SECTION 32. MARKET DISCOUNT

BONDS (§ 1278)

.01 Revocation of § 1278(b) election .

(1) Description of change . This change applies to a taxpayer that wants to change its method of accounting for market discount bonds by revoking its § 1278(b) election. Under § 1278(b), a taxpayer may elect a method of accounting under which market discount is currently included in gross income for the taxable years to which the discount is attributable. See Rev. Proc. 92–67, 1992–2 C.B. 429, for the procedures to make a § 1278(b) election (including a deemed § 1278(b) election). The procedures for revoking a § 1278 election were formerly provided in section 7 of Rev. Proc. 92–67.

(2) Revocation of election . The revocation of a § 1278(b) election applies to all market discount bonds that are held by the taxpayer on the first day of the first taxable year for which the revocation is effective (year of change), and to all market discount bonds that are subsequently acquired by the taxpayer. If a § 1278(b) election is revoked, then for purposes of § 1278(a), accrued market discount with respect to any bond previously subject to the election means accrued market discount as defined in § 1276(b) less any market discount included in income while the bond was subject to the § 1278(b) election.

cost or basis of the securities sold from the lot(s) of securities purchased or acquired the earliest, if the taxpayer does not make an adequate identification. See § 1.1012–1(c)(2) - (4) for examples of what constitutes adequate identification.

(b) Inapplicability . (i) This change does not apply to any shares of stock for which a taxpayer may make an election as to certain regulated investment company stock under § 1.1012–1(e).

(ii) This change does not apply, because there is no change in method of accounting, when for prior sales a taxpayer who has not adequately identified securities sold or transferred is deemed to have identified the securities sold or transferred that were purchased or acquired the earliest and for subsequent sales that taxpayer adequately identifies the securities sold or transferred, or vice versa .

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

(a) Section 481(a) adjustment . Except as provided in section 30.01(2)(b) of this APPENDIX, this change is made using a § 481(a) adjustment. The § 481(a) adjustment is calculated as the difference between the basis of the shares on hand at the beginning of the year of change under the new and prior methods.

(b) Cut-off basis . In lieu of a § 481(a) adjustment, the taxpayer may make an irrevocable election to make this change on a cut-off basis under which the taxpayer begins using the new method for determining basis in its securities for all sales and transfers made 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. The election to make this change on a cut-off basis must be made on the taxpayer’s timely filed Form 3115 ( see section 6.02(3) of this revenue procedure). If the taxpayer elects to make this change on a cut-off basis, the basis of the shares on hand at the beginning of the year of change is the basis determined under the taxpayer’s prior method of accounting, i.e., the method from which it is changing.

(c) Designated automatic accounting method change number . The designated automatic accounting method change number for a change under section 30.01

of this APPENDIX is “142.” See section 6.02(4) of this revenue procedure.

(d) Contact information . For further information regarding a change under this section, contact Shareen Pflanz at 202–622–4920 (not a toll-free call).

.02 Reserved .