SECTION 14. METHODS OF

ACCOUNTING (§ 446)

.01 Change in overall method from the cash method to an accrual method .

(1) Description of change .

(a) Applicability . This change applies to a taxpayer that wants to change its overall method of accounting from the cash receipts and disbursements (cash) method to an accrual method, with or without a “special method” as defined respectively in sections 14.01(3)(a), (b), and (e) of this APPENDIX, if subsequent to this change, the taxpayer will be using an overall accrual method of accounting (that is, all items of income and expense are accounted for using an accrual method). A taxpayer changing its overall method of accounting to an accrual method under this section 14.01 of the APPENDIX may also adopt the recurring item exception for one or more types of recurring items. A taxpayer that wants to change its method of accounting for one or more items of income or expense, but not its overall method of accounting, may be eligible to make such change(s) using section 14.09 of this APPENDIX.

If the year of change is the first taxable year the taxpayer is required by § 448 to change from the cash method (first § 448 year) and the taxpayer qualifies to make this change under the automatic consent procedures of § 1.448–1(g) and (h)(2) as well as this revenue procedure, the taxpayer must comply with both the provisions of § 1.448–1(h)(2) and the requirements of this revenue procedure.

(b) Inapplicability . This change does not apply to:

(i) a taxpayer that will not use an “overall accrual method of accounting” subsequent to this change under section 14.01 of this APPENDIX;

(ii) a taxpayer that is required by § 447 to change to an accrual method when the year of change is the first taxable year the taxpayer is required to change to that method;

(iii) a cooperative organization described in § 501(c)(12), 521, or 1381;

(iv) an individual taxpayer, except for activities conducted as a sole proprietorship;

(v) a taxpayer that is required by §§ 446 and 471 and §§ 1.446–1(a)(4)(i) and 1.471–1 to use an inventory method in the year of change. However, the taxpayer qualifies to make the change to an overall accrual method under this section 14.01 of this APPENDIX when in the year of change either:

(A) the taxpayer adopts or changes to a proper inventory method or continues to use a proper inventory method that it had used in the taxable year immediately prior to the year of change but only when:

( 1 ) the taxpayer is a small reseller within the meaning of § 1.263A–3(a) and, if the taxpayer also has production activities, those activities qualify under the de minimis presumption of § 1.263A–3(a)(2)(iii);

( 2 ) the taxpayer is a reseller within the meaning of § 263A and the regulations thereunder that qualifies to use the simplified resale method under § 1.263A–3(d) and the taxpayer either adopts or changes to that method in the year of change or continues its use of that method from the taxable year immediately prior to the year of change; or

( 3 ) the taxpayer is a producer of real or tangible personal property described in § 1.263A–2 that adopts in the year of change a “UNICAP method specifically described in the regulations” within the meaning of section 14.01(3)(d) of this APPENDIX. (For purposes of this section 14.01(1)(b)(v)(A)( 3 ) of the APPENDIX, a method not listed in section 14.01(3)(d) may not be adopted or changed in the year of change); or

(B) the taxpayer continues to use the proper inventory method and proper UNICAP method that it had used in the taxable year immediately prior to the year of change and the taxpayer is a producer of real or tangible personal property described in § 1.263A–2;

(vi) a taxpayer that is either required to or voluntarily wants to use a “special method of accounting” in the year of change regardless of whether a change to that special method is requested in that year. However, the taxpayer can request its change to an overall accrual method under this section 14.01 of the APPENDIX when ( a ) the change to the special

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(vii) the simplified production method without the historic absorption ratio election within the meaning of § 1.263A–2(b).

(e) Special method of accounting within the meaning of this section 14.01 of the APPENDIX is a method of accounting, other than the cash method, expressly permitted by the Code, regulations, or guidance published in the IRB that deviates from the tax accrual accounting rules of §§ 451 and 461 and the regulations thereunder. For example, the installment method of accounting under § 453, the mark-to-market method under § 475, a long-term contract method such as the percentage of completion method, and the deferral method of Rev. Proc. 2004–34, 2004–1 C.B. 991, used to account for advance payments are special methods of accounting. In contrast, application of the all-events test under a specific set of facts is not a special method of accounting. See, for example, Rev. Rul. 69–314, 1969–1 C.B. 139 (concerning the treatment of retainages).

(f) Overall accrual method of account- ing within the meaning of this section 14.01 of the APPENDIX is a method of accounting where, but for the use of a “special method of accounting,” all items of income and expense are accounted for using an accrual method.

(4) Manner of making change .

(a) Section 481(a) adjustment . A taxpayer changing its method of accounting under this section 14.01 of the APPENDIX must compute a § 481(a) adjustment. This adjustment must reflect the account receivables, account payables, inventory, and any other item determined to be necessary in order to prevent items from being duplicated or omitted. However, the adjustment does not include any item of income accrued but not received that was worthless or partially worthless (within the meaning of § 166(a)) on the last day of the year immediately prior to the year of change.

(b) Concurrent change to a special method of accounting not permitted to be made under this revenue procedure . A taxpayer, that can not change to an overall accrual method of accounting using this section 14.01 of the APPENDIX because the taxpayer is seeking to make a concurrent change to a special method of accounting not permitted automatically

under this revenue procedure, may request both changes by filing one Form 3115 under Rev. Proc. 97–27 (or any successor). Only one user fee per taxpayer will be required when a Form 3115 is filed for both changes.

(c) Adoption of recurring item excep- tion . The taxpayer must attach to its Form 3115 a statement describing the types of liabilities for which the recurring item exception will be used.

