SECTION 6. EFFECT ON OTHER

DOCUMENTS

.01 Rev. Proc. 2002–9 is modified and amplified to include the accounting method changes described in this revenue procedure in section 3 of the APPENDIX.

.02 Section 2.01(1)(d)(xiii)(A) of the APPENDIX of Rev. Proc. 2002–9 (as modified by Rev. Proc. 2004–11, 2004–1 C.B. 311) is modified to read as follows:

(A) a change in inventory costs (for example, when property is reclassified from inventory property to depreciable property, or vice versa) (but see section 3.02 of this APPENDIX for making a change in method of accounting from inventory property to depreciable property for unrecoverable line pack gas or unrecoverable cushion gas, and Rev. Proc. 2007–48, 2007–29 I.R.B. 110, for making a change in method of accounting from inventory property to depreciable property for rotable spare parts);

(a) The taxpayer must consent to, and agree to apply, all of the provisions of § 1.168(i)–1 to the rotable spare parts included in the general asset accounts, beginning with the year of change. Thus, pursuant to § 1.168(i)–1(k)(1), the establishment of general asset accounts beginning with the year of change is irrevocable and will be binding on the taxpayer for computing taxable income for the year of change and for all subsequent taxable years, except as provided in § 1.168(i)–1(c)(1)(ii)(A), (e)(3), (g), or (h)(1).

(b) The taxpayer must use a method of accounting described in section 4.05(2) of this revenue procedure for identifying the disposed rotable spare parts for purposes of applying § 1.168(i)–1(i).

(c) The taxpayer must group the rotable spare parts into one or more general asset accounts in accordance with the rules in § 1.168(i)–1(c) and each general asset account must include a beginning balance for both the unadjusted depreciable basis and the depreciation reserve of the general asset account. The beginning balance for the unadjusted depreciable basis of each general asset account is equal to the sum of the unadjusted depreciable bases as of the beginning of the year of change for all rotable spare parts included in that general asset account. The beginning balance of the depreciation reserve of each general asset account is equal to the portion of the accumulated depreciation component of the net § 481(a) adjustment that is allocable to the rotable spare parts included in that general asset account.

.03 Changes Made on a Cut-off Method . A taxpayer making a change in method of accounting described in section 5.01(2), (3), or (4) of this revenue procedure must make the change on a cut-off method. Thus, the new method of accounting applies to rotable spare parts placed in service, or disposed of, by the taxpayer beginning in the year of change.

.04 Changes Made Using a § 481(a) Adjustment .

(1) In general . A taxpayer making a change in method of accounting under section 5.01(1) of this revenue procedure to the safe harbor method of accounting must make the change using a § 481(a) adjustment. As required by the Form 3115, the taxpayer must attach a summary of the computation and an explanation of

the methodology used to determine the § 481(a) adjustment. To use the safe harbor method of accounting, the taxpayer also must include in the required attachment the amount of the taxpayer’s total gross sales (less returns) of rotable spare parts and gross revenues (less returns) from the taxpayer’s maintenance operation for the year of change and every year of the qualifying period used to compute the § 481(a) adjustment.

(2) Computation of § 481(a) Adjust- ment .

(a) In computing the § 481(a) adjustment, the taxpayer must use the adjusted depreciable basis of the rotable spare parts computed under the safe harbor method, as of the first day of the year of change taking into account the placed-in-service date provided for in subparagraph (2)(b) of this section 5.04 and the qualifying period described in subparagraph (3) of this section 5.04.

(b) Any rotable spare parts that were: (i) placed in service by the taxpayer after 1986 and in a taxable year prior to the earliest taxable year of the qualifying period, and (ii) owned by the taxpayer as of the beginning of the earliest taxable year of the qualifying period, must be treated as placed in service by the taxpayer in the earliest taxable year of the qualifying period. A taxpayer that does not have the books and records to determine whether it meets the requirements of section 4.01 of this revenue procedure in every year in which the rotable spare parts on hand as of the beginning of the year of change were placed in service and in every subsequent year prior to the year of change, must compute the § 481(a) adjustment using a qualifying period that can be established based on its books and records.

(3) Qualifying period . For purposes of this section 5.04, a “qualifying period” consists of the taxable year, or consecutive taxable years, immediately preceding the year of change during which the taxpayer can establish that it meets the requirements of section 4.01 of this revenue procedure.

.05 Nonautomatic Changes . If a taxpayer is not eligible to change to the safe harbor method of accounting provided in this revenue procedure, the taxpayer may request to change its method of accounting for treating rotable spare parts by filing a Form 3115 with the Commissioner in accordance with the requirements of

July 16, 2007 113 2007–29 I.R.B.

Books or records relating to a collection of information must be retained as long as their contents may become material in the administration of any internal revenue law. Generally, tax returns and tax information are confidential, as required by 26 U.S.C. 6103.

DRAFTING INFORMATION

The principal author of this revenue procedure is Gwen Turner of the Office of Associate Chief Counsel (Income Tax and Accounting). For further information regarding this revenue procedure, contact Ms. Turner at (202) 622–5020 (not a toll-free call). For further information regarding the method of computing depreciation for rotable spare parts, the establishment of pools or general asset accounts for rotable spare parts, or the method of identifying the disposed rotable spare parts, contact Douglas Kim of the Office of Associate Chief Counsel (Income Tax and Accounting) at (202) 622–4930 (not a toll-free call).