SECTION 15. TAXABLE YEAR OF

INCLUSION (§ 451)

.01 Accrual of interest on nonperforming 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

2011–4 I.R.B. 398 January 24, 2011

a method under section 5.02(3)(b)(i) or (iii) of Rev. Proc. 2004–34 applies. The taxpayer must request any such change in method of accounting using the non-automatic procedures in Rev. Proc. 97–27 (or any successor). See section 8.03 of Rev. Proc. 2004–34.

(2) Scope limitations temporarily inap- plicable for certain changes . The scope limitations in section 4.02 of this revenue procedure do not apply to a change in method of accounting for advance payments received from the sale of gift cards, as described in section 6.01(1) of Rev. Proc. 2011–18, for the taxpayer’s first or second taxable year ending on or after December 31, 2010.

(3) Concurrent automatic change to an overall accrual method . A taxpayer that wants to make both a change to its method of accounting for advance payments under section 15.07 of this APPENDIX and a change to an overall accrual method under section 14.01 of this APPENDIX for the same year of change must file a single Form 3115 for both changes and enter the designated automatic accounting method change numbers for both changes on the appropriate line on that Form 3115. See section 8.04(1) of Rev. Proc. 2004–34.

(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 ad

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.

(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 Jon Silver 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 performed 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 Jon Silver at 202–622–3930 (not a toll-free call). .07 Advance payments . (1) Description of change . (a) Applicability . This change applies to a taxpayer using or changing to an overall accrual method of accounting that receives advance payments, as defined in Rev. Proc. 2004–34, 2004–1 C.B. 991, as modified and clarified by Rev. Proc. 2011–18, 2011–5 I.R.B., and wants to change to either the full inclusion or deferral method, as described in Rev. Proc. 2004–34, other than a taxpayer changing to a method described in section 15.11 of this APPENDIX. See also Announcement 2004–48, 2004–1 C.B. 998. (b) Inapplicability . This change does not apply to a taxpayer that wants to use the Deferral Method for payments described in section 5.02(4)(a) of Rev. Proc. 2004–34 (other than allocable payments described in section 5.02(4)(c) of Rev. Proc. 2004–34) or for payments for which

January 24, 2011 399 2011–4 I.R.B.

(ii) a taxpayer that wants to change its method for allocating payments under section 5.02(4) of Rev. Proc. 2004–34.

(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 advance payments received on or after the beginning of the year of change. Any advance payments received prior to the year of change are accounted for under the taxpayer’s former method of accounting ( i.e., according to its former AFS). See also 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. To secure automatic consent for the change in method of accounting under section 15.11 of this APPENDIX, the taxpayer must attach the statement to its original return for the year of change (or to the amended return if the limited relief for a late application provided in section 6.02(3)(d) of this revenue procedure applies). Except as provided in section 15.11(4)(b) of this APPENDIX, the requirement to file a duplicate application, under section 6.02(3)(a) of this revenue procedure, is waived. The statement attached to the taxpayer’s return for the year of change must include all of the following:

(i) the designated automatic accounting method change number for this change, which is “153;”

(ii) the taxpayer’s name and employer identification (or social security number in the case of an individual) for each applicant as would be provided had a Form 3115 been required;

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

(iv) for each applicant, identify the type of applicable financial statement (as defined in section 4.06 of Rev. Proc. 2004–34) used by the taxpayer; (v) a detailed and complete description of each type of item affected by the change in revenue recognition and the line number (or schedule) where the affected item is

vances 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 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 Jon Silver at 202–622–3930 (not a toll-free call).

.09 Reserved . .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 to a method consistent with the holding in Rev. Rul. 69–314, 1969–1 C.B. 139. A taxpayer changing its method of accounting for retainages under section 15.10 of this APPENDIX must treat all retainages (receivables and payables) in the same manner.

(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). .11 Advance payments — change in applicable financial statements (AFS) .

(1) Description of change . (a) Applicability . (i) This change applies to a taxpayer that: (A) receives advance payments, as defined in Rev. Proc. 2004–34, 2004–1 C.B. 991, (B) uses the deferral method described in section 5.02(3)(a) of Rev. Proc. 2004–34 for including those advance payments in gross income in accordance with its applicable financial statement (AFS), (C) changes the manner in which it recognizes advance payments in revenues in its AFS, and (D) wants to change its method of accounting to use its new method of recognizing advance payments in revenues in its AFS for determining the extent to which advance payments are included in gross income under Rev. Proc. 2004–34.

(ii) A taxpayer’s restatement of its AFS for financial accounting presentation does not affect the propriety of the taxpayer’s method of accounting for advance payments in the prior taxable year(s). Thus, if the taxpayer uses the deferral method described in section 5.02(3)(a) of Rev. Proc. 2004–34 for including advance payments in gross income in accordance with its AFS (even if the AFS for that taxable year is later restated), the taxpayer satisfies the requirement of section 15.11(1)(a)(i)(B) and may change its method of accounting under this section if it is otherwise eligible.

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

(i) a taxpayer that uses a present method of accounting for advance payments that is not the deferral method described in section 5.02(3)(a) of Rev. Proc. 2004–34. For example, this change does not apply to a taxpayer that uses the full inclusion method under section 5.01 of Rev. Proc. 2004–34;

2011–4 I.R.B. 400 January 24, 2011

year change rule in section 4.02(7) of Rev. Proc. 2011–14.