(5) Coordination with section 33.01 of this APPENDIX for short-term obliga- tions . When a taxpayer subject to § 1281 is changing its method of accounting for interest income on short-term obligations as part of the change to an overall accrual method, the taxpayer must request the change for the interest income under section 33.01 of this APPENDIX. Section 14.01 will govern the request for change in method of accounting to an overall accrual method. The taxpayer must timely file individual Forms 3115 for each change requested.

(6) Concurrent automatic change to the deferral method for advance payments . A taxpayer that wants to make both a change to an overall accrual method under this section 14.01 of the APPENDIX and an automatic change to the deferral method for advance payments under Rev. Proc. 2004–34 ( see section 15.07 of this APPENDIX) for the same year of change may file a single Form 3115 for both changes, provided the taxpayer enters the designated automatic accounting method change numbers for both changes on the appropriate line on that Form 3115.

(7) Designated automatic accounting method change number . The designated automatic accounting method change number for a change under section 14.01 of this APPENDIX for other than a taxpayer’s first § 448 year is “122.”

The designated automatic accounting method change number for a change under section 14.01 of this APPENDIX for the taxpayer’s first § 448 year is “123.” Entering designated automatic accounting method change number “123” on the appropriate line on the Form 3115 fulfills the requirement of § 1.448–1(h)(2) to type or print “Automatic Change to Accrual Method — Section 448” at the top of page 1 of the Form 3115. See section 6.02(4) of this revenue procedure.

(8) Contact information . For further information regarding a change under this section, contact W. Thomas McElroy, Jr. at 202–622–4970 (not a toll-free call).

.02 Multi-year insurance policies for multi-year service warranty contracts .

(1) Description of change .

(a) Applicability . This change applies to a manufacturer, wholesaler, or retailer of motor vehicles or other durable consumer goods that wants to change its method of accounting for insurance costs paid or incurred to insure its risks under multi-year service warranty contracts to the method described in section 14.02(2) of this APPENDIX. Multi-year service warranty contracts to which this change applies include only those separately priced contracts sold by a manufacturer, wholesaler, or retailer also selling the motor vehicles or other durable consumer goods (to the ultimate customer or to an intermediary) underlying the contracts. The classification of goods as “durable consumer goods” for purposes of this change depends on the common usage of the goods, rather than the purchaser’s actual intended use of the goods.

(b) Inapplicability . This change does not apply to a taxpayer that covers its risks under its multi-year service warranty contracts through arrangements not constituting insurance.

(2) Description of method . If a taxpayer purchases a multi-year service warranty insurance policy (in connection with its sale of multi-year service warranty contracts to customers) by paying a lump-sum premium in advance, the taxpayer must capitalize the amount paid or incurred and may only obtain deductions for that amount by prorating (or amortizing) it over the life of the insurance policy (whether the cash method or an accrual method of accounting is used to account for service warranty transactions).

(3) Designated automatic accounting method change number . The designated automatic accounting method change number for a change under section 14.02 of this APPENDIX is “31.” See section 6.02(4) of this revenue procedure.

(4) Contact information . For further information regarding a change under this section, contact Erika Reigle at 202–622–4950 (not a toll-free call).

September 8, 2008 648 2008–36 I.R.B.

Proc. 2006–56 is made with a § 481(a) adjustment. A change made under section 3.01(4) of Rev. Proc. 2006–56 is made on a cut-off basis and the new applicable period applies only to the taxpayer’s nonaccrual-experience calculation of its uncollectible amount for the year of change and for subsequent years. Accordingly, a § 481(a) adjustment is neither permitted nor required for changes made under section 3.01(4) of Rev. Proc. 2006–56.

(4) Concurrent change to overall ac- crual method and a NAE method of ac- counting .

(a) First § 448 year . A taxpayer that is within the scope of section 3.01(1) through (5) of Rev. Proc. 2006–56 that wants to change to a NAE method of accounting (with or without also changing to a periodic system) and is required to change to an overall accrual method of accounting under § 448 and the regulations thereunder for the taxpayer’s first § 448 year must request to make both changes by filing one Form 3115, and the taxpayer must follow the change in method of accounting provisions of § 1.448–1(h)(2). The taxpayer must complete all applicable sections of Form 3115, including sections that apply to the change to an overall accrual method and to the change to the NAE method, and must enter the automatic accounting method change numbers for both changes on Form 3115.

(b) Concurrent automatic change to overall accrual method . A taxpayer that is within the scope of section 3.01(1) through (5) of Rev. Proc. 2006–56 that wants to make a change to a NAE method of accounting (with or without also changing to a periodic system) under this section 14.04 of the APPENDIX and is eligible to and wants to change to an overall accrual method of accounting under Appendix section 14.01 of this APPENDIX for the same year of change, must file a single Form 3115 for both changes. The taxpayer must complete all applicable sections of Form 3115, including sections that apply to the change to an overall accrual method and to the change to the NAE method, and must enter the automatic accounting method change numbers for both changes on the appropriate line on that Form 3115.

(5) Designated automatic accounting method change number . The designated automatic accounting method change

.03 Taxpayers changing to overall cash method .

