SECTION 2. BACKGROUND

.01 In Rev. Rul. 2007–3, the Internal Revenue Service addressed the issue of when a taxpayer using an accrual method of accounting incurs a liability for services or insurance under § 461. The ruling holds that a liability for services or insurance is

not fixed by the mere execution of a contract for the future provision of services or insurance. Instead, all the events have occurred that establish the fact of the liability when (1) the event fixing the liability, whether that be the required performance or other event, occurs, or (2) payment is due, whichever happens earliest.

.02 Under § 446(e) and § 1.446– 1(e)(2)(i) of the Income Tax Regulations, a taxpayer generally must secure the consent of the Commissioner before changing a method of accounting for federal income tax purposes. To obtain the Commissioner’s consent to a change in method, § 1.446–1(e)(3)(i) generally requires a taxpayer to file Form 3115, Application for Change in Accounting Method, during the taxable year in which the taxpayer wants to make the proposed change. Section 1.446–1(e)(3)(ii) authorizes the Commissioner to prescribe administrative procedures that provide the terms and conditions necessary for a taxpayer to obtain consent to change a method of accounting. The terms and conditions the Commissioner may prescribe include whether the change

January 22, 2007 357 2007–4 I.R.B.

consent procedure allowing a taxpayer to make a change in method of accounting under § 446(e) for depreciable property after its disposition. Rev. Proc. 2004–11 also waived the application of the two-year rule set forth in Rev. Rul. 90–38 for certain changes in depreciation. In addition, Rev. Proc. 2004–11 modified Rev. Proc. 2002–9 and other revenue procedures to conform with § 1.446–1T(e)(2)(ii)( d ) of the temporary Income Tax Regulations.

.03 Concurrent with the issuance of this revenue procedure, §§ 1.446–1(e)(2)(ii)( d ) and 1.1016–3(h) have been promulgated. Section 1.446–1(e)(2)(ii)( d ) identifies the changes in depreciation that are (and are not) considered a change in method of accounting. Section 1.1016–3(h) provides that for purposes of determining whether a change in depreciation is a change in method of accounting under § 446(e), the “allowed or allowable” rule under § 1016(a)(2) will not be considered to permanently affect a taxpayer’s lifetime income.

.04 In general, if a taxpayer uses an impermissible method of accounting in two or more consecutively filed federal tax returns the taxpayer has adopted a method of accounting. See Rev. Rul. 90–38. The Service and Treasury Department recognize that with respect to changes in depreciation this two-year rule may increase administrative and compliance costs because many taxpayers changing from an impermissible to permissible method of accounting for depreciation used the impermissible method for depreciable properties placed in service in the taxable year immediately preceding the year of change. Accordingly, in the interest of sound tax administration, the Service and Treasury have decided to waive the two-year rule in Rev. Rul. 90–38 for a change in depreciation to which § 1.446–1(e)(2)(ii)( d ) applies.

.05 If depreciable property is transferred in a transaction in which the transferee is treated as the transferor for purposes of computing the depreciation allowance for the property with respect to so much of the basis in the hands of the transferee as does not exceed the adjusted depreciable basis in the hands of the transferor (for example, in transactions subject to § 168(i)(7) or § 381(c)(6)), the transferee may file a Form 3115, Application for Change in Accounting Method, to