SECTION 4. SCOPE — Internal Revenue Bulletin 2008-36

.01 Applicability . This revenue procedure applies to a taxpayer requesting the Commissioner’s consent to change to a method of accounting described in the APPENDIX of this revenue procedure. This revenue procedure is the exclusive procedure for a taxpayer within its scope to obtain the Commissioner’s consent.

.02 Inapplicability . Except as otherwise provided in the APPENDIX of this revenue procedure (see, for example, section 2.01 of the APPENDIX of this revenue procedure), this revenue procedure does not apply in the following situations:

(1) Under examination . If, on the date the taxpayer would otherwise file a copy of the application with the national office, the taxpayer is under examination (as provided in section 3.08 of this revenue procedure), except as provided in sections 6.03(2) (90-day window), 6.03(3) (120day window), 6.03(4) (consent of director), 6.03(5) (changes lacking audit protection), and 6.03(6) (issue pending) of this revenue procedure;

(2) Consolidated group member . A corporation that is (or was formerly) a member of a consolidated group is under examination (for purposes of section 4.02(1) of this revenue procedure) if the consolidated group is under examination for a taxable year(s) that the corporation was a member of the group;

(3) Partnerships and S corporations . For an entity (including a limited liability company) treated as a partnership or an S corporation for federal income tax pur

the date on which the period for filing a petition with the Tax Court expires, or the date of the notice of claim disallowance.

(b) An examination does not end as a result of the early referral of an issue to Appeals under the provisions of Rev. Proc. 99–28, 1999–2 C.B. 109. (c) An examination resumes on the date the taxpayer (or its representative) is notified by Appeals (or otherwise) that the case has been referred to the examining agent(s) for reconsideration.

(2) Partnerships subject to TEFRA . For an entity (including a limited liability company) treated as a partnership for federal income tax purposes that is subject to the TEFRA unified audit and litigation provisions for partnerships, an examination begins on the date of the notice of the beginning of an administrative proceeding sent to the Tax Matters Partner (TMP). An examination ends:

(a) in a case in which the Service accepts the partnership return as filed, on the date of the “no adjustments” letter or the “no change” notice of final administrative adjustment sent to the TMP;

(b) in a fully agreed case, when all the partners or members execute a Form 870–P, Agreement to Assessment and Col- lection of Deficiency in Tax for Partnership Adjustments, 870–L , Agreement to Assess- ment and Collection of Deficiencies in Tax for Partnership Adjustments, Additions to Tax, and Affected Items ; or

(c) in an unagreed or a partially agreed case, on the earliest of the date the TMP (or its representative) is notified by Appeals that the case has been referred by the examining agent(s) to Appeals, the date the TMP (or a partner or member) requests judicial review, or the date on which the period for requesting judicial review expires. But see section 4.02(3) of this revenue procedure for certain rules that preclude an entity from requesting a change in accounting method.

(3) S corporations subject to TEFRA The rules of section 3.08(2) of this revenue procedure apply to an S corporation that is subject to the TEFRA unified audit and litigation provisions for S corporations for any taxable year ending on or before December 31, 1996, except in section 3.08(2)(b) of this revenue procedure, a fully agreed case is when all shareholders execute a Form 870–S, Agreement to As-

sessment and Collection of Deficiency in Tax for S Corporation Adjustments .

.09 Issue under consideration .

(1) Under examination . A taxpayer’s method of accounting for an item is an issue under consideration for the taxable years under examination if the taxpayer receives written notification (for example, by examination plan, information document request (IDR), or notification of proposed adjustments or income tax examination changes) from the examining agent(s) specifically citing the treatment of the item as an issue under consideration. For example, a taxpayer’s method of pooling under the dollar-value, last-in, first-out (LIFO) inventory method is an issue under consideration as a result of an examination plan that identifies LIFO pooling as a matter to be examined, but it is not an issue under consideration as a result of an examination plan that merely identifies LIFO inventories as a matter to be examined. Similarly, a taxpayer’s method of determining inventoriable costs under § 263A is an issue under consideration as a result of an IDR that requests documentation supporting the costs included in inventoriable costs, but it is not an issue under consideration as a result of an IDR that requests documentation supporting the amount of costs of goods sold reported on the return. The question of whether a method of accounting is an issue under consideration may be referred to the national office as a request for technical advice under the provisions of Rev. Proc. 2008–2, 2008–1 I.R.B. 90 (or any successor).

