This agreement must be signed and filed in triplicate. (All copies must have original signatures.) The original and copies of the agreement must be identical. The name of the taxpayer must be stated accurately. The agreement may relate to one or more years.

If an attorney or agent signs the agreement for the taxpayer, the power of attorney (or a copy) authorizing that person to sign must be attached to the agreement.

If the taxpayer is a corporation, the agreement must be dated and signed with the name of the corporation, the signature and title of an authorized officer or officers, or the signature of an authorized attorney or agent. It is not necessary that a copy of an enabling corporate resolution be attached.

Use additional pages if necessary and identify them as part of this agreement.

Please see Rev. Proc. 68–16 (1968–1 C.B. 770) for a detailed description of practices and procedures applicable to most closing agreements.

April 1, 2002 693 2002-13 I.R.B.

APPENDIX B MODEL CLOSING AGREEMENT FOR SETTLEMENT ON NONACCOUNTING-METHOD-CHANGE BASIS

Department of the Treasury Internal Revenue Service

Closing Agreement on Final Determination Covering Specific Matters

WHEREAS:

The accounting method issue covered by this closing agreement is [ identify subject: for example: “costs of acquiring nondepreciable asset X”];
[ Insert if alternative-timing resolution ] The item(s) covered by this closing agreement are [ identify items subject to the clos- ing agreement: for example, “the costs incurred in connection with the acquisition of nondepreciable asset X in 1997 and 1998”].

[ Alternatively, insert if time-value-of-money resolution ] The taxable year(s) covered by this closing agreement are [ insert taxable year(s) covered by the agreement ];

The taxpayer and the Commissioner relied on the following facts and representations in making this closing agreement:

[ insert any relevant facts ];

Under the taxpayer’s present method of accounting for [ identify subject: for example, “costs of acquiring nondepreciable asset X”], the taxpayer [ describe in detail the accounting method issue: for example, “deducts the costs as an ordinary and necessary business expense”];
[ If applicable, insert: ] The taxpayer has filed an amended return(s) for the taxable year(s) ended [ insert applicable affected succeeding taxable years for which a federal income tax return has been filed as of the date of the closing agreement ] to reflect the alternative-timing resolution for [ insert subject: for example, “costs of acquiring nondepreciable asset X”] described in this closing agreement;
[ If applicable, insert: ] A stipulated decision has been entered by the [ insert name of federal court ] with respect to the taxable years ended [ insert date(s) ] that reflects the nonaccounting-method-change resolution set forth in this agreement for [ insert subject: for example, “costs of acquiring nondepreciable asset X”].

NOW IT IS HEREBY DETERMINED AND AGREED for federal income tax purposes that:

The Service is not changing the taxpayer’s method of accounting for [ insert subject: for example, “costs of acquiring nondepreciable asset X”].
The accounting method issue covered by this agreement ( [identify subject: for example: “costs of acquiring nondepreciable asset X”]) is being resolved on [ insert basis for resolution: for example, “an alternative-timing basis” or “a time-value-of-money basis”].

[ If alternative-timing resolution, insert the following paragraphs 3 – 9 as applicable ] 3. The items covered by the closing agreement are to be accounted for in the affected taxable years as follows: [ insert a description of the manner in which the items are to be accounted for, for example, “Fifty percent of the costs incurred in each of 1997 and 1998 ($1,000,000) will be deductible and the remaining fifty percent ($1,000,000) will be capitalized”]; 4. As a result of this treatment, [ Insert a description of any collateral effects of thie alternative-timing treatment: for example, “the taxpayer’s basis in asset X is increased by $2,000,000”];

Any items not specifically covered by this closing agreement are not affected by this agreement;
The adjustment(s) to tax attributable to the adjustment to taxable income resulting from the resolution of [ insert subject: for example, “costs of acquiring nondepreciable asset X”] by this agreement (including the current year adjustment and any collateral adjustments for each taxable year affected by this closing agreement) is [ insert taxable year(s) ], $ [ insert amount in numbers] ([insert amount in words ] dollars);
The Service is not precluded from changing the taxpayer’s method of accounting for [ insert subject: for example, “costs of acquiring nondepreciable asset X”] upon subsequent examination for any open taxable year for items not covered by this agreement;
If the taxpayer’s method of accounting for [ insert subject: for example, “costs of acquiring nondepreciable asset X”] subsequently is changed (voluntarily or involuntarily) in any open taxable year, the adjustment under § 481(a) (if any) will be determined by reference to all items arising prior to the year of change except for those items specifically covered by this closing agreement; and
[ Insert if applicable: ] The following additional conditions also apply: [ insert, for example, conditions with respect to waiv- ing restrictions on assessment and collection, paying any tax, abating any overassessment, or refunding or crediting any tax over- payment ];

2002-13 I.R.B. 694 April 1, 2002

[ Alternatively, if a time-value-of-money resolution, insert the following paragraphs 3 – 10 as applicable ] 3. The computation of the specified amount as provided in section 6.02(4)(b) of Rev. Proc. 2002–18 has been made as follows:

[ insert computation ].