(1) Description of change . This change applies to either:

(a) a taxpayer (other than a taxpayer described in § 448(a)(3) or a bank described in section 14.12(2)(a) of this APPENDIX) with “average annual gross receipts” (as defined in section 5.01 of Rev. Proc. 2001–10, 2001–1 C.B. 272) of $1,000,000 or less that wants to change to the overall cash receipts and disbursements (cash) method of accounting as provided in Rev. Proc. 2001–10; or

(b) a taxpayer (other than a taxpayer described in § 448 or a bank described in section 14.12(2)(a) of this APPENDIX) with “average annual gross receipts” (as defined in section 5.02 of Rev. Proc. 2002–28, 2002–1 C.B. 815) of $10,000,000 or less that wants to change to the overall cash receipts and disbursements (cash) method of accounting as provided in Rev. Proc. 2002–28.

(2) Scope limitations applicable . Rev. Proc. 2001–10 and Rev. Proc. 2002–28 are modified to delete section 6.02(1)(a) of Rev. Proc. 2001–10 and section 7.02(1)(a) of Rev. Proc. 2002–28. Therefore, the scope limitations in section 4.02 of this revenue procedure (including the limitation regarding a prior change within five taxable years of section 4.02(6)) and the requirements in sections 6.03 (regarding taxpayers under examination), 6.04 (regarding taxpayers before an appeals office) and 6.05 (regarding taxpayers before a federal court) of this revenue procedure apply to a change in method of accounting made under this section 14.03 of the APPENDIX.

(3) Manner of making change . See either Rev. Proc. 2001–10 or Rev. Proc. 2002–28 for additional guidance on the computation of the § 481(a) adjustment and the completion of the Form 3115.

(4) Concurrent automatic change to treat inventoriable items as nonincidental materials and supplies under Rev. Proc. 2001–10 or Rev. Proc. 2002–28 . A taxpayer that wants to make both a change to the overall cash method under this section 14.03 of the APPENDIX and a change to treat inventoriable items as materials and supplies that are not incidental under § 1.162–3 ( see section 21.03 of this APPENDIX) for the same year of change may file a single Form 3115 for both

changes, provided the taxpayer enters the designated automatic accounting method change numbers for both changes on the appropriate line on that Form 3115.

(5) Banks changing to overall cash/hy- brid method . This change does not apply to a bank described in section 14.12(2)(a) of this APPENDIX. However, such a bank may be eligible to change to the overall cash/hybrid method under section 14.12 of this APPENDIX if it meets the requirements of that section.

(6) Designated automatic account- ing method change number . The designated automatic accounting method change number for a change under section 14.03(1)(a) of this APPENDIX is “32.” The designated automatic accounting method change number for a change under section 14.03(1)(b) of this APPENDIX is “33.” See section 6.02(4) of this revenue procedure.

(7) Contact information . For further information regarding a change under this section, contact Kari Fisher at 202–622–4970 (not a toll-free call).

.04 Nonaccrual-experience method .

(1) Description of change .

(a) Applicability . This change applies to a taxpayer within the scope of section 3.01(1) through (5) of Rev. Proc. 2006–56, 2006–2 C.B. 1169, that wants to make certain changes to, from, or within a nonaccrual-experience (NAE) method of accounting.

(b) Inapplicability . This change does not apply to a taxpayer within the scope of section 3.01(6) through 3.01(8) of Rev. Proc. 2006–56.

(2) Scope limitations inapplicable . The scope limitations in section 4.02 of this revenue procedure do not apply to this change for the taxpayer’s first taxable year ending on or after August 31, 2006. However, if the taxpayer’s NAE method of accounting is an issue under consideration for taxable years under examination, before an appeals office, or before a federal court, at the time the Form 3115 is filed with the national office, the audit protection of section 7 of this revenue procedure does not apply.

(3) Manner of making the change . A change in method of accounting within section 3.01(1), (2), (3), or (5) of Rev.

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clude those payments in discounted unpaid losses without regard to § 404. A payment by a taxpayer to a health care provider is a “provider incentive payment,” and thus eligible for this treatment, if (a) the taxpayer is taxable as an insurance company under Part II of subchapter L; (b) the payment is made pursuant to a written agreement the purpose of which is to encourage participating health care providers to provide quality health care to the taxpayer’s subscribers in a cost-efficient manner; (c) the taxpayer’s liability for the payment is dependent on the attainment of one or more preestablished goals during a performance period consisting of not more than 12 consecutive months; (d) the terms of the arrangement pursuant to which the payment is made are established unilaterally by the taxpayer, and are not negotiated with the health care providers; (e) the taxpayer normally makes payments to health care providers under the arrangement within 12 months after the close of the performance period; (f) deferring the receipt of income by the health care provider or otherwise providing a tax benefit to the provider is not a principal purpose of the arrangement; (g) the taxpayer records a liability for the payment on its annual statement filed for state regulatory purposes, and includes this liability in the determination of discounted unpaid losses under § 846; and (h) the health care provider is not an employee, and is not providing health care as an agent, of the taxpayer. See Rev. Proc. 2004–41.

(2) Scope . This procedure applies to a taxpayer that wants to change to the method of accounting for provider incentive payments, under which those payments are included in discounted unpaid losses without regard to § 404.

(3) Designated automatic accounting method change number . The designated automatic accounting method change number for a change under section 14.07 of this APPENDIX is “90.” See section 6.02(4) of this revenue procedure.

(4) Contact information . For further information regarding a change under this section, contact Josephine Firehock or Kay Hossofsky, at 202–622–3970 (not a tollfree call).

.08 Change by bank for uncollected in- terest .

number for a change to the NAE method of accounting under section 14.04 of this APPENDIX is “35.”