(2) Before an appeals office . A taxpayer’s method of accounting for an item is an issue under consideration for the taxable years before an appeals office if the treatment of the item is included as an item of adjustment in the examination report referred to Appeals or is specifically identified in writing to the taxpayer by Appeals.

(3) Before a federal court . A taxpayer’s method of accounting for an item is an issue under consideration for the taxable years before a federal court if the treatment of the item is included in the statutory notice of deficiency, the notice of claim disallowance, the notice of final administrative adjustment, the pleadings (for example, the petition, complaint, or answer) or amendments thereto, or is specifically

2008–36 I.R.B. 609 September 8, 2008

poses, if, on the date the entity would otherwise file a copy of the application with the national office, the entity’s accounting method to be changed is an issue under consideration in an examination of a partner, member, or shareholder’s federal income tax return;

(4) Section 381(a) transaction . Except as otherwise provided in this section 4.02(4), if the taxpayer engages in a transaction to which § 381(a) applies within the proposed taxable year of change (determined without regard to any potential closing of the year under § 381(b)(1)):

(a) No differences in methods . An acquiring corporation may change its method of accounting pursuant to this revenue procedure if the acquiring corporation would be permitted to continue to use its prior method of accounting under the rules of §§ 1.381(c)(4)–1(b)(1) and (3)(i) (taking into account the third sentence of § 1.381(c)(4)–1(b)(4) relating to no prior method established by a party to the transaction) or §§ 1.381(c)(5)–1(b)(1) and (3)(i) (taking into account the second sentence of § 1.381(c)(5)–1(b)(4)(i) relating to no prior inventory method established by a party to the transaction) because all of the parties to the transaction used the same method of accounting on the date of distribution or transfer. The change pursuant to this revenue procedure is ignored for purposes of determining whether on the date of distribution or transfer the parties to the transaction used the same methods of accounting under § 1.381(c)(4)–1(b) or § 1.381(c)(5)–1(b), and thus §§ 1.381(c)(4)–1(b)(3)(ii) and (c) and §§ 1.381(c)(5)–1(b)(3)(ii) and (c) will not apply.

(b) Separate trades or businesses . An acquiring corporation may change pursuant to this revenue procedure a method of accounting used by a trade or business operated by such corporation if the trade or business would be permitted to continue to use its prior method of accounting under the rules of § 1.381(c)(4)–1(b)(2) or § 1.381(c)(5)–1(b)(2). The change pursuant to this revenue procedure is ignored for purposes of determining whether on the date of distribution or transfer the parties to the transaction used the same methods of accounting under § 1.381(c)(4)–1(b) or § 1.381(c)(5)–1(b), and thus §§ 1.381(c)(4)–1(b)(3) and (c)

and §§ 1.381(c)(5)–1(b)(3) and (c) will not apply.

(5) Final year of trade or business . If, in the year of change, a taxpayer requesting a change in method of accounting ceases to engage in the trade or business to which the change in accounting method relates or terminates its existence, as described in section 5.04(3)(c) of this revenue procedure. For purposes of this section 4.02(5), a taxpayer is treated as ceasing to engage in the trade or business or terminating its existence without regard to whether the taxpayer’s change in method of accounting request would result in either a positive or negative § 481(a) adjustment or be made on a cut-off basis.