The specified amount is not interest under § 163(a) of the Code and may not be deducted or capitalized under any provision of the Code.
[ Insert if the computation of the specified amount takes into account the taxpayer’s actual tax attributes ] The tax attributes that may affect the computation of the taxpayer’s tax liability in subsequent taxable years [ insert “ are ” or “ are not ” ] adjusted to reflect their effect on the specified amount;
The Service is not precluded from changing the taxpayer’s method of accounting for [ insert subject: for example, “costs of acquiring nondepreciable asset X”] upon subsequent examination for any open taxable year not covered by the agreement;
If the taxpayer’s method of accounting for [ insert subject: for example, “costs of acquiring nondepreciable asset X”] subsequently is changed (voluntarily or involuntarily) in any open taxable year not covered by this agreement, the adjustment under § 481(a) (if any) will be determined by reference to all items arising prior to the year of change;
If the Service changes the taxpayer’s method of accounting in an open taxable year not covered by this agreement and imposes a § 481(a) adjustment, the interest that is assessed on any underpayment, or the interest that is due on any overpayment, for the year of change will be treated as paid to the extent necessary to prevent duplicate payment of the time-value-of-money benefit relating to the § 481(a) adjustment;
[ Insert if applicable: ] The following additional conditions also apply: [ insert, for example, conditions with respect to waiv- ing restrictions on assessment and collection, paying any tax, abating any overassessment, or refunding or crediting any tax over- payment ];

The taxpayer accepts this settlement and agrees to the applicable terms of Rev. Proc. 2002–18.

This agreement is final and conclusive except:

(1) The matter it relates to may be reopened in the event of fraud, malfeasance, or misrepresentation of a material fact; (2) It is subject to the Internal Revenue Code sections that expressly provide that effect be given to their provisions (including any stated exception for § 7122) notwithstanding any law or rule of law; and

(3) If it relates to a tax period ending after the date of this agreement, it is subject to any law enacted after the agreement date, that applies to the tax period.

By signing, the parties certify that they have read and agreed to the terms of this document.

Your signature Date: Spouse’s signature if joint return: Date: Taxpayer’s representative: Date: Taxpayer (other than an individual): Date: Title:

Commissioner of Internal Revenue:

By: Date: Title:

Instructions

If an attorney or agent signs the agreement for the taxpayer, the power of attorney (or a copy) authorizing that person to sign must be attached to the agreement.

Use additional pages if necessary and identify them as part of this agreement. Please see Rev. Proc. 68–16 (1968–1 C.B. 770) for a detailed description of practices and procedures applicable to most closing agreements.

April 1, 2002 695 2002-13 I.R.B.

and reseller-producers) is modified to read as follows:

“(3) Section 481(a) adjustment . Beginning with the year of change, a taxpayer changing its method of accounting for costs pursuant to sections 4.01(a)(1)(i), 4.01(1)(a)(iii), or 4.01(1)(a)(iv) of this APPENDIX generally must take any applicable net positive § 481(a) adjustment for such change into account ratably over the same number of taxable years, not to exceed four, that the taxpayer used its former method of accounting. A taxpayer changing its method of accounting for costs pursuant to sections 4.01(1)(a)(ii), 4.01(1)(a)(v), or 4.01(1)(a)(vi) of this APPENDIX generally must take any applicable net positive § adjustment for such change into account ratably over four taxable years. See section 5.04(3) of this revenue procedure for exceptions to this general rule.”

(6) Section 4.01(5) of the APPENDIX of Rev. Proc. 2002–9, which provides an example illustrating the change to and from a UNICAP method of accounting for small resellers and formerly small resellers is modified to read as follows:

- - Because X satisfies the small reseller

exception for 1997, X may change voluntarily from the UNICAP method to a permissible non-UNICAP inventory capitalization method under section 4.01 of this APPENDIX. To reflect the removal of the additional § 263A costs from the cost of its 1997 beginning inventory, X must compute a corresponding § 481(a) adjustment, which is a negative $100,000 ($1,200,000 - $1,300,000). The entire amount of this negative § 481(a) adjustment is included in the computation of X’s taxable income for 1997. In addition, X must include $20,000 of the unamortized 1995 § 481(a) adjustment in 1997 taxable income.

26 CFR 601.204: Changes in accounting periods and methods of accounting. (Also Part I, §§ 446, 481; 1.446–1, 1.481–1, 1.481– 4.)

Rev. Proc. 2002–19