The designated automatic accounting method change number for a change to an overall accrual method for the taxpayer’s first § 448 year under the provisions of § 1.448–1(h)(2) is “34.” Entering the designated automatic accounting method change number “34” on the appropriate line on the Form 3115 fulfills the requirement of § 1.448–1(h)(2) to type or print “Automatic Change to Accrual Method

• Section 448” at the top of page 1 of the Form 3115. See section 6.02(4) of this revenue procedure.

(6) Contact information . For further information regarding a change under this section, contact W. Thomas McElroy, Jr. at 202–622–4970 (not a toll-free call).

.05 Interest accruals on short-term con- sumer loans–Rule of 78’s method .

(1) Description of change . This change applies to a taxpayer that wants to change its method of accounting from the Rule of 78’s method to the constant yield method for stated interest (including stated interest that is original issue discount) on short-term consumer loans described in Rev. Proc. 83–40, 1983–1 C.B. 774, which was obsoleted by Rev. Proc. 97–37, 1997–2 C.B. 455. (2) Background . (a) A short-term consumer loan is described in Rev. Proc. 83–40, provided:

(i) the loan is a self-amortizing loan that requires level payments, at regular intervals at least annually, over a period not in excess of five years (with no balloon payment at the end of the loan term); and

(ii) the loan agreement between the borrower and the lender provides that interest is earned, or upon the prepayment of the loan interest is treated as earned, in accordance with the Rule of 78’s method.

(b) In general, the Rule of 78’s method allocates interest over the term of a loan based, in part, on the sum of the periods’ digits for the term of the loan. See Rev. Rul. 83–84, 1983–1 C.B. 97, for a description of the Rule of 78’s method.

(c) In general, the constant yield method allocates interest and original issue discount over the term of a loan based on a constant yield. See § 1.1272–1(b) for a description of the constant yield method. The Rule of 78’s method gener

ally front-loads interest as compared to the constant yield method.

(d) Rev. Proc. 83–40 was obsoleted because, under §§ 1.446–2 and 1.1272–1 (which were effective for debt instruments issued on or after April 4, 1994), taxpayers generally must account for stated interest and original issue discount on a debt instrument (loan) by using a constant yield method. As a result, the Rule of 78’s method is no longer an acceptable method of accounting for federal income tax purposes.

(3) Designated automatic accounting method change number . The designated automatic accounting method change number for a change under section 14.05 of this APPENDIX is “71.” See section 6.02(4) of this revenue procedure.

(4) Contact information . For further information regarding a change under this section, contact William E. Blanchard at 202–622–3950 (not a toll-free call).

.06 Film producer’s treatment of certain creative property costs .

(1) Description of change . This change applies to a taxpayer that wants to change the method of accounting for creative property costs to the safe harbor method provided by section 5 of Rev. Proc. 2004–36, 2004–1 C.B. 1063. This safe harbor method of accounting applies to a taxpayer engaged in the trade of business of film production and to creative property costs (as defined in section 2.01 of Rev. Proc. 2004–36) properly written off by the taxpayer under The American Institute of Certified Public Accountants Statement of Position (SOP) 00–2, “Accounting for Producers or Distributors of Film.”

(2) Designated automatic accounting method change number . The designated automatic accounting method change number for a change under section 14.06 of this APPENDIX is “85.” See section 6.02(4) of this revenue procedure.

(3) Contact information . For further information regarding a change under this section, contact Bernard Harvey at 202–622–4930 (not a toll-free call).

.07 Deduction of incentive payments to health care providers .

(1) Description of change . Rev. Proc. 2004–41, 2004–2 C.B. 90, permits an insurance company that makes incentive payments to health care providers to in

September 8, 2008 650 2008–36 I.R.B.

method subsequent to this change under this section 14.09 of the APPENDIX;

(ii) a cooperative organization described in § 501(c)(12), 521, or 1381;

(iii) an individual taxpayer, except for activities conducted as a sole proprietorship;

(iv) a taxpayer engaged in two or more trades or businesses, unless the taxpayer makes this change so that the identical accrual method is used for each such trade or business beginning with the year of change;

(v) a change in method of accounting for any payment liability described in § 1.461–4(g); and

(vi) any change that is specifically provided in another section of the APPENDIX of this revenue procedure.

(2) Definitions . (a) Cash method of accounting is the method identified by § 446(c)(1) and §§ 1.446–1(c)(1)(i), 1.451–1(a), and 1.461–1(a)(1). (b) Accrual method of accounting is the method identified by § 446(c)(2) and §§ 1.446–1(c)(1)(ii), 1.451–1(a), and 1.461–1(a)(2).

(3) Additional requirements . In addition to the other filing requirements of this revenue procedure, to change a method of accounting under this section 14.09 of the APPENDIX, a taxpayer must fully and completely describe each specific item for which the change in method of accounting is being made and how the accrual method applies to each item and list the § 481(a) adjustment for each item, if any, associated with the change. The change is fully and completely described if the revenue or expense item is described with specificity and how the all-events test (and the economic performance requirement, if applicable) applies to the item is described under the facts and circumstances of the taxpayer’s trade or business. For example, a taxpayer that merely states that it is changing its accounting method for advertising expenses from the cash method to an accrual method, recites the regulations under § 1.461–1(a)(2), and enters the associated § 481(a) adjustment has failed to describe fully and completely the specific item for which the change in method of accounting is being made. In contrast, a taxpayer that states that it is changing its method of accounting for