(c) No Form 3115 filed . (i) Background . Under § 446(e), a taxpayer that changes its book method of accounting must secure the Commissioner’s consent before applying its new book method of accounting for tax purposes. See also § 1.446–1(e)(2)(i). Accordingly, a taxpayer that previously elected to defer advance payments under Rev. Proc. 2004–34 is required to obtain consent under § 446(e) if the taxpayer subsequently changes its book method for the deferred advance payments and wants to use its new AFS in determining the extent to which advance payments are included in gross income under Rev. Proc. 2004–34. The Service recognizes that some taxpayers took the position that consent under § 446(e) was not required in these circumstances and changed their method of accounting without properly obtaining consent. The safe harbor described below in section 15.11(4)(c)(ii) of this APPENDIX is provided to reduce controversy in this area.

(ii) Safe harbor . If before January 10, 2011, a taxpayer: (1) received advance payments, as defined in Rev. Proc. 2004–34; (2) used the deferral method described in section 5.02(3)(a) of Rev. Proc. 2004–34 for including those advance payments in gross income in accordance with its AFS; (3) changed the manner in which advance payments are recognized in revenues in its AFS; and (4) used its new AFS method with respect to a timely filed original federal income tax return in determining the amount of advance payments included in gross income under the deferral method of Rev. Proc. 2004–34 without securing the consent of the Commissioner to that change in accordance with § 446(e) and § 1.446–1(e)(2)(i), the Service will not assert that the taxpayer’s present method of accounting for advance payments is not a proper deferral method described in section 5.02(3)(a) of Rev. Proc. 2004–34 solely on the ground that the taxpayer failed to obtain the consent of the Commissioner for that change.

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

reflected on the federal tax return for the year of change; and

(vi) a detailed description of the basis used for deferral ( i.e., the method the taxpayer uses in its applicable financial statement or how the taxpayer determines amounts earned, as applicable) both before and after the change in the revenue recognition policy for the applicable financial statement.

(3) Scope limitation inapplicable . The scope limitation in section 4.02(7) of this revenue procedure does not apply to a change in method of accounting request made under section 15.11 of this APPENDIX.

(4) Special transition rules . In lieu of the general transition rules in section 13.02 of this revenue procedure, the following transition rules apply regarding this section 15.11 of the APPENDIX.

(a) Form 3115 filed under Rev. Proc. 97–27 . If before January 10, 2011, a taxpayer within the scope of Rev. Proc. 97–27 timely filed a Form 3115 under Rev. Proc. 97–27 requesting consent for a change in method of accounting described in section 15.11 of this APPENDIX for a year of change ending on or after April 30, 2010, and the Form 3115 is pending with the national office on January 10, 2011, the taxpayer may choose to make the change under this revenue procedure and make the change on a cut-off basis as provided in section 15.11(2)(a) of this APPENDIX if the taxpayer is otherwise eligible under this revenue procedure. The taxpayer must notify the national office of its intent to make the change under this section 15.11(4)(a) before the later of (a) February 11, 2011, or (b) the issuance of either a letter ruling granting or denying consent for the change or a letter closing the case. If the taxpayer timely notifies the national office that it will make the change under this section 15.11(4)(a), the national office ordinarily will return the Form 3115 to the taxpayer and refund the user fee.

A taxpayer may make the change under this section 15.11(4)(a) if the taxpayer attaches an application that complies with the provisions of section 15.11(2) of this APPENDIX to its original or amended return for the year of change, filed no later than the date required in section 6.02(3) of this revenue procedure. If the taxpayer converts the Form 3115 under this section 15.11(4)(a), for purposes of the au

dit protection in section 7 of this revenue procedure, the application will be considered filed as of the date the taxpayer originally filed the Form 3115 under Rev. Proc. 97–27. A Form 3115 filed under Rev. Proc. 97–27 before January 10, 2011, that is pending with the national office on January 10, 2011, will be disregarded for purposes of the prior 5 year change rule in section 4.02(7) of Rev. Proc. 2011–14, in the following circumstances:

(1) the taxpayer converts the Form 3115 under this section 15.11(4)(a); or

(2) the taxpayer withdraws the Form 3115 and files an application under Rev. Proc. 2011–14 for the same change in method of accounting for a year of change ending on or before April 30, 2011.

(b) Form 3115 filed under Rev. Proc. 2008–52 . If before January 10, 2011, a taxpayer properly filed a Form 3115 under Rev. Proc. 2008–52 for a year of change ending on or after April 30, 2010, for a change in method of accounting described in section 15.11 of this APPENDIX, the taxpayer may choose to file an application for that year of change under this revenue procedure and make the change on a cut-off basis as provided in section 15.11(2)(a) of this APPENDIX if, within 6 months from the due date of the federal income tax return for the year of change (excluding any extension), the taxpayer (i) files an original or amended return implementing the new method of accounting pursuant to this revenue procedure; (ii) attaches an application (amending the previously filed Form 3115) that complies with the provisions of section 15.11(2) of this APPENDIX to its original (or amended) return for the year of change; (iii) writes on the top of page 1 of a copy of the application: “Statement Revising Form 3115 Filed Pursuant to Sec. 15.11 of the APPENDIX of Rev. Proc. 2011–14”; and (iv) sends the copy of the application to the following address no later than the date the application is filed with the original or amended return: Internal Revenue Service, P.O. Box 14095, Benjamin Franklin Station, Washington, D.C. 20044, Attention — CC:ITA:8. A Form 3115 filed under Rev. Proc 2008–52 before January 10, 2011, for a taxable year ending on or after April 30, 2010, that is amended under this section 15.11 of the APPENDIX will be disregarded for purposes of the prior 5

January 24, 2011 401 2011–4 I.R.B.

(3) Contact information . For further information regarding a change under this section, contact Patrick M. Clinton at 202–622–4970 (not a toll-free call).

.02 Reserved .