SECTION 3. DEFINITIONS

The following definitions apply to this revenue procedure and the List of Automatic Changes:

.01 Applicable provisions . The term “applicable provisions” means all provisions and requirements of this revenue procedure and either the List of Automatic Changes (in the case of an automatic change) or the letter ruling (in the case of a non-automatic change) pertinent to the taxpayer and its requested change in method of accounting.

.02 Automatic change . An “automatic change” is a change in method of accounting for which the taxpayer is eligible under SECTION 5.01(1) to request the Commissioner’s consent for the requested year of change.

.03 Automatic change procedures . The “automatic change procedures” are all of the procedures and provisions in this revenue procedure applicable to an automatic change and in the applicable section of the List of Automatic Changes.

.04 Cessation of a trade or business . (1) In general . Except as provided in SECTION 3.04(3), 3.04(4), or 3.04(5), a taxpayer is considered to cease to engage in a trade or business if the taxpayer terminates its existence for federal income tax purposes, ceases operation of the trade or business, or transfers substantially all the assets of the trade or business 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.

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(2) Examples of transactions that are treated as the cessation of a trade or business . The following is a nonexclusive list of transactions that are treated as the cessation of a trade or business:

(a) the trade or business is incorporated;

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

(c) the trade or business is terminated or transferred pursuant to a taxable liquidation;

(d) a division of a corporation ceases to operate the trade or business;

(e) the assets of a trade or business are contributed to a partnership; or

(f) within a 12-month period there is a sale or exchange of 50 percent or more of the total interest in a partnership’s capital and profits under § 708(b)(1)(B).

(3) Exception for conversion to or from S corporation status . A C corporation electing to be treated as an S corporation or an S corporation terminating its S election that is then treated as a C corporation is not treated as ceasing to engage in a trade or business.

(4) Exception for certain transfers to which § 381(a) applies . A corporation is not considered to cease to engage in a trade or business to the extent (a) the corporation transfers substantially all the assets of that trade or business to another corporation in a transfer to which § 381(a) applies, and (b) the transferor’s method of accounting for an item for that trade or business is a tax attribute that the acquiring corporation carries over and uses for that item immediately after the transfer pursuant to § 381(c).

(5) Exception for certain transfers within a consolidated group to which § 351 applies . A corporation is not considered to cease to engage in a trade or business to the extent (a) the corporation transfers substantially all the assets of that trade or business to another member of the same consolidated group in an exchange qualifying under § 351, and (b) the transferee member adopts and uses the transferor member’s method of accounting for an item.

.05 Director . The term “director” has the same meaning as this term has in Rev. Proc. 2015–1, 2015–1 I.R.B. 1 (or successor).

.06 Federal income tax return . A “federal income tax return” includes a return of tax (for example, Form 1120, U.S. Cor- poration Income Tax Return, and Form 1120S, U.S. Income Tax Return for an S Corporation ) and, for a taxpayer that is not required to file a return of tax, the appropriate information return (for example, Form 1065, U.S. Return of Partner- ship Income, and Form 990, Return of Organization Exempt From Income Tax ) for federal income tax purposes.

.07 Form 3115 . (1) In general . The term “Form 3115” means the Form 3115 most recently released by the IRS or, when permitted in the applicable section of the List of Automatic Changes, a short Form 3115, as described in SECTION 3.07(2), and any attachments to the Form 3115 or short Form 3115.

(2) Short Form 3115 . A “short Form 3115” means: (a) only the following information must be completed on Form 3115:

(i) the identification section of page 1 above Part I;

(ii) the signature section at the bottom of page 1; and

(iii) Part I, line 1(a); and (b) any additional information required in this revenue procedure or the applicable section of the List of Automatic Changes to be attached to or included with a Form 3115. .08 Issue under consideration . (1) Under examination . A taxpayer’s method of accounting for an item is an “issue under consideration” for the taxable year(s) under examination as of the date of any written notification to the taxpayer (for example, draft or final (a) examination plan, (b) information document request (IDR), or (c) 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. If an examining agent does not propose an adjustment for the item that is an issue under consideration during the examination, the item continues to be an issue under consideration after that examination ends only if the issue is placed in suspense. An item is an issue placed in suspense if, by the date the examination ends, the examining agent provides the

taxpayer with written notification of the IRS’s intent to examine the issue during the examination of the subsequent taxable year(s) to be examined.

