SECTION 2. BACKGROUND

.01 Section 448(d)(5) of the Internal Revenue Code provides a special NAE method of accounting with respect to amounts to be received by certain taxpayers for the performance of services.

.02 The NAE method is available only to a taxpayer using an accrual method of accounting that either provides services in a field described in § 448(d)(2)(A) (health, law, engineering, architecture, accounting, actuarial science, performing arts, or consulting), or that meets the $5 million annual gross receipts test of § 448(c). The taxpayer may not charge interest or penalties for failure to timely pay the amount charged for the performance of services.

.03 On September 6, 2006, the Internal Revenue Service and Treasury Department published final regulations under § 1.448–2 of the Income Tax Regulations (T.D. 9285, 71 FR 52430, 2006–41 I.R.B. 656). The final regulations apply to taxable years ending on or after August 31, 2006. The preamble to the final regulations states that the Service and Treasury Department intend to issue administrative guidance providing procedures for changes in a NAE method of accounting and to adopt certain NAE methods of accounting.

.04 Sections 446(e) and 1.446–1(e)(2) state that, except as otherwise provided, a taxpayer must secure the consent of the Commissioner 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 limitations, terms, and conditions necessary to permit a taxpayer to obtain consent

to change a method of accounting in accordance with § 446(e).

.05 Section 1.446–1(e)(1) states that a taxpayer filing its first return may adopt any permissible method of accounting and that a taxpayer may adopt any permissible method in connection with each separate and distinct trade or business, the income from which is reported for the first time.

.06 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 for a taxpayer to obtain automatic consent of the Commissioner to change to a method of accounting described in the Appendix of Rev. Proc. 2002–9.

.07 Rev. Proc. 97–27, 1997–1 C.B. 680 (as modified and amplified by Rev. Proc. 2002–19, 2002–1 C.B. 696, and amplified and clarified by Rev. Proc. 2002–54, 2002–2 C.B. 432), provides procedures for a taxpayer to obtain advance consent of the Commissioner to change its method of accounting.

.08 Section 481(a) requires the adjustments necessary to prevent amounts from being duplicated or omitted when a taxpayer’s taxable income is determined under a method of accounting different from the method used to determine taxable income for the preceding taxable year.