SECTION 15. TAXABLE YEAR OF

INCLUSION (§ 451)

.01 Accrual of interest on nonperform- ing loans .

(1) Description of change . (a) This change applies to an accrual method taxpayer that is a bank as defined in § 581 (or whose primary business is making or managing loans) and wants to change its method of accounting to comply with § 451 and § 1.451–1(a) for qualified stated interest (as defined in § 1.1273–1(c)) on nonperforming loans.

(b) Section 1.451–1(a) requires income to be accrued when all the events have occurred that fix the right to receive the income and the amount thereof can be determined with reasonable accuracy. A taxpayer may not stop accruing qualified stated interest on a nonperforming loan for federal income tax purposes merely because payments on the loan are overdue by a certain length of time, such as 90 days, even if a federal, state, or other regulatory authority having jurisdiction over the taxpayer permits or requires that the overdue interest not be accrued for regulatory purposes.

(c) Under § 451 and § 1.451–1(a), a taxpayer must continue accruing qualified stated interest on any nonperforming loan until either (i) the loan is worthless under § 166 and charged off as a bad debt, or (ii) the interest is determined to be uncollectible. In order for interest to be determined uncollectible, the taxpayer must substantiate, taking into account all the facts and circumstances, that it has no reasonable expectation of payment of the interest. This substantiation requirement is applied on a loan by loan basis.

(d) A taxpayer that changes its method of accounting under section 15.01 of this APPENDIX must do so for all of its loans.

(2) Section 481(a) adjustment . In general, the § 481(a) adjustment for a method change under section 15.01 of this APPENDIX represents the amount of qualified stated interest, on the taxpayer’s nonperforming loans outstanding as of the beginning of the year of change, that should have been accrued under § 451 and § 1.451–1(a) and was not accrued. Interest for which the taxpayer, as of the beginning of the year of change, has no reasonable expectation of payment is not taken into

account in determining the amount of the § 481(a) adjustment.

(3) Designated automatic accounting method change number . The designated automatic accounting method change number for a change under section 15.01 of this APPENDIX is “36.” See section 6.02(4) of this revenue procedure.

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

.02 Advance rentals .

(1) Description of change . This change applies to a taxpayer that wants to change its method of accounting for advance rentals (other than advance rentals subject to § 467 and the regulations thereunder) to include such advance rentals in gross income in the taxable year received. See § 1.61–8(b).

(2) Designated automatic accounting method change number . The designated automatic accounting method change number for a change under section 15.02 of this APPENDIX is “37.” See section 6.02(4) of this revenue procedure.

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

.03 State or local income or franchise tax refunds .

(1) Description of change . This change applies to an accrual method taxpayer described in Rev. Rul. 2003–3, 2003–1 C.B. 252, that receives a state or local income or franchise tax refund and wants to accrue the refund in the year payment or notice of the approval of the refund claim is received (whichever is earlier).

(2) Designated automatic accounting method change number . The designated automatic accounting method change number for a change under section 15.03 of this APPENDIX is “38.” See section 6.02(4) of this revenue procedure.

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

.04 Capital cost reduction payments .

(1) Description of change . This change applies to a taxpayer that purchases motor

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ral method under this section 15.07 of the APPENDIX and a change to an overall accrual method under section 14.01 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.

(4) Designated automatic accounting method change number . The designated automatic accounting method change number for a change under section 15.07 of this APPENDIX to use the full-inclusion method is “83.” The designated automatic accounting method change number for a change under 15.07 of this APPENDIX to use the deferral method is “84.” See section 6.02(4) of this revenue procedure.

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

.08 Credit card cash advance fees .

(1) Description of change . This change applies to a taxpayer that wants to change its method of accounting for credit card cash advance fees to a method that treats these fees as creating or increasing original issue discount (OID) on a pool of credit card loans that includes the cash advances that give rise to the fees. This change is available only to a taxpayer that issues credit cards allowing cardholders to access a revolving line of credit established by the taxpayer both to make credit card purchase transactions and to obtain cash advances and that, for federal income tax purposes, does not treat the credit card purchase transactions of its cardholders as creating debt that is given in consideration for the sale or exchange of property. See Rev. Proc. 2005–47, 2005–2 C.B. 269, for additional guidance relating to this change.

(2) Other requirements . A taxpayer making this change must be able to demonstrate both of the following:

(a) the amount of any credit card cash advance fee charged to a cardholder by the taxpayer is separately stated on the cardholder’s account when that fee is imposed; and

(b) under the credit card agreement with the cardholder, no amount identified as a credit card cash advance fee is charged for property or for specific services performed

(2) Manner of making change . A taxpayer making this change must identify the specific method to which the taxpayer is changing. See also section 15.05(3) of this APPENDIX.

(3) Designated automatic accounting method change number . The designated automatic accounting method change number for a change under section 15.05 of this APPENDIX to a method that satisfies the all events test in accordance with Rev. Rul. 2004–52 is “80.” The designated automatic accounting method change number for a change under section 15.05 of this APPENDIX to the Ratable Inclusion Method for Credit Card Annual Fees is “81.” See section 6.02(4) of this revenue procedure.

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

.06 Credit card late fees .