An entity (including a limited liability company) treated as a partnership or an S corporation for federal income tax purposes also has an issue under consideration for the taxable year(s) under examination if the same item is an issue under consideration in an examination of a partner, member, or shareholder’s federal income tax return.

A corporation that is (or was formerly) a member of a consolidated group also has an issue under consideration for the taxable year(s) under examination if the same item is an issue under consideration in an examination of any other member of that consolidated group for one or more of the taxable year(s) that the corporation was a member of the consolidated group.

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. 2015–2, 2015–1 I.R.B. 105 (or successor).

Example 1 . 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.

Example 2 . 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 cost of goods sold reported on the federal income tax return.

(2) Before an Appeals office . A taxpayer’s method of accounting for an item is an issue under consideration for the taxable year(s) before an Appeals office if the treatment of the item is included as an item of adjustment in the examination report referred to Appeals. Further, a taxpayer’s method of accounting for an item is an issue under consideration as of the date of Appeals’ written notification to the taxpayer specifically identifying the method of accounting for the item as an issue under consideration. If an Appeals office submits to the Joint Committee on Taxation pursuant to § 6405 a report of a refund or credit, the method of accounting

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continues to be an issue under consideration by the Appeals office while the refund or credit is under review by the Joint Committee on Taxation.

An entity (including a limited liability company) treated as a partnership or an S corporation for federal income tax purposes also has an issue under consideration by an Appeals office if the same item is an issue under consideration by an Appeals office with respect to a partner, member, or shareholder’s federal income tax return.

(3) Before a federal court . A taxpayer’s method of accounting for an item is an issue under consideration for the taxable year(s) before a federal court if the treatment of the item is included as an item of adjustment 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. Further a taxpayer’s method of accounting for an item is an issue under consideration as of the date of the government counsel’s written notification to the taxpayer specifically identifying the method of accounting for the item as under consideration. If a settlement stipulation is submitted to the Joint Committee on Taxation pursuant to § 6405, the method of accounting continues to be an issue under consideration by the federal court while the settlement stipulation is under review by the Joint Committee on Taxation.

An entity (including a limited liability company) treated as a partnership or an S corporation for federal income tax purposes also has an issue under consideration before a federal court if the same item is an issue under consideration before a federal court with respect to a partner, member, or shareholder’s federal income tax return.

A corporation that is (or was formerly) a member of a consolidated group also has an issue under consideration before a federal court if the same item is an issue under consideration before a federal court

for any other member of that consolidated group for one or more of the taxable year(s) that the corporation was a member of the consolidated group.

(4) Certain foreign corporations . In the case of a CFC or 10/50 corporation, the foreign corporation’s method of accounting for an item is an issue under consideration if any of the corporation’s controlling domestic shareholders (as defined in § 1.964–1(c)(5)) receives notification described in SECTION 3.08(1), 3.08(2), or 3.08(3) that the treatment of a distribution, deemed distribution, or inclusion from the foreign corporation, or the amount of its earnings and profits or foreign taxes deemed paid, is an issue under consideration.

.09 List of Automatic Changes . The List of Automatic Changes refers to Rev. Proc. 2015–14 (or successor).

.10 Non-automatic change . A “nonautomatic change” is any change in method of accounting for which the taxpayer is eligible under SECTION 5.01(2) to request the Commissioner’s consent for the requested year of change.

.11 Non-automatic change procedures . The “non-automatic change procedures” are all of the procedures and provisions in this revenue procedure applicable to a non-automatic change.