(1) Description of change . This change applies to a “bank” as defined in § 1.166–2(d)(4)(i) that: (1) uses an accrual method of accounting to determine its taxable income for federal income tax purposes; (2) is subject to supervision by Federal authorities, or by state authorities maintaining substantially equivalent standards; (3) has uncollected interest other than interest described in § 1.446–2(a)(2); and (4) has six or more years of collection experience. Under the safe harbor method of accounting provided by section 4 of Rev. Proc. 2007–33, 2007–21 I.R.B. 1289, a bank determines for each taxable year the amount of uncollected interest (other than interest described in § 1.446–2(a)(2)) for which it is considered to have a reasonable expectancy of payment by multiplying: (1) the total accrued (determined under § 1.446–2) but uncollected interest for the year by, (2) the bank’s “recovery percentage” (determined under section 4.02 of Rev. Proc. 2007–33) for that year. Solely for purposes of this safe harbor, the bank is not considered to have a reasonable expectancy of payment for the excess, if any, of the accrued but uncollected interest over the expected collection amount determined using the bank’s recovery percentage. The bank includes in gross income the portion of accrued but uncollected interest for which it has a reasonable expectancy of payment. The bank excludes from income the portion of accrued but uncollected interest for which it has no reasonable expectancy of payment.

(2) Recovery percentage . Subject to the limitations and conditions in Rev. Proc. 2007–33, sections 4.02(2), (3), and (4), a bank determines its recovery percentage for each taxable year by dividing: (a) total payments that the bank received on loans (including principal and interest) during the 5 taxable years immediately preceding the taxable year, by (b) total amounts that were due and payable to the bank on loans during the same 5 taxable years. The recovery percentage cannot exceed 100 percent and must be calculated to at least four decimal places. The data used in the recovery percentage must take into account acquisitions and dispositions. If a bank acquires the major portion of a trade or business of another person (predecessor) or the major portion of a separate unit of a trade

or business of a predecessor, then in applying Rev. Proc. 2007–33 for any taxable year ending on or after the acquisition, the data from preceding taxable years of the predecessor attributable to the portion of the trade or business acquired, if available, must be used in determining the bank’s recovery percentage. If a bank disposes of a major portion of a trade or business or the major portion of a separate unit of a trade or business, and the bank furnished the acquiring person the information necessary for the computations required by Rev. Proc. 2007–33, then in applying the revenue procedure for any taxable year ending on or after the disposition, the data from preceding taxable years attributable to the disposed portion of the trade or business may not be used in determining the bank’s recovery percentage.

(3) Scope limitations inapplicable . The scope limitations in section 4.02 of this revenue procedure do not apply to a change made for either the bank’s first or second taxable year ending on or after December 31, 2006.

(4) Designated automatic accounting method change number . The designated automatic accounting method change number for a change under section 14.08 of this APPENDIX is “108.” See section 6.02(4) of this revenue procedure.

(5) Contact information . For further information regarding a change under this section, contact Timothy Sebastian at 202–622–3920 (not a toll-free call).

.09 Change from the cash method to an accrual method for specific items .

(1) Description of change .

(a) Applicability . This change applies to a taxpayer whose overall method of accounting is an accrual method of accounting but has identified a specific item or items of income and expense that are being accounted for on the cash method of accounting. This change does not apply to a taxpayer that is changing its overall method of accounting from cash to accrual. Such a taxpayer may be eligible to change to an overall accrual method using section 14.01 of this APPENDIX.

(b) Inapplicability . This change does not apply to:

(i) a taxpayer that will not have all items of income and expense on an accrual

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(B) Support Activities for Transportation within the meaning of NAICS subsector code 488.

(ii) The taxpayer is not prohibited from using the overall cash method under § 448.

(b) Business . A taxpayer may use any reasonable method of applying the relevant facts and circumstances to determine its business. A business may consist of several activities, which may or may not be related. For example, a taxpayer engaged in transportation activities may provide various services such as transporting air cargo and then subsequently trucking the cargo throughout a metropolitan area to warehouses and wholesale/retail stores. However, each activity within a taxpayer’s business must individually satisfy the description of a NAICS subsector code in section 14.11(2)(a)(i)(A) or (B) of this APPENDIX. For example, a sightseeing bus operator that sells box lunches in connection with its tours is not a “specified transportation industry taxpayer” because each of its two activities (that is, sightseeing transportation and food sales) do not each satisfy the description of a NAICS subsector code in section 14.11(2)(a)(i)(A) or (B) of this APPENDIX. Similarly, a train operator who operates a dining car where meals are served is not a “specified transportation industry taxpayer” because all of the activities of its “business” fail to satisfy the descriptions of one or more of the NAICS subsector codes in section 14.11(2)(a)(i)(A) or (B) of this APPENDIX. That is, while the rail service satisfies the description of a NAICS subsector code in section 14.11(2)(a)(i)(A) of this APPENDIX, the food service does not satisfy the description of any NAICS subsector code in section 14.11(2)(a)(i)(A) or (B) of this APPENDIX, and thus, the taxpayer’s business fails to meet the criteria of section 14.11(2)(a)(i).

(c) Average annual gross receipts . A taxpayer has average annual gross receipts of more than $10,000,000 and not in excess of $50,000,000 if, for each prior taxable year ending on or after December 31, 2006, the taxpayer’s average annual gross receipts for the three prior taxable-year period ending with the applicable prior taxable year are more than $10,000,000 and do not exceed $50,000,000. If a taxpayer has not been in existence for three prior taxable years, the taxpayer must determine

print advertising expenses from the cash method to an accrual method, describes all of the relevant facts related to the print advertising expenses, and explains how the all-events test applies to those facts and when economic performance occurs has fully and completely described the item and the change. See section 6.02 of this revenue procedure for additional filing requirements.

