SECTION 2. BACKGROUND

.01 On January 5, 2004, the Internal Revenue Service and Treasury Department published final regulations in the Federal Register (T.D. 9107, 2004–7 I.R.B. 447

[69 FR 436]). Section 1.263(a)–4 prescribes the extent to which taxpayers must capitalize amounts paid or incurred to acquire or create (or to facilitate the acquisition or creation of) intangibles. Section 1.263(a)–5 prescribes the extent to which taxpayers must capitalize amounts paid or incurred to facilitate an acquisition of a trade or business, a change in the capital structure of a business entity, and certain other transactions. Section 1.167(a)–3(b) provides a safe harbor useful life for certain intangible assets. The final regulations under §§ 1.263(a)–4 and 1.263(a)–5 are effective for amounts paid or incurred on or after December 31, 2003. The final regulations under § 1.167(a)–3(b) are effective for intangible assets created on or after December 31, 2003.

.02 Sections 1.263(a)–4(p) and 1.263(a)–5(n) provide that a taxpayer seeking to change to a method of accounting provided in the final regulations must secure the consent of the Commissioner in accordance with the requirements of § 1.446–1(e). In addition, §§ 1.263(a)–4(p) and 1.263(a)–5(n) provide that, for the taxpayer’s first taxable year ending on or after December 31, 2003, the taxpayer is granted the con

sent of the Commissioner to change to a method of accounting provided in the final regulations, provided the taxpayer follows the administrative procedures issued under § 1.446–1(e)(3)(ii) for obtaining the Commissioner’s automatic consent to a change in accounting method (for further guidance, for example, see Rev. Proc. 2002–9, 2002–1 C.B. 327, as modified and clarified by Announcement 2002–17, 2002–1 C.B. 561, modified and amplified by Rev. Proc. 2002–19, 2002–1 C.B. 696, and amplified, clarified, and modified by Rev. Proc. 2002–54, 2002–2 C.B. 432). The final regulations further provide that any applicable § 481(a) adjustment for a change to a method of accounting provided in the final regulations for a taxpayer’s first taxable year ending on or after December 31, 2003, is determined by taking into account only amounts paid or incurred in taxable years ending on or after January 24, 2002. The preamble to the final regulations states that the Service may issue additional guidance for utilizing the automatic consent procedures to change to a method of accounting provided in the regulations.

.03 Section 1.446–1(e)(3)(ii) authorizes the Commissioner to prescribe administrative procedures setting forth the limitations, terms, and conditions deemed necessary to permit a taxpayer to obtain consent to change a method of accounting.

.04 Rev. Proc. 2002–9 provides procedures by which a taxpayer may obtain automatic consent to change to a method of accounting described in the Appendix of Rev. Proc. 2002–9.

.05 Rev. Rul. 90–38, 1990–1 C.B. 57, provides that, if a taxpayer uses an erroneous method of accounting for two or more consecutive taxable years, the taxpayer has adopted a method of accounting. The ruling further provides that a taxpayer may not, without the Commissioner’s consent, retroactively change from an erroneous to a permissible method of accounting by filing an amended return.

.06 Rev. Proc. 2004–23, 2004–16 I.R.B. 785, provides the exclusive administrative procedures under which a taxpayer may obtain automatic consent for the taxpayer’s first taxable year ending on or after December 31, 2003, to change to a method of accounting provided in the final regulations and, if desired, to change to a method of utilizing the 3 ¹ /2 month

rule authorized by § 1.461–4(d)(6)(ii) or the recurring item exception authorized by § 1.461–5 in conjunction with a change to a method of accounting provided in the final regulations. Under Rev. Proc. 2004–23, a term and condition of the Commissioner’s consent with respect to a change to a method of accounting provided in the final regulations is that any applicable § 481(a) adjustment take into account only amounts paid or incurred in taxable years ending on or after January 24, 2002. In addition, Rev. Proc. 2004–23 states that for taxable years subsequent to the first taxable year ending on or after December 31, 2003, a similar term and condition will apply. (For further background, see Section 2 of Rev. Proc. 2004–23.) .07 This revenue procedure applies only for a taxpayer’s second taxable year ending on or after December 31, 2003. As in Rev. Proc. 2004–23, this revenue procedure grants taxpayers the Commissioner’s consent to change to a method of utilizing the 3 ¹ /2 month rule or the recurring item exception only for the item for which the taxpayer is simultaneously changing to a method of accounting provided in the final regulations. In addition, a term and condition of obtaining the Commissioner’s consent, whether or not automatic, is that any applicable § 481(a) adjustment take into account only amounts paid or incurred in taxable years ending on or after January 24, 2002. The Service intends to issue future guidance for changes in methods of accounting made for subsequent taxable years, including automatic consent procedures for some or all methods of accounting provided in the final regulations. Such guidance will include as a term and condition of obtaining the Commissioner’s consent, whether or not automatic, that any applicable § 481(a) adjustment take into account only amounts paid or incurred in taxable years ending on or after January 24, 2002. .08 This revenue procedure constitutes the exclusive guidance for utilizing the automatic consent procedures to change to a method of accounting provided in the final regulations for a taxpayer’s second taxable year ending on or after December 31, 2003. For any change in method of accounting to which this revenue procedure applies, a taxpayer may not file an application for a change in method of accounting

January 10, 2005 303 2005–2 I.R.B.

procedure if the taxpayer is making more than one change in method of accounting);

(e) Part IV, in accordance with section 6 of this revenue procedure; and (f) Schedule E, if applicable; (3) In addition to the other information required on line 12 of Form 3115, the taxpayer must include the citation to the paragraph of the final regulations that provides for the proposed method of accounting for each item ( e.g., § 1.263(a)–4(d)(6) or § 1.263(a)–4(f)), and, if applicable, whether the taxpayer is also proposing to change to a method that uses the 3 ¹ /2 month rule authorized by § 1.461–4(d)(6)(ii) or the recurring item exception authorized by § 1.461–5 with respect to the item;

(4) In addition to the other information required on Schedule E of Form 3115 (if applicable), the taxpayer must include a statement as to whether the useful life is the safe harbor useful life prescribed by § 1.167(a)–3(b)(1) or § 1.167(a)–3(b)(1)(iv) and, if the useful life is the safe harbor useful life prescribed by § 1.167(a)–3(b)(1), a statement explaining why the intangible asset does not have a useful life the length of which can be estimated with reasonable accuracy; and

(5) A taxpayer that must file one or more amended returns as provided in section 5.03 of this revenue procedure to be eligible to use the automatic consent procedures of this revenue procedure must attach to the Form 3115 a written statement signed under penalties of perjury confirming that the taxpayer has filed the amended returns pursuant to section 5.03 of this revenue procedure.

.03 Unauthorized change in a preced- ing year .

(1) A taxpayer may change a method of accounting only with the consent of the Commissioner. § 1.446–1(e)(2). A taxpayer that changes a method of accounting without the consent of the Commissioner has made an unauthorized change in method of accounting. If a taxpayer makes an unauthorized change in method of accounting, the Service may adjust the taxpayer’s taxable income during the examination of the taxpayer’s income tax return for the taxable year the unauthorized change was made and for all affected subsequent years. In the notice of proposed rulemaking that preceded the publication of the final regulations (REG–125638–01,

under Rev. Proc. 97–27, 1997–1 C.B. 10 (as modified and amplified by Rev. Proc. 2002–19, 2002–1 C.B. 696, as amplified and clarified by Rev. Proc. 2002–54, 2002–2 C.B. 432). See section 4.02(1) of Rev. Proc. 97–27.