.12 Present method . The term “present method” means the established method of accounting from which the taxpayer is requesting the Commissioner’s consent to change under this revenue procedure.

.13 Proposed method . The term “proposed method” means the method of accounting to which the taxpayer is requesting the Commissioner’s consent to change under this revenue procedure.

.14 SECTION . For purposes of this revenue procedure, the term “SECTION” means a section of this revenue procedure.

.15 Section 481(a) adjustment . The “§ 481(a) adjustment” is the amount necessary to prevent amounts from being duplicated or omitted as a result of the taxpayer computing its taxable income for the year of change and thereafter using a different method of accounting as if the

different method of accounting had always been used. See SECTION 2.06(1). The § 481(a) adjustment is computed as of the beginning of the year of change. For a change in method of accounting that affects multiple accounts, the taxpayer’s § 481(a) adjustment for that change is a net § 481(a) adjustment. In computing the net § 481(a) adjustment for a change, the taxpayer must take into account all relevant accounts. For example, the net § 481(a) adjustment for a change in the proper time for deducting salary bonuses under § 461 reflects any necessary adjustments for amounts of salary bonuses capitalized to inventory under § 263A. The term “§ 481(a) adjustment” includes a net § 481(a) adjustment.

Example 1 . A taxpayer that is not required to use inventories uses the overall cash receipts and disbursements method of accounting and changes to an overall accrual method of accounting. The taxpayer has $120,000 of income earned but not yet received (accounts receivable) and $100,000 of expenses incurred but not yet paid (accounts payable) as of the end of the taxable year preceding the year of change in method of accounting. A positive net § 481(a) adjustment of $20,000 ($120,000 accounts receivable less $100,000 accounts payable) is required as a result of the change in method of accounting.

Example 2 . X Corporation, a calendar year taxpayer, is a producer and capitalizes costs that are required to be capitalized into inventory under § 263A. Each February, X Corporation pays a salary bonus to each production employee who remains in its employment as of January 31 for the employee’s services provided in the prior calendar year. Under its present method, X Corporation treats these salary bonuses as incurred in the taxable year the employee provides the related services. $40,000 of these salary bonuses were treated as incurred in 2013, $8,000 of which were capitalized into 2013 ending inventory, and $32,000 of which were included in cost of goods sold. For 2014, X Corporation proposes to change its method of accounting to treat salary bonuses as incurred in the taxable year in which all events have occurred that establish the fact of the liability to pay the salary bonuses and the amount of the liability can be determined with reasonable accuracy. The computation of X Corporation’s net § 481(a) adjustment for the change in method of accounting for salary bonuses, which reflects the impact of the change in method of accounting on the amount of salary bonuses capitalized into beginning inventory for the year of change, is demonstrated as follows:

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Salary bonuses treated as incurred before January 1, 2014, under the present method of accounting, but not incurred until on or after January 1, 2014, under the proposed method $40,000

Beginning inventory as of January 1, 2014, with capitalized salary bonuses computed under the present method

Beginning inventory as of January 1, 2014, with capitalized salary bonuses, computed under the proposed method

$100,000

$92,000

Decrease in beginning inventory as of January 1, 2014 ($8,000)

Net positive § 481(a) adjustment $32,000

.16 Section 481(a) adjustment period . The “§ 481(a) adjustment period” is the applicable number of taxable years that the taxpayer takes into account the § 481(a) adjustment required as a result of the change in method of accounting, beginning with the year of change.

.17 Taxpayer . (1) In general . The term “taxpayer” has the same meaning as the term “person” defined in § 7701(a)(1) (rather than the meaning of the term “taxpayer” defined in § 7701(a)(14)), and includes, where appropriate, the taxpayer’s authorized representative, or designated shareholder, or controlling domestic shareholders (as defined in § 1.964–1(c)(5)).

(2) Consolidated group . Except as otherwise provided ( see, for example, SECTION 3.08(1)), in the case of a consolidated group, the term “taxpayer” is the consolidated group member to which the request for a change in method of accounting relates. However, for any action for which the common parent of the consolidated group must act as the agent for that member pursuant to § 1.1502–77, the taxpayer is the common parent of the consolidated group acting on behalf of that member.

