SECTION 5. TERMS AND

CONDITIONS OF CHANGE

.01 In general . An accounting method change filed under this revenue procedure must be made pursuant to the terms and conditions provided in this revenue procedure.

.02 Year of change . The year of change is the taxable year designated on the application and for which the application is timely filed under section 6.02(3) of this revenue procedure.

.03 Section 481(a) adjustment . Unless otherwise provided in this revenue procedure, a taxpayer making a change in method of accounting under this revenue procedure must apply § 481(a) and take into account a § 481(a) adjustment in the manner provided in section 5.04 of this revenue procedure.

.04 Section 481(a) adjustment period .

(1) In general . Except as otherwise provided in section 5.04(3), the APPENDIX of this revenue procedure, or in other guidance published in the IRB, the § 481(a) adjustment period is four taxable years for a net positive § 481(a) adjustment for an accounting method change, and one taxable year for a net negative § 481(a) adjustment for an accounting method change.

(2) Short period as a separate taxable year . If the year of change or any other taxable year during the § 481(a) adjustment period is a short taxable year, the § 481(a) adjustment must be included in income as if that short taxable year were a full 12-month taxable year. See Rev. Rul. 78–165, 1978–1 C.B. 276. Example 1 . 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. The taxpayer subsequently receives permission to change its annual accounting period to September 30, effective for the taxable year ending September 30, 2008. The taxpayer must include $7,500 of the § 481(a) adjustment in gross income for the short period from January 1, 2008, through September 30, 2008.

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member ceases to be a member of a consolidated group by reason of an acquisition to which § 381(a) applies and the acquiring corporation (1) is a member of the same group as the transferor member, and (2) continues, under §381(c)(4) and the regulations thereunder, to use the same method of accounting as that used by the transferor member with respect to the assets of the trade or business to which the § 481(a) adjustment relates.

.05 NOL carryback limitation for tax- payer subject to criminal investigation . No portion of any net operating loss that is attributable to a negative § 481(a) adjustment may be carried back to a taxable year prior to the year of change that is the subject of any pending or future criminal investigation or proceeding concerning (1) directly or indirectly, any issue relating to the taxpayer’s federal tax liability, or (2) the possibility of false or fraudulent statements made by the taxpayer with respect to any issue relating to its federal tax liability.

.06 Certain foreign corporations . If the change in method of accounting is on behalf of a controlled foreign corporation (CFC) as defined in § 953(c)(1)(B) or § 957 or a noncontrolled section 902 corporation as defined in § 904(d)(2)(E), the following additional terms and conditions apply:

(1) If the functional currency of the foreign corporation is not the U.S. dollar, the § 481(a) adjustment must be stated in the functional currency of the foreign corporation and not in U.S. dollars;

(2) A positive § 481(a) adjustment necessary to prevent the duplication of amounts of an expense item will have the same source, separate limitation classification, character, and treatment for purposes of subpart F as the foreign corporation’s gross income that was offset by the expense in the prior year or years. A positive § 481(a) adjustment necessary to prevent the omission of amounts of an income item will have the same source, separate limitation classification, character, and treatment for purposes of subpart F as the foreign corporation’s income would have had in the prior year or years. A negative § 481(a) adjustment necessary to prevent the omission of amounts of an expense item will be allocated to the class of gross income that has the same source, separate limitation classification, character, and

ness . The following is a nonexclusive list of transactions that are treated as the cessation of a trade or business for purposes of accelerating the § 481(a) adjustment under section 5.04(3)(c) of this revenue procedure:

(A) the trade or business to which the § 481(a) adjustment relates is incorporated;

(B) the trade or business to which the § 481(a) adjustment relates is purchased by another taxpayer in a transaction to which § 1060 applies;

(C) the trade or business to which the § 481(a) adjustment relates is terminated or transferred pursuant to a taxable liquidation;

(D) a division of a corporation ceases to operate the trade or business to which the § 481(a) adjustment relates; or

(E) the assets of a trade or business to which the § 481(a) adjustment relates are contributed to a partnership.

(iii) Conversion to or from S corpo- ration status . Except as provided in section 22.01 of the APPENDIX of this revenue procedure, no acceleration of a § 481(a) adjustment is required under section 5.04(3)(c) of this revenue procedure when a C corporation elects to be treated as an S corporation or an S corporation terminates its S election and is then treated as a C corporation.

(iv) Certain transfers to which § 381(a) applies . No acceleration of the § 481(a) adjustment is required under section 5.04(3)(c) of this revenue procedure when a taxpayer transfers substantially all the assets of the trade or business that gave rise to the § 481(a) adjustment to another taxpayer in a transfer to which § 381(a) applies and the accounting method (the change to which gave rise to the § 481(a) adjustment) is a tax attribute that is carried over and used by the acquiring corporation immediately after the transfer pursuant to § 381(c). The acquiring corporation is subject to any terms and conditions imposed on the transferor (or any predecessor of the transferor) as a result of its change in method of accounting.

(v) Certain transfers pursuant to § 351 within a consolidated group .

