SECTION 2. BACKGROUND AND

CHANGES

.01 Section 446(e) and § 1.446–1(e) provide that, except as otherwise provided, a taxpayer must secure the consent of the Commissioner of Internal Revenue 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 deemed necessary to permit a taxpayer to obtain consent to change a method of accounting.

.02 On January 20, 2004, the Internal Revenue Service published Rev. Proc. 2004–11, which provided an automatic

2007–4 I.R.B. 358 January 22, 2007

payer elects under § 1.168(i)–6T(i) and (j) to treat the entire basis (that is, both the exchanged and excess basis (as defined in § 1.168(i)–6T(b)(7) and (8), respectively)) of the replacement MACRS property (as defined in § 1.168(i)–6T(b)(1)) as property placed in service by the taxpayer at the time of replacement and treat the adjusted depreciable basis of the relinquished MACRS property (as defined in § 1.168(i)–6T(b)(2)) as being disposed of by the taxpayer at the time of disposition.

.02 Change in method of accounting . (1) Change made on original return for year of change . On its timely filed (including extensions) original federal tax return for the year of change (as defined in section 3.02(3)(b) of this revenue procedure), a taxpayer within the scope of section 3 of this revenue procedure may change from an impermissible method of accounting for depreciation to a permissible method of accounting for depreciation for any item of depreciable property within the scope of section 3 of this revenue procedure, provided the taxpayer files the original Form 3115 in accordance with section 6.02(3) of Rev. Proc. 2002–9 (or its successor).

(2) Change made on an amended re- turn for year of change . On an amended federal tax return for the year of change (as defined in section 3.02(3)(b) of this revenue procedure), a taxpayer within the scope of section 3 of this revenue procedure may change from an impermissible method of accounting for depreciation to a permissible method of accounting for depreciation for any item of depreciable property within the scope of section 3 of this revenue procedure, provided:

(a) the taxpayer files the original Form 3115 in accordance with section 3.02(3)(c) of this revenue procedure prior to the expiration of the period of limitation for assessment under § 6501(a) for the taxable year in which the item of depreciable or amortizable property was disposed of by the taxpayer; and

(b) the taxpayer files an amended federal tax return for the year of change (as defined in section 3.02(3)(b) of this revenue procedure) that includes the adjustments to taxable income and any collateral adjustments to taxable income or tax liability (for example, adjustments to the amount or character of the gain or loss of the disposed depreciable or amortiz

change from an impermissible method of accounting adopted by the transferor for that portion of the basis of the property to a permissible method of accounting for depreciation for the same portion of the basis of the property, provided the impermissible method of accounting for that portion of the basis of the property has not been changed by the transferor (through filing, for example, a Form 3115 or an amended return) or by the Service upon examination of the transferor’s tax returns. In this case, the § 481 adjustment will include any necessary adjustments since the property’s placed-in-service date by the transferor.

.06 The significant changes to Rev. Proc. 2004–11 include:

(1) The application of section 3 is extended to allow a taxpayer to file a Form 3115 with an original federal tax return for the taxable year in which the depreciable property is disposed of by the taxpayer that claimed less than the depreciation allowable for that property.

(2) A new section 4.01 is added, clarifying that a change from an impermissible method of determining depreciation for depreciable property in two or more consecutively filed federal tax returns is a change in method of accounting under § 446(e) and § 1.446–1(e).

(3) A new section 6.03 is added, extending the application of section 3 of this revenue procedure to dispositions of depreciable property occurring in taxable years ending before December 30, 2003.

.07 The significant changes to Rev. Proc. 2002–9 include:

(1) Section 2.01 of the APPENDIX of Rev. Proc. 2002–9 is changed to clarify that section 2.01 of this APPENDIX does not apply to any property for which a taxpayer is revoking a timely valid election or making a late election under § 179, or to any change in method of accounting involving a change from capitalizing and depreciation the cost or other basis of any property to deducting the cost or other basis as an expense.

(2) Section 2B of the APPENDIX of Rev. Proc. 2002–9 is changed to remove section 2B.03, which provided that the change under section 2B does not apply to a change in useful life under the method described in section 5.01(2) or 6.01(2) of Rev. Proc. 2000–50.