.18 Under examination . (1) In general . (a) Except as provided in SECTIONS 3.18(2), 3.18(3), 3.18(4), and 3.18(6), a taxpayer is “under examination” with respect to a federal income tax return as of the date the taxpayer is contacted in any manner by a representative of the IRS for the purpose of scheduling or conducting any type of examination of the return. Except as provided in SECTIONS 3.18(1)(b), 3.18(1)(c), 3.18(2), 3.18(3), 3.18(4), and 3.18(5), an examination ends: (i) in a case in which the IRS accepts the federal income tax return as filed, on the date of the IRS’s “no change” final

letter (for example Letter 590, No Change Final Letter ) that is sent to the taxpayer;

(ii) in a fully agreed case, on the earliest of the date the taxpayer executes a waiver of restrictions on assessment or acceptance of overassessment (for example, Form 870, Waiver of Restrictions on Assessment and Collection of Deficiency in Tax and Acceptance of Overassess- ment, Form 4549, Income Tax Examina- tion Changes, or Form 4605, Examination Changes – Partnerships, Fiduciaries, S Corporations, and Interest Charge Domes- tic International Sales Corporations ), the date the taxpayer makes a payment of tax that equals or exceeds the proposed deficiency, or the date of the IRS’s final “closing” letter (for example, Letter 987, Agreed Income Tax Change ) that is sent to the taxpayer; or

(iii) in an unagreed or a partially agreed case, on the earliest of the date Appeals notifies the taxpayer that jurisdiction for the case has been transferred to Appeals from Examination, the date the taxpayer files a petition in the Tax Court, the date on which the period for filing a petition with the Tax Court expires, or the date of the final 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 of the notification to the taxpayer that Appeals has transferred jurisdiction of the case to Examination for reconsideration. Further, notwithstanding SECTIONS 3.18(1)(a)(iii) and 8.02(1)(b), if the taxpayer is within a 120-day window provided in SECTION 8.02(1)(b), that 120-day window is no longer available to the taxpayer as of the date the IRS notifies the taxpayer that jurisdiction for the case has been transferred to the examining agent(s) for reconsideration. The 120-day window provisions in SECTION 8.02(1)(b) will be available

to the taxpayer when the resumed examination ends.

(2) Consolidated group member . A corporation that is (or was formerly) a member of a consolidated group is under examination during the period of time the consolidated group is under examination for a taxable year(s) that the corporation was a member of the group.

Example . X Corporation was a member of Y consolidated group from Year 1 through Year 4. On January 1, Year 5, Z consolidated group purchased X Corporation. Thus, X Corporation is a member of Z consolidated group in Year 5. On July 1, Year 5, a representative of the IRS contacts the common parent of Y consolidated group for purposes of scheduling or conducting an examination of the Y consolidated group return for year 2. Because X Corporation was a member of Y consolidated group for the taxable year under examination, X Corporation is under examination as of July 1, Year 5, for purposes of this SECTION 3.18 even though it is no longer a member of Y consolidated group.

(3) Partnerships subject to TEFRA . Except as provided in SECTION 3.18(1)(b), 3.18(1)(c), 3.18(5), and 3.18(6), 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 that is sent to the Tax Matters Partner (TMP) and ends:

(a) in a case in which the IRS accepts the partnership return as filed, on the date of the “no adjustments” final letter or the “no change” notice of final administrative adjustment that is 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 Collection of Deficiency in Tax for Part- nership Adjustments, or Form 870–L, Agreement to Assessment and Collection of Deficiencies in Tax for Partnership Ad- justments, Additions to Tax, and Affected Items ; or

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(c) in an unagreed or a partially agreed case, on the earliest of the date the IRS notifies the TMP that the examining agent(s) has transferred jurisdiction for the case to Appeals (for example, the date that Appeals issues its uniform acknowledgement letter to the TMP), the date the TMP (or a partner or member) requests judicial review, or the date on which the period for requesting judicial review expires.

