SECTION 7. AUDIT PROTECTION

.01 If a taxpayer within the scope of this revenue procedure currently uses a method of accounting that treats credit card cash advance fees as creating or increasing the amount of OID on a pool of credit card loans that includes the cash advances that give rise to those fees, the issue of whether that treatment is proper will not be raised by the Commissioner for a taxable year that ends before December 31, 2004.

.02 If a taxpayer within the scope of this revenue procedure currently uses a method of accounting that treats credit card cash advance fees as creating or increasing the amount of OID on a pool of credit card

cash advance fee is generally a flat fee or a percentage of the face amount of the cash advance (often subject to minimum and maximum limits). Credit card cash advance fees are generally imposed in addition to any stated periodic interest rate charges.

.03 Under § 1273(a)(1) of the Internal Revenue Code, OID is the excess of the stated redemption price at maturity (SRPM) of a debt instrument over the issue price of that instrument. Under § 1.1273–1(b) of the Income Tax Regulations, the SRPM is the sum of all payments provided by the debt instrument other than payments of qualified stated interest (QSI). Under § 1.1273–1(c), QSI is stated interest that is unconditionally payable in cash or property (other than debt instruments of the issuer) or that will be constructively received under § 451 at least annually at a single fixed rate. See § 1.1273–2 for rules to determine the issue price of a debt instrument.

.04 Section 1272(a)(6) provides rules for determining the daily portions of OID on certain debt instruments. The instruments covered include REMIC regular interests and qualified mortgages held by REMICs, debt instruments the payments under which may be accelerated by reason of prepayments of other obligations securing the debt instruments, and any pool of debt instruments the yield on which may be affected by reason of prepayments.

.05 Rev. Proc. 2004–33, 2004–1 C.B. 989, describes conditions under which the Commissioner will allow a taxpayer within the scope of that procedure to treat credit card late fees as creating or increasing the amount of OID on a pool of credit card loans to which those fees relate. Under Rev. Proc. 2004–33, a credit card late fee that is a one-time charge or a flat sum imposed in addition to a stated periodic interest charge may be treated as creating or increasing OID if that fee otherwise satisfies the revenue procedure’s requirements.

.06 Any change in the taxpayer’s treatment of credit card cash advance fees that affects when income is recognized is a change in method of accounting to which the provisions of §§ 446 and 481, and the regulations thereunder, apply. Under § 1.446–1(e)(2)(i), a taxpayer generally must secure the consent of the Commis

sioner before changing a method of accounting for federal income tax purposes. Section 1.446–1(e)(3)(ii) authorizes the Commissioner to prescribe administrative procedures setting forth the terms and conditions necessary to obtain consent to change a method of accounting.

.07 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), provides procedures by which taxpayers may obtain automatic consent to change to the methods of accounting described in the Appendix of Rev. Proc. 2002–9. Section 5.03 of Rev. Proc. 2002–9 provides that, unless otherwise provided, a taxpayer making a change in method of accounting under the revenue procedure must take into account a section 481(a) adjustment in the manner provided in section 5.04 of Rev. Proc. 2002–9.