(1) Description of change . This change applies to a taxpayer that wants to change its method of accounting for credit card late fees to a method that treats these fees as interest income that creates or increases the amount of original issue discount (OID) on the pool of credit card loans to which the fees relate. This change is available only to a taxpayer that issues credit cards allowing cardholders to access a revolving line of credit established by the taxpayer and that, for federal income tax purposes, does not treat the credit card purchase transactions of its cardholders as creating either debt that is given in consideration for the sale or exchange of property (within the meaning of § 1274) or debt that is deferred payment for property (within the meaning of § 483). See Rev. Proc. 2004–33, 2004–1 C.B. 989, for additional guidance relating to this change.

(2) Additional requirements . A taxpayer making this change must be able to demonstrate both of the following:

(a) the amount of any credit card late fee charged to each cardholder by the taxpayer is separately stated on the cardholder’s account when that fee is imposed; and

(b) under the applicable credit card agreement governing each cardholder’s use of the credit card, no amount identified as a credit card late fee is charged for property or for specific services per

formed by the taxpayer for the benefit of the cardholder.

(3) Audit protection . The audit protection provided in connection with this change is not a determination by the Commissioner that the taxpayer is properly accounting for any OID income on that pool of credit card loans. Thus, for example, the Service is not precluded from pursuing the issue of whether a taxpayer is properly accounting for its OID income (including any OID income attributable to credit card late fees) on its pool of credit card loans in accordance with § 1272(a)(6).

(4) Designated automatic accounting method change number . The designated automatic accounting method change number for a change under section 15.06 of this APPENDIX is “82.” See section 6.02(4) of this revenue procedure.

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

.07 Advance payments .

(1) Description of change . This change applies to a taxpayer using or changing to an overall accrual accounting method that receives advance payments, as defined in Rev. Proc. 2004–34, 2004–1 C.B. 991, and wants to use either the full inclusion or deferral method, as described in Rev. Proc. 2004–34. See also Announcement 2004–48, 2004–1 C.B. 998.

(2) Manner of making change . In lieu of providing the information and documentation required by line 1 of Schedule B to Form 3115, a taxpayer changing to the deferral method must also: (i) state whether the taxpayer uses an applicable financial statement and, if so, identify the type; (ii) describe the bases used for deferral (that is, the method the taxpayer uses in its applicable financial statement or how the taxpayer determines amounts earned, as applicable); and (iii) if the taxpayer makes an allocation to which section 5.02(4) of Rev. Proc. 2004–34 applies, include a statement that the allocation method is based on payments the taxpayer regularly receives for an item or items it regularly provides separately. See Rev. Proc. 2004–34 and Announcement 2004–48.

(3) Concurrent automatic change to an overall accrual method . A taxpayer that wants to make both a change to the defer

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by the taxpayer for the benefit of the cardholder.

(3) Audit protection . The audit protection provided in connection with this change is not a determination by the Commissioner that the taxpayer is properly accounting for any OID income on that pool of credit card loans. Thus, for example, the Service is not precluded from pursuing the issue of whether, under § 1272(a)(6), a taxpayer is correctly accounting for its OID income (including any OID income attributable to credit card cash advance fees) on its pool of credit card loans.

(4) Designated automatic accounting method change number . The designated automatic accounting method change number for a change under section 15.08 of this APPENDIX is “94.” See section 6.02(4) of this revenue procedure.

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

.09 Sales or dispositions to implement Federal Energy Regulatory Commission or state electric restructuring policy .

(1) Description of change . This change applies to a taxpayer that realizes qualified gain from a qualifying electric transmission transaction and elects, under § 451(i), to recognize all or part of the gain ratably over an 8-year period beginning with the year that includes the date of the qualifying electric transmission transaction.

(2) Scope .

(a) Applicability . This change applies only to a qualified electric transmission transaction occurring after October 22, 2004, for which a taxpayer filed its federal tax return for the taxable year in which the transaction occurred before June 15, 2006. This change may only be made for the taxpayer’s first or second taxable year ending on or after December 31, 2005.

(b) Inapplicability . This change does not apply to a qualified electric transmission transaction occurring after October 22, 2004, for which a taxpayer filed its federal tax return for the taxable year in which the transaction occurred before June 15, 2006, and filed on or before November 15, 2006, an amended federal tax return for the taxable year in which the transaction occurred and all subsequent affected taxable years.

(3) Scope limitations inapplicable . The scope limitations in section 4.02 of this revenue procedure do not apply to this change.

(4) Additional requirements . The statement described in section F.1, Interim Rules, of Notice 2006–47, 2006–1 C.B. 892, should be attached to the Form 3115.

(5) Designated automatic accounting method change number . The designated automatic accounting method change number for a change under section 15.09 of this APPENDIX is “103.” See section 6.02(4) of this revenue procedure.

(6) Contact information . For further information regarding a change under this section, contact Michael Schmit at 202–622–4960 (not a toll-free call).

.10 Retainages .

(1) Description of change .

(a) Applicability . This change applies to an accrual method taxpayer that wants to change its method of accounting for treating retainages under § 451 to a method consistent with the holding in Rev. Rul. 69–314, 1969–1 C.B. 139.

(b) Inapplicability . This change does not apply to retainages that are received under long-term contracts as defined in § 460.

(2) Designated automatic accounting method change number . The designated automatic accounting method change number for a change under section 15.10 of this APPENDIX is “130.” See section 6.02(4) of this revenue procedure.

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