(4) Certain foreign corporations . A foreign corporation that is not required to file a federal income tax return is under examination if any of its controlling domestic shareholders (as defined in § 1.964– 1(c)(5)) is under examination for a taxable year(s) in which any such shareholder was a United States shareholder, as defined in § 951(b) or § 953(c)(1)(A), of the foreign corporation. For purposes of this revenue procedure, a foreign corporation is no longer under examination when all of its controlling domestic shareholders are no longer under examination, as defined in this SECTION 3.18.

(5) Taxpayer before Joint Committee on Taxation . If a taxpayer is under examination (including an examination that begins on the date a taxpayer is contacted in any manner for additional information as a result of a Joint Committee on Taxation inquiry pursuant to § 6405) then, notwithstanding the performance of an act described in SECTION 3.18(1), 3.18(2), 3.18(3), or 3.18(4), for purposes of this revenue procedure, the taxpayer continues to be under examination (for the taxable year(s) that Examination reported to the Joint Committee on Taxation) while the taxpayer has a refund or credit under review by the Joint Committee on Taxation. A taxpayer that is not otherwise under examination as of the date of an IRS letter notifying the taxpayer of the IRS’s proposal to the Joint Committee on Taxation in a report mandated by § 6405 regarding the taxpayer’s federal income tax return(s) is not under examination solely as a result of that letter. The examination ends on the later of (i) the performance of the applicable act described in SECTION 3.18(1), 3.18(2), 3.18(3), or 3.18(4), or (ii) the date of the Joint Committee Specialist’s written notification to the taxpayer that the Joint Committee on Taxation has completed its consideration (for example, Let

ter 1574 (P)), or that the case has been withdrawn from consideration by the Joint Committee on Taxation. See Rev. Proc. 2005–32, 2005–1 C.B. 1206. Example . A taxpayer’s 2014 federal income tax return is under examination. The examination results in a minimum refund, which is an amount the taxpayer is due to receive after offsetting any potential unagreed deficiency, in excess of $2 million. The taxpayer indicates agreement with the examiner’s findings on the agreed issues resulting in the minimum refund by signing Form 870, Waiver of Re- strictions on Assessment and Collection of Defi- ciency in Tax and Acceptance of Overassessment, and the Joint Committee Specialist Group reports the refund to the Joint Committee on Taxation before releasing the unagreed issues to Appeals. The taxpayer continues to be under examination for 2014 until the later of (i) the performance of the applicable act described in SECTION 3.18(1), 3.18(2), 3.18(3), or 3.18(4) for the 2014 return, or (ii) the date of the Joint Committee Specialist’s written notification to the taxpayer that the Joint Committee on Taxation has completed its consideration of the minimum refund for 2014 (for example, Letter 1574 (P)), or that the 2014 minimum refund case has been withdrawn from consideration by the Joint Committee on Taxation.

(6) Taxpayer in Compliance Assurance Process . For purposes of this revenue procedure, a taxpayer participating in the Compliance Assurance Process (CAP) is under examination as of the date the taxpayer executes the Memorandum of Understanding for the CAP.

.19 Year of change . The “year of change” is the taxable year for which a change in method of accounting is effective, that is, the first taxable year the taxpayer uses the proposed method of accounting, even if no affected items are taken into account for that year. The year of change is also the first taxable year the taxpayer must comply with all the applicable provisions. For an automatic change, the year of change is the taxable year designated on the Form 3115 and for which the Taxpayer timely filed a Form 3115 under SECTION 6.03(1)(a). For a non-automatic change, except as provided in SECTION 13 (request to revise the year of change), SECTION 6.03(4)(b) (other extensions of time), or other guidance published in the Internal Revenue Bulletin (IRB), the year of change is the taxable year for which the taxpayer timely filed a Form 3115 under SECTION 6.03(2)(a).