(4) Designated automatic accounting method change number . The designated automatic accounting method change number for a change under section 14.09 of this APPENDIX is “124.” See section 6.02(4) of this revenue procedure.

(5) Contact information . For further information regarding a change under this section, contact Gwen Turner at 202–622–5020 (not a toll-free call).

.10 Multi-year service warranty con- tracts .

(1) Description of change .

(a) Applicability . This change applies to an eligible accrual method manufacturer, wholesaler, or retailer of motor vehicles or other durable consumer goods that wants to change to the service warranty income method described in section 5 of Rev. Proc. 97–38, 1997–2 C.B. 479. Under the service warranty income method, a qualifying taxpayer may, in certain specified and limited circumstances, include a portion of an advance payment related to the sale of a multi-year service warranty contract in gross income generally over the life of the service warranty obligation.

(b) Inapplicability . This change does not apply to a taxpayer outside the scope of Rev. Proc. 97–38.

(2) Manner of making change and designated automatic accounting method change number .

(a) This change is made on a cut-off basis and applies only to qualified advance payments for multi-year service warranty contracts on or after the beginning of the year of change. See section 2.06 of this revenue procedure for more information regarding a cut-off basis. Accordingly, a § 481(a) adjustment is neither permitted nor required.

(b) In accordance with § 1.446–1(e)(3)(ii), the requirement of § 1.446–1(e)(3)(i) to file an application on Form 3115 is waived and a statement

in lieu of the Form 3115 is authorized for this change. The statement must set forth:

(i) the designated automatic accounting method change number for this change, which is “125”;

(ii) the taxpayer’s name and employer identification (or social security number in the case of an individual);

(iii) the year of change (both the beginning and ending dates); and

(iv) the information required under section 6.03 of Rev. Proc. 97–38, except that the statement under section 6.03(2) (that the taxpayer agrees to all of the terms and conditions of the revenue procedure) also should refer to Rev. Proc. 2008–52.

(3) Additional requirement . A taxpayer changing to the service warranty income method of accounting under section 14.10 of this APPENDIX must satisfy the annual reporting requirement set forth in section 6.04 of Rev. Proc. 97–38.

(4) Contact information . For further information regarding a change under this section, contact Erika Reigle at 202–622–4950 (not a toll-free call).

.11 Overall cash method for specified transportation industry taxpayers .

(1) Description of change . This change applies to a “specified transportation industry taxpayer” with “average annual gross receipts” of more than $10,000,000 and not in excess of $50,000,000 that wants to change to the overall cash receipts and disbursement (cash) method.

(2) Definitions . For purposes of this section 14.11 of this APPENDIX, the following definitions apply:

(a) Specified transportation indus- try taxpayer . A specified transportation industry taxpayer is a taxpayer that satisfies the following criteria for the year of change:

(i) The taxpayer reasonably identifies its “business” (as defined in section 14.11(2)(b) below) as being described in one of the following NAICS subsector codes (first three digits of the six-digit NAICS codes):

(A) Air Transportation, Rail Transportation, Water Transportation, Truck Transportation, Transit and Ground Passenger Transportation, or Scenic and Sightseeing Transportation, within the meaning of NAICS subsector codes 481–485 and 487; or

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its average annual gross receipts for the number of years (including short taxable years) that the taxpayer has been in existence. See § 448(c)(3)(A).

(d) Gross receipts . Gross receipts is defined consistent with § 1.448–1T(f)(2)(iv). Thus, gross receipts for a taxable year equal all receipts that must be recognized under the method of accounting actually used by the taxpayer for that taxable year for federal income tax purposes. See also § 448(c)(3)(C).

(e) Aggregation of gross receipts . For purposes of computing gross receipts under section 14.11(2)(d) of this APPENDIX, all taxpayers treated as a single employer under § 52(a) or (b) or § 414(m) or (o) (or that would be treated as a single employer under these sections if the taxpayers had employees) will be treated as a single taxpayer. However, when transactions occur between taxpayers that are treated as a single taxpayer by the previous sentence, gross receipts arising from these transactions will not be treated as gross receipts for purposes of the average annual gross receipts limitation. See § 448(c)(2) and § 1.448–1T(f)(2)(ii).

(f) Treatment of short taxable year . In the case of a short taxable year, a taxpayer’s gross receipts must be annualized by multiplying the gross receipts for the short taxable year by 12 and then dividing the result by the number of months in the short taxable year. See § 448(c)(3)(B) and § 1.448–1T(f)(2)(iii).

(g) Treatment of predecessors . Any reference to a taxpayer in this section 14.11 of the APPENDIX includes a reference to any predecessor of that taxpayer. See § 448(c)(3)(D).

(h) Cash method . The cash method is the method identified by § 446(c)(1) and §§ 1.446–1(c)(1)(i), 1.451–1(a), and 1.461–1(a)(1).

(3) Designated automatic accounting method change number . The designated automatic accounting method change number for a change under section 14.11 of this APPENDIX is “126.” See section 6.02(4) of this revenue procedure. (4) Example . Example . Taxpayer X is an LLC and taxed for federal income tax purposes as a partnership. Taxpayer X does not have any C corporations as partners and Taxpayer X is not a tax shelter within the meaning of § 448(d)(3). Taxpayer X ’s business consists of

short-haul trucking among various cities within State Y, which satisfies the description of the NAICS subsector code 484. Taxpayer X determines that its average annual gross receipts for each of the three prior taxable years have been more than $10,000,000 and not in excess of $50,000,000. Taxpayer X qualifies to change to the overall cash method using this section 14.11 of the APPENDIX.

