SECTION 8. OPTIONAL

SETTLEMENT FOR TAXPAYERS UNDER EXAMINATION, BEFORE AN AREA APPEALS OFFICE, OR BEFORE THE TAX COURT

.01 In General. If a taxpayer is within the scope of this revenue procedure; the treatment of its track structure expenditures is an issue under consideration (within the meaning of section 3.09 of Rev. Proc. 2002–9) in examination, before an area appeals office, or before the Tax Court on September 30, 2002; and the taxpayer does not change to the track maintenance allowance method under section 6.03 of this revenue procedure, the Service offers to settle the track structure expenditure issue by changing the taxpayer’s method of accounting for track structure expenditures to the track maintenance allowance method in the earliest open taxable year after which there is no closed taxable year.

and to ensure proper handling, section 6.02(4) of Rev. Proc. 2002–9 is modified to require that a Form 3115 filed under this revenue procedure include the statement: “Automatic Change Filed Under Rev. Proc. 2002–65.” This statement should be legibly printed or typed at the top of any Form 3115 filed under this revenue procedure. (4) The change to the track maintenance allowance method will be made using a “cut-off method.” Under a cut-off method, only the items arising on or after the beginning of the year of change are accounted for under the track maintenance allowance method. Any items arising before the year of change continue to be accounted for under the taxpayer’s former method of accounting, unless such method of accounting is changed as a result of an examination or a return filed for a year before the year of change. Because no items are duplicated or omitted from income when a cut-off method is used to effect a change in accounting method, no § 481(a) adjustment is necessary.

(5) Section 7 of Rev. Proc. 2002–9 does not apply. The taxpayer does not receive audit protection in connection with a change to the track maintenance allowance method.

.04 Special Rule for Certain Taxpay- ers with Issue Under Consideration. If a taxpayer is within the scope of this revenue procedure, and the treatment of its track structure expenditures is an issue under consideration (within the meaning of section 3.09 of Rev. Proc. 2002–9) in examination, before an area appeals office, or before the Tax Court on September 30, 2002, the taxpayer may change to the track maintenance allowance method for its first or second taxable year ending on or after December 31, 2001, under section 6.03 of this revenue procedure or, alternatively, for an earlier taxable year under section 8 of this revenue procedure.

.05 Special Rule for Taxpayers Reclas- sified as Class I Railroads. In the event that a Class II or Class III railroad is reclassified as a Class I railroad by the Surface Transportation Board and required to file a Form R–1, the railroad is not eligible to use the method under this revenue procedure for any taxable year that it is a Class

I railroad and must change its method of accounting for track structure expenditures, beginning with its first full taxable year as a Class I railroad. The reclassified railroad may adopt the safe harbor method of accounting for track structure expenditures of Rev. Proc. 2001–46, 2001–2 C.B. 263, if it otherwise qualifies, and must do so on a cut-off basis. To this extent, section 6.06 of Rev. Proc. 2001–46 is amplified.

.06 Changes Not Made under this Rev- enue Procedure. A taxpayer that wants to change to the track maintenance allowance method described in section 5 of this revenue procedure that does not change its method of accounting under section 6 or 8 of this revenue procedure must follow the change in method of accounting provisions in Rev. Proc. 97–27, 1997–1 C.B. 680 (or any successor).