(6) Prior five-year overall method change . Except as provided in the APPENDIX of this revenue procedure, if a taxpayer changed its overall method of accounting, or applied for consent to change its overall method of accounting, regardless of whether it implemented that change, during any of the five taxable years ending with the year of change, the taxpayer may not obtain automatic consent to change its overall method of accounting under this revenue procedure. However, a taxpayer that changed its overall method of accounting during the five taxable years ending with the year of change may obtain automatic consent to change a method of accounting for an item when that change may otherwise be implemented under the provisions of this revenue procedure. For purposes of this section 4.02(6), a change in overall method of accounting does not include the use of an overall method of accounting when computing taxable income for the taxable year that the taxpayer first files a federal income tax return (“adopts an overall method of accounting”) or a change in method of accounting imposed by the Service pursuant to Rev. Proc. 2002–18 (or any successor). The five-year change prohibition in this section 4.02(6) applies regardless of whether the taxpayer’s current or prior method is a permissible method or clearly reflects the taxpayer’s income and regardless of the administrative guidance used to request consent or to change the prior method of accounting.

Example . A, an attorney, began business in 2000 and adopted the overall cash method of accounting. In 2005, A changed to an overall accrual method of accounting using the then appropriate administrative

guidance. A may not use the provisions of this revenue procedure for 2007 to change to the overall cash method because of the five-year change prohibition contained in this section 4.02(6). However, A may still be able to use the provisions of this revenue procedure to change the method of accounting the taxpayer will use to treat advances made on behalf of clients in 2007. See section 3.01 of the APPENDIX of this revenue procedure.

(7) Prior five-year item change .

(a) In general . Except as provided in section 4.02(7)(b) or the APPENDIX of this revenue procedure, if a taxpayer changed its method of accounting for a specific item, or applied for consent to change a method of accounting for a specific item regardless of whether it implemented that change, during any of the five taxable years ending with the year of change, the taxpayer may not obtain automatic consent to change its method of accounting for that same item. For purposes of this section 4.02(7)(a), a change in method of accounting for an item does not include the use of a method of accounting for the first taxable year that the taxpayer accounts for the item (for example, include in income, deduct, or capitalize) to which the method of accounting relates, or a change in method of accounting imposed by the Service pursuant to Rev. Proc. 2002–18 (or any successor). The five-year change prohibition in this section 4.02(7) applies regardless of whether the taxpayer’s current or prior method is a permissible method or clearly reflects the taxpayer’s income and regardless of the administrative guidance used to request consent or to change the prior method of accounting.

(b) Exceptions . Nothwithstanding section 4.02(7)(a) of this revenue procedure, a taxpayer may obtain automatic consent to change its method of accounting for an item when that change is required as part of another change in method of accounting that the taxpayer may otherwise implement under the provisions of this revenue procedure. In addition, a taxpayer is not prohibited from changing a last-in, first-out (LIFO) inventory sub-method (for example, the method of determining current-year cost or the method of computing a dollar-value pool index) within five years of adopting or changing to the LIFO inventory method or another LIFO inventory sub-method. However, a taxpayer that changes a LIFO inventory sub-method

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Example 2 . Corporation X, a calendar year taxpayer, changed its method of accounting under this revenue procedure beginning with the 2007 calendar year. The net § 481(a) adjustment for this method change is a positive adjustment of $30,000 and the adjustment period is four taxable years. On July 1, 2009, Corporation Z acquires Corporation X in a transaction to which § 381(a) applies. Corporation Z is a calendar year taxpayer that uses the same method of accounting to which Corporation X changed in 2007. Corporation X must include $7,500 of the § 481(a) adjustment in gross income for its short period income tax return for January 1, 2009, through June 30, 2009. In addition, Corporation Z must include $7,500 of the § 481(a) adjustment in gross income in its income tax return for calendar year 2009.

(3) Shortened or accelerated § 481(a) adjustment periods . The § 481(a) adjustment period provided in section 5.04(1) or the APPENDIX of this revenue procedure will be shortened or accelerated in the following situations.