(5) Contact information . For further information regarding a change under this section, contact Kari Fisher at 202–622–4970 (not a toll-free call).

.12 Change to overall cash/hybrid method for certain banks .

(1) Description of change .

(a) Applicability . This change applies to a bank described in section 14.12(2)(a) of this APPENDIX that wants to change to an overall cash/hybrid method described in section 14.12(2)(b) of this APPENDIX.

(b) Inapplicability . A bank’s change to an overall cash/hybrid method under this section 14.12 of the APPENDIX does not include any change in the accounting treatment of an item for which the bank uses a special method (as described in section 14.12(2)(b) of this APPENDIX) before the change, or is required to use a special method, or will use a special method after the change. No change in the accounting treatment of such an item may be made under this section 14.12 of the APPENDIX. Any change in the accounting treatment of such an item must be made under an applicable section of this APPENDIX, under Rev. Proc. 97–27 (or any successor), or under another guidance published in the IRB, as appropriate.

(2) Definitions .

(a) Bank . A bank is described in this section 14.12(2)(a) of the APPENDIX if the bank:

(i) is a bank as defined in § 581; (ii) is an S corporation as defined in § 1361(a)(1), or a qualified subchapter S subsidiary as defined in § 1361(b)(3)(B); and

(iii) has average annual gross receipts (computed as described in section 14.12(5) of this APPENDIX) not in excess of $50,000,000.

(b) Overall cash/hybrid method . An overall cash/hybrid method is the use of a combination of accounting methods under which some items of income or expense are reported on the cash receipts and disbursements method (cash method) and

other items of income or expense are reported on methods permitted or required for the accounting treatment of special items (special methods).

(i) Cash method . The cash method is the method identified by § 446(c)(1) and §§ 1.446–1(c)(1)(i), 1.451–1(a), and 1.461–1(a)(1).

(ii) Special methods . A few of the special methods typically used by banks include those provided for the accounting treatment of the following items: securities held by a dealer in securities as defined in § 475(c)(1) (the mark-to-market method of § 475); securities held by a dealer in securities as defined in § 1.471–5 (inventories maintained under § 471 and § 1.446–1(c)(2)(i)); hedging transactions (§ 1.446–4); contracts to which § 1256 applies (§ 1256); original issue discount on debt instruments (§§ 163(e) and 1271–1275); interest income (including acquisition discount and original issue discount) on short-term obligations (§§ 1281–1283); and stripped debt instruments (§ 1286). For example, a bank that regularly purchases or originates mortgages in the ordinary course of its business and engages in more than negligible sales of those mortgages generally is a dealer in securities under § 475(c)(1) and § 1.475(c)–1(c) and thus must use the mark-to-market method of § 475 for mortgages and any other securities (as defined in § 475(c)(2)) held by the bank.

(3) Additional condition of change . To change to an overall cash/hybrid method under this section 14.12 of the APPENDIX, a bank must comply with the following additional condition. In addition to complying with the terms and conditions set forth in section 5 of this revenue procedure, the bank must keep its books and records for the year of change and for subsequent taxable years on an overall cash/hybrid method allowed by this section 14.12 of the APPENDIX. This condition is considered satisfied if the bank reconciles the results obtained under the method used in keeping its books and records and those obtained under the method used for federal income tax purposes pursuant to this section 14.12 of the APPENDIX and the bank maintains sufficient records to support such reconciliation. See also § 1.446–1(a)(4).

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(b) The trade or business of farming is a farming business as defined by § 263A(e)(4) and the regulations thereunder.

(3) Manner of making change . Generally, a taxpayer changing its method of accounting under this section 14.13 of the APPENDIX, must compute a § 481(a) adjustment. However, if the taxpayer is changing from the crop method, that portion of the change shall be made using a cut-off basis under which expenses reported on the crop method and not deducted prior to the year of change are deducted in the year the related crop is sold.

(4) Designated automatic accounting method change number . The designated automatic accounting method change number for a change under section 14.13 of this APPENDIX is “128.” See section 6.02(4) of this revenue procedure.

(5) Contact information . For further information regarding a change under this section, contact Robert Basso at 202–622–4950 or Renay France at 202–622–5020 (not a toll-free call).

.14 Nonshareholder contributions to capital under § 118 .

(1) Description of change . This change applies to a taxpayer that wants to change its method of accounting for nontaxable contributions to capital from excluding certain payments received from gross income, by characterizing the payments as nontaxable contributions to capital under § 118(a), to including the payments in gross income. This change also applies to a taxpayer that wants to change its method of accounting of treating certain payments received from including the payments in gross income to excluding the payments from income, as nontaxable contributions to capital under § 118(a). See Rev. Rul. 2008–30, 2008–25 I.R.B. 1156.

(2) Designated automatic accounting method change number . The designated automatic accounting method change number for a change under section 14.14 of this APPENDIX is “129.” See section 6.02(4) of this revenue procedure.

(3) Contact information . For further information regarding a change under this section, contact Grant Anderson or Karla Meola at 202–622–4930 (not a toll-free call).