(A) In general . No acceleration of the § 481(a) adjustment is required under section 5.04(3)(c) of this revenue procedure when one member of an affiliated

group filing a consolidated return transfers substantially all the assets of the trade or business that gave rise to the § 481(a) adjustment to another member of the same consolidated group in an exchange qualifying under § 351 and the transferee member adopts and uses the same method of accounting (the change to which gave rise to the § 481(a) adjustment) used by the transferor member. The transferor member must continue to take the § 481(a) adjustment into account pursuant to the terms and conditions set forth in this revenue procedure. The transferor member must take into account activities of the transferee member (or any successor) in determining whether acceleration of the § 481(a) adjustment is required. For example, except as provided in the following sentence, the transferor member must take any remaining § 481(a) adjustment into account in computing taxable income in the taxable year in which the transferee member ceases to engage in the trade or business to which the § 481(a) adjustment relates. The § 481(a) adjustment is not accelerated when the transferee member engages in a transaction described in section 5.04(3)(c)(iv) or this section 5.04(3)(c)(v)(A).

(B) Exception . The provisions of section 5.04(3)(c)(v)(A) of this revenue procedure cease to apply and the transferor member must take any remaining balance of the § 481(a) adjustment into account in the taxable year immediately preceding any of the following: (1) the taxable year the transferor member ceases to be a member of the group; (2) the taxable year any transferee member owning substantially all the assets of the trade or business that gave rise to the § 481(a) adjustment ceases to be a member of the group; or (3) a separate return year of the common parent of the group. In applying the preceding sentence, the rules of §§ 1.1502–13(j)(2), (j)(5) and (j)(6) apply, but only if the method of accounting to which the transferor member changed and to which the § 481(a) adjustment relates is adopted, carried over, or used by any transferee member acquiring the assets of the trade or business that gave rise to the § 481(a) adjustment immediately after acquisition of such assets. For example, the transferor member is not required to accelerate the § 481(a) adjustment if a transferee

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sions of this revenue procedure applicable to particular changes may require or allow a taxpayer to file a single application with respect to two or more changes. See, for example, section 14.03 of the APPENDIX of this revenue procedure.

(c) Contents . The taxpayer must submit an application that is accurate and complete as to all information required by this revenue procedure. Further, unless this revenue procedure provides that a Form 3115 is not required for the requested change in method of accounting, the taxpayer must submit a current Form 3115 that contains all information required by the applicable portions of the Form 3115 and its instructions.

For example, an application must identify the taxpayer making the change; the year of change (both the beginning and ending dates); the designated automatic accounting method change number(s) for the requested change(s) in method of accounting; and the amount of the adjustment under § 481(a), unless the change is required to be made using a cut-off basis. Also, the application must fully describe the item(s) being changed; the present method(s) of accounting from which the taxpayer is changing and the proposed method(s) of accounting to which the taxpayer is changing. Further, unless a Form 3115 is not required for the requested change in method of accounting, the taxpayer must provide all other information required by Parts I, II, and IV, and any applicable schedule(s) on the Form 3115.

(2) Waiver of taxable year filing requirement . The requirement under § 1.446–1(e)(3)(i) to file a Form 3115 within the taxable year for which the change is requested is waived for any application for a change in method of accounting filed pursuant to this revenue procedure. See § 1.446–1(e)(3)(ii).

(3) Timely duplicate filing requirement .

(a) In general . A taxpayer changing a method of accounting pursuant to this revenue procedure must complete and file an application in duplicate. The original must be attached to the taxpayer’s timely filed (including any extension) original federal income tax return for the year of change, and a copy (with signature) of the application must be filed with the national office (see section 6.02(7) of this revenue procedure for the address) no earlier than

treatment for purposes of subpart F as the foreign corporation’s income that would have been offset by the expense in the prior year or years. A negative § 481(a) adjustment necessary to prevent the duplication of amounts of an income item will be treated as an offset to gross income that has the same source, separate limitation classification, character, and treatment for purposes of subpart F as the foreign corporation’s income in the prior year or years;

(3) For each taxable year of the adjustment period beginning with the year of change, the appropriate amount of the § 481(a) adjustment must be taken into account in computing the foreign corporation’s subpart F income under § 951 and its earnings and profits under §§ 964 and 986(b) for all federal income tax purposes; (4) The written statement required by § 1.964–1T(c)(3)(i) and (ii) must be filed by each controlling domestic shareholder (or its common parent) with its tax return for its taxable year with or within which ends the foreign corporation’s year of change;

(5) The shareholders of the foreign corporation must maintain records and accounts with respect to the foreign corporation, for the year of change and for subsequent taxable years, in conformity with the requirements of § 905(b) and § 964(c);

(6) If a foreign corporation loses its status as a CFC or noncontrolled section 902 corporation at any time prior to the expiration of the adjustment period, the foreign corporation must take into account in computing its subpart F income and earnings and profits, on the final day on which it is a CFC or noncontrolled section 902 corporation, the balance of the § 481(a) adjustment not previously taken into account;

(7) Each U.S. shareholder of a CFC must comply with its obligations to report changes in the shareholder’s ownership of the CFC on Form 5471, Information Re- turn of U.S. Persons With Respect To Cer- tain Foreign Corporations, during the adjustment period; and

(8) In the case of any disposition of stock of the foreign corporation that is owned directly or indirectly by a United States person if the disposition (i) represents ten percent or more of the total value of the stock of the corporation, or (ii) results in the person no longer meeting the stock ownership requirements of § 6046(a)(2) with respect to the foreign

corporation, then the foreign corporation must include, prior to the disposition, in its income and earnings and profits the balance of the § 481(a) adjustment not previously taken into account. This condition does not apply to any change in ownership of the foreign corporation if the stock disposed of continues to be owned, directly or indirectly, by a member of the U.S. consolidated group of which the former shareholder is a member.

.07 Change treated as initiated by the taxpayer . For purposes of § 481, a change in method of accounting made under this revenue procedure is a change in method of accounting initiated by the taxpayer.