(a) De minimis rule . A taxpayer may elect to use a one-year § 481(a) adjustment period in lieu of the § 481(a) adjustment period otherwise provided by this revenue procedure for a positive § 481(a) adjustment if the net § 481(a) adjustment for the change is less than $25,000. The taxpayer must complete the appropriate line on Form 3115 to elect this de minimis rule.

(b) Cooperatives . A cooperative within the meaning of § 1381(a) generally must take the entire amount of a § 481(a) adjustment into account in computing taxable income for the year of change. See Rev. Rul. 79–45, 1979–1 C.B. 284.

(i) In general . A taxpayer that ceases to engage in a trade or business or terminates its existence must take the remaining balance of any § 481(a) adjustment relating to the trade or business into account in computing taxable income in the taxable year of the cessation or termination. Except as provided in sections 5.04(3)(c)(iv) and (v) of this revenue procedure, a taxpayer is treated as ceasing to engage in a trade or business if the operations of the trade or business cease or substantially all the assets of the trade or business are transferred to another taxpayer. For this purpose, “substantially all” has the same meaning as in section 3.01 of Rev. Proc. 77–37, 1977–2 C.B. 568.

(ii) Examples of transactions that are treated as the cessation of a trade or busi-

within five years of adopting or changing to the LIFO inventory method does not receive audit protection under section 7 of this revenue procedure.

(c) Examples . Example 1 . A uses the LIFO inventory method. In 2004, A changed a LIFO inventory sub-method. Specifically, A changed from the average-cost method of determining the current-year cost of inventories to the earliest-acquisitions cost method. In 2007, A seeks to change to the IPIC method of computing the index and value of its dollar-value pools, a method that A has never used. As part of this change, A seeks to change its method of determining the current-year cost of inventories from the earliest-acquisitions cost method to the most-recent acquisitions cost method. A is eligible to change its method of computing the index and value of its dollar-value pools to the IPIC method under this revenue procedure. However, A is not eligible to change its method of determining the current-year costs of inventories under this revenue procedure because A changed this LIFO inventory sub-method within the proscribed five-year period.

Example 2 . B uses the dollar-value LIFO inventory method and maintains separate dollar-value pools for its inventory of (1) new cars; (2) new trucks; (3) used cars; and (4) used trucks. In 2004, B terminated its use of the LIFO inventory method for its used cars and used trucks under Rev. Proc. 2002–9. In 2007, B seeks to terminate its use of the LIFO inventory method for its new cars and new trucks. B is eligible to change its method of accounting for new cars and new trucks under this revenue procedure because it has not changed the inventory-identification method for those pools within the proscribed five-year period.

Example 3 . C, a driving instruction school, uses an overall accrual method of accounting. C obtains payment in full from its students at the beginning of each session of classes. In 2006, C properly elected the deferral method for advance payments as described in Rev. Proc. 2004–34, 2004–1 C.B. 991. In 2007, C seeks to change its overall method of accounting to the cash method as described in Rev. Proc. 2001–10, 2001–1 C.B. 272, which it qualifies to use. C is eligible to change its method of accounting for advance payments even though it made a prior change in its method of accounting for advance payments within the previous 5 taxable years ending with 2007 because C is required to change its treatment of advance payments as part of its change to the overall cash method of accounting.

.03 Nonautomatic changes . If a taxpayer is precluded other than by sections 4.02(1) through 4.02(3) of this revenue procedure from using this revenue procedure to make a change in method of accounting, the taxpayer requesting such a change must file a Form 3115 with the Commissioner in accordance with the requirements of § 1.446–1(e)(3)(i) and Rev. Proc. 97–27, 1997–1 C.B. 680, as modified and amplified by Rev. Proc. 2002–19, 2002–1 C.B. 696, as amplified and clar

ified by Rev. Proc. 2002–54, 2002–2 C.B. 432, and modified by Rev. Proc. 2007–67, 2007–48 I.R.B. 1072 (or any other applicable Code, regulation, or guidance published in the Internal Revenue Bulletin (IRB)).