(4) Additional filing requirement . To change to an overall cash/hybrid method under this section 14.12 of this APPENDIX, a bank must include the following additional information on its Form 3115 filed in accordance with section 6.02 of this revenue procedure. In addition to complying with all other applicable requirements, the Form 3115 must describe each specific item of the bank’s income or expense that is affected by the change under this section 14.12 of the APPENDIX and, for each such item, identify the following: the accounting method under which the bank reports that item for federal income tax purposes immediately before the change; and the amount of the § 481(a) adjustment associated with changing that item to the cash method under this section 14.12 of the APPENDIX.

(5) Computation of average annual gross receipts . For purposes of section 14.12(2)(a)(iii) of this APPENDIX, a bank’s average annual gross receipts are computed as described in this section 14.12(5) of the APPENDIX.

(a) Average annual gross receipts . A bank has average annual gross receipts not in excess of $50,000,000 if, for each prior taxable year ending on or after December 31, 2006, the bank’s average annual gross receipts for the three prior taxable-year period ending with the applicable prior taxable year do not exceed $50,000,000. If a bank has not been in existence for three prior taxable years, the bank must determine its average annual gross receipts for the number of years (including short taxable years) that the bank has been in existence. See § 448(c)(3)(A).

(b) Gross receipts . Gross receipts is defined consistent with § 1.448–1T(f)(2)(iv). Thus, gross receipts for a taxable year equal all receipts that must be recognized under the method of accounting actually used by the bank for that taxable year for federal income tax purposes. See also § 448(c)(3)(C).

(c) Aggregation of gross receipts . For purposes of computing gross receipts under section 14.12(5)(b) of this APPENDIX, all taxpayers treated as a single employer under § 52(a) or (b) or § 414(m) or (o) (or that would be treated as a single employer under these sections if the taxpayers had employees) will be treated as a

single taxpayer ( i.e., a single bank). However, when transactions occur between taxpayers that are treated as a single taxpayer by the previous sentence, gross receipts arising from these transactions will not be treated as gross receipts for purposes of the average annual gross receipts limitation. See § 448(c)(2) and § 1.448–1T(f)(2)(ii).

(d) Treatment of short taxable year . In the case of a short taxable year, a bank’s gross receipts must be annualized by multiplying the gross receipts for the short taxable year by 12 and then dividing the result by the number of months in the short taxable year. See § 448(c)(3)(B) and § 1.448–1T(f)(2)(iii).

(e) Treatment of predecessors . Any reference to a bank or taxpayer in section 14.12(5) of this APPENDIX includes a reference to any predecessor of that bank or taxpayer. See § 448(c)(3)(D).

(6) Designated automatic accounting method change number . The designated automatic accounting method change number for a change under section 14.12 of this APPENDIX is “127.” See section 6.02(4) of this revenue procedure.

(7) Contact information . For further information regarding a change under this section, contact Sharon Galm at 202–622–3930 (not a toll-free call).

.13 Change to overall cash method for farmers .

(1) Description of change .

(a) Applicability . This change applies to a taxpayer engaged in the trade or business of farming that wants to change to the overall cash receipts and disbursement (cash) method. If a taxpayer is engaged in more than one trade or business, this change applies only to the taxpayer’s trade or business of farming.

(b) Inapplicability . This change does not apply to a taxpayer that is required to use an accrual method pursuant to § 447 or prohibited from using the cash method by § 448.

(2) Definitions . (a) Cash method of accounting is the method defined by § 446(c)(1) and §§ 1.446–1(c)(1)(i), 1.451–1(a), and 1.461–1(a)(1). See also, §§ 1.61–4 and 1.162–12 for specific rules relating to farmers.

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vehicles subject to leases and assumes the associated leases from the vehicles’ dealers and wants to use the safe harbor accounting method for capital cost reduction (CCR) payments specified in Rev. Proc. 2002–36, 2002–1 C.B. 993.

(2) Audit protection . If a taxpayer complies with the requirements of Rev. Proc. 2002–36 and changes its method of accounting for CCR payments to the CCR method provided in section 5 of Rev. Proc. 2002–36, the treatment of CCR payments will not be raised as an issue in any taxable year before the year of change.

(3) Designated automatic accounting method change number . The designated automatic accounting method change number for a change under section 15.04 of this APPENDIX is “39.” See section 6.02(4) of this revenue procedure.

(4) Contact information . For further information regarding a change under this section, contact R. Matthew Kelley at 202–622–7900 (not a toll-free call).

.05 Credit card annual fees .

(1) Description of change . This change applies to a taxpayer that wants to change its method of accounting for credit card annual fees as described in Rev. Rul. 2004–52, 2004–1 C.B. 973, either to a method that satisfies the all events test in accordance with Rev. Rul. 2004–52 or to the Ratable Inclusion Method for Credit Card Annual Fees that is described in section 4 of Rev. Proc. 2004–32, 2004–1 C.B. 988. Rev. Rul. 2004–52 holds that credit card annual fees are not interest for federal income tax purposes and that such fees are includible in income by the card issuer when the all events test under § 451 is satisfied. Rev. Proc. 2004–32 provides additional guidance for taxpayers seeking to change their methods of accounting for such fees, including guidance with respect to the Ratable Inclusion Method for Credit Card Annual Fees. However, a taxpayer may make either change under this revenue procedure only if the taxpayer uses an overall accrual method of accounting for federal income tax purposes and issues credit cards to, and receives annual fees from, cardholders under agreements that allow each cardholder to use a credit card to access a revolving line of credit to make purchases of goods and services and, if so authorized, to obtain cash advances.