SECTION 6. HOW THIS REVENUE

PROCEDURE DIFFERS FROM REV. PROC. 2005–9

.01 Rev. Proc. 2005–9 applies to a taxpayer’s second taxable year ending on or after December 31, 2003. This revenue procedure applies to a taxable year ending on or after December 31, 2005, and any earlier taxable year that is after the taxpayer’s second taxable year ending on or after December 31, 2003.

.02 Rev. Proc. 2005–9 grants taxpayers the Commissioner’s consent to change to a method of accounting utilizing the 3 ¹ /2 month rule authorized by § 1.461–4(d)(6)(ii) or to utilize the recurring item exception authorized by § 1.461–5 for the item for which the taxpayer is simultaneously changing to a method of accounting provided in the final regulations. This revenue procedure provides consent only for a change to a method of accounting provided in the final regulations. This revenue procedure does not provide consent for a change in method utilizing the 3 ¹ /2 month rule or the recurring item exception in conjunction with a change to a method provided by the final regulations. Thus, for a change in method of accounting utilizing the 3 ¹ /2 month rule or the recurring item exception in conjunction with a change to a method provided by the final regulations, a taxpayer must file two separate applications for a change in method of accounting — an application for a change in method of accounting under this revenue procedure to change to the method of accounting provided in the final regulations, and a separate application for a change in method of accounting under Rev. Proc. 97–27 for a change in method of accounting utilizing the 3 ¹ /2 month rule or the recurring item exception.

.03 Rev. Proc. 2005–9, as modified by Rev. Proc. 2005–17, waives the 5-year prior change scope limitation contained in section 4.02(6) of Rev. Proc. 2002–9. This revenue procedure modifies the waiver of the 5-year prior change scope limitation to restrict such waiver to prior requests for, or changes in, methods of accounting provided in the final regulations for a taxable year ending on or before December 31, 2005. See section 4.04 of this revenue procedure. .04 Unlike Rev. Proc. 2005–9, this revenue procedure provides procedures to

proposed method of accounting, reduced by the amount of capitalized costs that would have been recovered through amortization or depreciation if the taxpayer’s proposed method of accounting had been applied in taxable years ending on or after January 24, 2002, and (iii) as an increase or a reduction to taxable income, as appropriate, any other adjustments required as a result of the change in method of accounting. If under its present method of accounting a taxpayer capitalized costs incurred prior to the first taxable year that includes January 24, 2002, the taxpayer must continue to treat amortization or depreciation deductions attributable to those costs in accordance with the taxpayer’s present method of accounting. Thus, for example, a taxpayer that files its federal income tax return on a calendar year basis continues to amortize or depreciate in 2005 an intangible created in 2001, even though the taxpayer has changed to a method of accounting provided in the final regulations under which the entire cost of the intangible would be currently deductible if incurred in 2005. For taxpayers who correct an unauthorized change in a preceding year under section 4.03 of this revenue procedure, the taxpayer’s present method of accounting is the method used by the taxpayer prior to making the unauthorized change.

.02 Reporting the section 481(a) adjust- ment on Form 3115 .

(1) Netting . For purposes of determining the adjustment period under section 2.05(2) of Rev. Proc. 2002–9, the § 481(a) adjustment is determined separately for each change in method of accounting being made under this revenue procedure. Thus, a positive adjustment attributable to a change in one method may not be netted against a negative adjustment attributable to a change in another method. However, in determining the adjustment attributable to a change in method, a taxpayer must net positive § 481(a) adjustments and negative § 481(a) adjustments resulting from that change in method ( e.g., if a taxpayer changes to a method of applying the 12-month rule to prepaid amounts, the taxpayer must net the resulting negative § 481(a) adjustment with the positive § 481(a) adjustment that results from including those amounts in inventory pursuant to the taxpayer’s existing § 263A method of accounting for inventory).

(2) Itemized listing on Form 3115 . The taxpayer must include on Form 3115, Part IV, line 25, the total § 481(a) adjustment for all changes in methods of accounting being made. If the taxpayer is making more than one change in method of accounting under the final regulations, the taxpayer must include on an attachment to Form 3115 (a) the information required by Part IV, line 25 for each change in method of accounting (including the amount of the § 481(a) adjustment for each change in method of accounting);

(b) the information required by Part II, line 12 of Form 3115 that is associated with each change; and

(c) the citation to the paragraph of the final regulations that provides for each proposed method of accounting ( e.g., § 1.263(a)–4(d)(6) or § 1.263(a)–4(f)).

.03 Example : Y, a calendar year taxpayer that uses an accrual method of accounting, is a service provider not required to maintain inventories. Y wishes to change to a method of accounting provided in the final regulations for taxable year 2005. Y incurred and capitalized $100x in taxable year 2001, $200x in taxable year 2002, $250x in taxable year 2003, and $300x in taxable year 2004. In addition, Y incurred $330x in taxable year 2005. The $100x, $200x, $250x, and $300x capitalized and depreciated by Y in 2001, 2002, 2003, and 2004 all relate to the same method of accounting and would be currently deductible under the final regulations if the amounts had been incurred on or after December 31, 2003. Y claimed a depreciation deduction of $10x in each of the taxable years 2001, 2002, 2003, and 2004 with respect to the $100x incurred and capitalized in 2001, a depreciation deduction of $20x in each of the taxable years 2002, 2003, and 2004 with respect to the $200x incurred and capitalized in 2002, a depreciation deduction of $25x in each of the taxable years 2003 and 2004 with respect to the $250x incurred and capitalized in 2003, and a depreciation deduction of $30x in taxable year 2004 with respect to the $300x incurred and capitalized in 2004. For taxable year 2005, Y may apply for an automatic change in method of accounting with respect to the method under which the amounts had been capitalized. Y’s section 481(a) adjustment is a decrease in income of $610x ($140x relating to amounts capitalized in 2002 ($200x - $60 ($20 for each of 2002, 2003, and 2004))

• $200x relating to amounts capitalized in 2003 ($250x - $50x ($25 for each of 2003 and 2004)) + 270x relating to amounts capitalized in 2004 ($300x

• $30x)). Y must continue to use its present method of accounting for the amount capitalized in 2001. Y uses its new method of accounting for the amount incurred in 2005.

2006–3 I.R.B. 314 January 17, 2006

change back to the taxpayer’s method of accounting used for an item prior to making an unauthorized change when the period of limitations has expired for one or more affected taxable years. See section 4.03(6) of this revenue procedure. .05. This revenue procedure eliminates the requirement to submit the copy of Form 3115 to a special address. Taxpayers must submit the copy of Form 3115 to the address for taxpayers filing under automatic change request procedures. See the current Instructions for Form 3115 for the address.