SECTION 9. DEFAULT PROCEDURES

.01 In General . Section 9 of this revenue procedure applies to the resolution of any accounting method issue if the Service changes the taxpayer’s method of accounting and fails to provide the notice required by section 7.01 of this revenue procedure, or if the Service resolves the accounting method issue on a nonaccounting-method-change basis and the Service and the taxpayer do not execute a closing agreement as required by section 8.01 of this revenue procedure. See section 10.05 of this revenue procedure for an example of the application of section 9 of this revenue procedure.

.02 Effect of Adjustments . For accounting method issues resolved under section 9 of this revenue procedure: (1) No omission or duplication . The Service and the taxpayer are required to treat all items in a manner that prevents

(3) Effect of subsequent change .

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change the taxpayer to the capitalization method of accounting for the costs. The appeals officer should provide the notice required by section 7.01 of this revenue procedure.

The appeals officer may make the change using the cut-off method. If the appeals officer makes the change in 1997 using the cut-off method, the appeals officer will disallow the deductions of $2,000,000 in each of 1997 and 1998. The taxpayer’s basis in the property as of the beginning of 1998 will be increased by $4,000,000 (representing the disallowance of the $2,000,000 of deductions in each of 1997 and 1998). The method change (once final) is effective for 1997. Thus, the taxpayer is required to capitalize the costs in 1997 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.

Alternatively, the appeals officer may compromise the amount of the § 481(a) adjustment. If the appeals officer makes the change in 1997 and agrees to reduce the § 481(a) adjustment by 25%, the appeals officer will impose a § 481(a) adjustment of $750,000 (representing 75% of the amount of the costs deducted in 1996), the entire amount of which will be taken into account in computing taxable income in 1997. The appeals officer will disallow the deductions of $2,000,000 in each of 1997 and 1998. The taxpayer and the appeals officer agree in a closing agreement that basis in the property as of the beginning of 1998 will be increased by $4,750,000 (representing the reduced § 481(a) adjustment of $750,000 and the disallowance of the $2,000,000 of deductions in each of 1997 and 1998). The method change (once final) is effective for 1997. Thus, the taxpayer is required to capitalize the costs in 1997 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.

As another alternative, the appeals officer may compromise the year of change and/or the § 481(a) adjustment period. For example, the appeals officer may agree to make the change in 1998 with a two-year § 481(a) adjustment

the duplication or omission of items of income or deduction;

(2) No change in method . The resolution does not constitute a change in method of accounting. The taxpayer is required to continue to use its current method of accounting for all items not affected by the adjustments made by the Service, unless the taxpayer obtains the consent of the Commissioner to change from its current method or the Service changes the taxpayer from its current method on subsequent examination;

(3) Subsequent change . The Service is not precluded from changing the taxpayer’s method of accounting in any open taxable year; and

(4) Effect of subsequent change . If the taxpayer’s method of accounting subsequently is changed (voluntarily or involuntarily) in any open taxable year, the § 481(a) adjustment (if any) will be determined by reference to all items arising prior to the year of change, including the items affected by the adjustment made by the Service.