SECTION 2. BACKGROUND AND

CHANGES

.01 In general, § 451 provides that the amount of any item of gross income is included in gross income for the taxable year in which received by the taxpayer, unless, under the method of accounting used in computing taxable income, the amount is to be properly accounted for as of a different period. Section 1.451–1(a) provides that, under an accrual method of accounting, income is includible in gross income when all the events have occurred that fix the right to receive the income and the amount can be determined with reasonable accuracy. All the events that fix the right to receive income generally occur when (1) the required performance takes place, (2) payment is due to the taxpayer, or (3) payment is received by the taxpayer, whichever happens earliest. See Rev. Rul. 84–31, 1984–1 C.B. 127. .02 Section 1.451–5 generally allows accrual method taxpayers to defer the inclusion in gross income for federal income tax purposes of advance payments for goods until the taxable year in which they are properly accruable under the taxpayer’s method of accounting for tax purposes if that method results in the payments being included in gross income no later than when they are includible in gross receipts under the taxpayer’s method of accounting for financial reporting purposes.

.03 Rev. Proc. 71–21 was published to implement an administrative decision of the Commissioner in the exercise of his discretion under § 446 to allow accrual method taxpayers in certain specified and limited circumstances to defer the inclusion in gross income for federal income tax purposes of payments received (or amounts due and payable) in one taxable year for services to be performed by the end of the next succeeding taxable year. Rev. Proc. 71–21 was designed to reconcile the tax and financial accounting treatment of payments received for services to be performed by the end of the next succeeding taxable year without permitting extended deferral of the inclusion of those payments in gross income for federal income tax purposes.

Advance Payments

Notice 2002–79

This notice provides a proposed revenue procedure that, if finalized, will modify and supersede Rev. Proc. 71–21, 1971–2 C.B. 549. Pursuant to the discretion granted the Commissioner of Internal Revenue under § 446 of the Internal Revenue Code, Rev. Proc. 71–21 allows, and this proposed revenue procedure (if finalized) will allow, taxpayers using an accrual method of accounting to defer the inclusion in gross income for federal income tax purposes of advance payments in certain limited situations. This proposed revenue procedure is intended to reduce the administrative and tax compliance burdens on taxpayers and to minimize disputes between the Internal Revenue Service and taxpayers regarding advance payments.

In conjunction with this proposed revenue procedure, the Treasury Department and the Service plan to propose regulations that will modify § 1.61–8(b) of the Income Tax Regulations to conform with the proposed revenue procedure. The current regulation states that “advance rentals” are includible in gross income for the year of receipt (except as provided by § 467 and the regulations thereunder); the proposed regulation will allow the Commissioner to provide rules allowing for inclusion in gross income for a taxable year other than the taxable year of receipt.

The Service requests comments on the proposed revenue procedure provided in this notice. In particular, the Service requests comments regarding:

• whether the proposed revenue procedure should take into account the cost of goods sold in deferring advance payments from the sale of goods;

• a taxpayer’s ability to allocate advance payments between the deferral provisions in § 1.451–5 and this revenue procedure;

• the acceleration of advance payments pursuant to non-taxable transfers, such as transfers under § 351 or § 721, and the treatment of short tax years resulting from § 381(a) transactions; and

• the use of statistical methodologies for tracing advance payments if the taxpayer cannot determine the extent to

which particular advance payments received in a given taxable year are actually included in gross receipts for financial reporting purposes in that year. All comments should be submitted by March 24, 2003, either to:

Internal Revenue Service P.O. Box 7604 Ben Franklin Station Washington, DC 20044 Attn: CC:PA:T:CRU (ITA) Room 5529

or electronically via the Service internet site at: Notice.Comments@m1.irscounsel. treas.gov (the Service Comments e-mail address).

Rev. Proc. 2003–XX