SECTION 6. GENERAL — Internal Revenue Bulletin 2015-5

APPLICATION PROCEDURES

.01 Requesting consent . Except as otherwise provided in the List of Automatic Changes, the Code, or other guidance published in the IRB, a taxpayer requests the Commissioner’s consent to change a method of accounting under this revenue procedure by completing and filing a Form 3115.

.02 Completing Form 3115 . (1) Separate Forms 3115 . Ordinarily, a taxpayer may request only one change in method of accounting on a Form 3115. If the taxpayer wants to request a change in method of accounting for more than one unrelated item or sub-method of accounting, the taxpayer must submit a separate Form 3115 for each unrelated item or submethod, except in certain situations in which the IRS specifically permits certain unrelated changes to be included on a single Form 3115. See, for example, section 14.03 of the List of Automatic Changes. See section 9.02 of Rev. Proc. 2015–1 (or successor).

(2) Form 3115 contents . The taxpayer must submit a Form 3115 that is accurate and, except as specifically permitted in the applicable section of the List of Automatic Changes, complete. The Form 3115 must include all relevant facts, including all information and representations required by this revenue procedure, the applicable provisions of Rev. Proc. 2015–1 (or successor), the current instructions for Form 3115, and the applicable section of the List of Automatic Changes (in the case of an automatic change).

(3) Designated automatic accounting method change number . In the case of a Form 3115 filed under the automatic change procedures, the taxpayer must include the designated automatic accounting method change number in the applicable section of the List of Automatic Changes on the applicable line of Form 3115. For example, the designated automatic accounting method change number for the change in method of accounting identified in section 1.01 of the List of Automatic Changes is 91. Therefore, a taxpayer requesting consent for the change in method of accounting identified in section 1.01 of

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that want to change the foreign corporation’s method of accounting must satisfy the requirements set forth in § 1.964– 1(c)(3). The designated shareholder that retains the jointly executed consent described in § 1.964–1(c)(3)(ii) must complete and file a Form 3115 on behalf of the foreign corporation, the applicant. Except as provided in sections 9.02 and 15.07(4) of Rev. Proc. 2015–1 (or successor), the designated shareholder must submit a separate Form 3115 and, in the case of a non-automatic change, user fee for each CFC or 10/50 corporation for which consent for a change in method of accounting is requested.

(7) Certain foreign partnerships . In the case of a foreign partnership that is not required to file a federal income tax return, the partners or partner described in § 1.6031(a)–1(b)(5)(i) or (ii), respectively, may file a Form 3115 on behalf of the foreign partnership, the applicant.

(8) Signature requirements . The Form 3115 must be signed by, or on behalf of, the taxpayer requesting the change in method of accounting by an individual who has personal knowledge of the facts of, and authority to bind the taxpayer in, such matters. For example, if the taxpayer is a member of a consolidated group, the Form 3115 submitted on behalf of the taxpayer must be signed by a duly authorized officer of the common parent with personal knowledge of the facts of, and authority to bind the taxpayer in, such matters. Further, if the individual who, for compensation, prepared the Form 3115 is not the taxpayer or an individual with authority to sign the Form 3115 on behalf of the taxpayer, the preparer must also sign the Form 3115. See the additional signature requirements in the current Instructions for Form 3115 regarding those who are permitted and required to sign.

.03 Filing Form 3115 . A Form 3115 is filed under this revenue procedure if the taxpayer complies with all applicable provisions of this SECTION 6.03.

(1) Automatic change . (a) When and where to file Form 3115 . The requirement in § 1.446–1(e)(3)(i) to file a Form 3115 within the requested year of change is waived for any Form 3115 filed under the automatic change procedures. See § 1.446–1(e)(3)(ii).

(i) In general . Except as otherwise provided in this revenue procedure or in the List of Automatic Changes, a taxpayer requesting to change a method of accounting under the automatic change procedures must complete a Form 3115 as required by SECTION 6.02 and file that Form 3115 in duplicate, as follows:

(A) Original Form 3115 . The original completed Form 3115 (or an electronic version of the Form 3115) must be attached to the taxpayer’s timely filed (including any extension) original federal income tax return implementing the requested automatic change for the requested year of change; and

(B) Ogden copy of Form 3115 . A signed copy of the original Form 3115 must be filed with the IRS in Ogden, UT (Ogden copy) at the applicable address in section 9.05 of Rev. Proc. 2015–1 (or successor) no earlier than the first day of the requested year of change and no later than the date the taxpayer files the original Form 3115 with the federal income tax return for the requested year of change.

(ii) Certain foreign corporations . If SECTION 6.02(6) applies, the original Form 3115 must be attached to the designated shareholder’s (or, if a member of a consolidated group, its common parent’s) timely filed (including any extension) original federal income tax return for its taxable year with or within which ends the year of change of the foreign corporation, and a signed copy of the original Form 3115 must be filed with the IRS in Ogden, UT (see the applicable address in section 9.05 of Rev. Proc. 2015–1 (or successor)) no earlier than the first day of the year of change and no later than the date the designated shareholder (or its common parent) files the original Form 3115 with the designated shareholder’s (or its common parent’s) federal income tax return for its taxable year with or within which ends the year of change of the foreign corporation.

(iii) Certain foreign partnerships . If SECTION 6.02(7) applies, the original Form 3115 must be attached to the return on the form prescribed for the partnership return that must be filed for the partnership as described in § 1.6031(a)–1(b)(5) (for example, Form 1065, U.S. Return of Partnership Income ) and a signed copy of the original Form 3115 must be filed with the IRS in Ogden, UT (see the applicable

address in section 9.05 of Rev. Proc. 2015–1 (or successor)) no earlier than the first day of the requested year of change and no later than the date the partnership files the original Form 3115.

(b) Certain concurrent changes in method of accounting . Ordinarily, a taxpayer must submit a separate Form 3115 for each automatic change. See SECTION 6.02(1). In some cases, however, the List of Automatic Changes describes particular changes in method of accounting that a taxpayer is required or permitted to request on a single Form 3115 (concurrent changes). See, for example, section 14.03 of the List of Automatic Changes. When the taxpayer is required or permitted to file a single Form 3115 for two or more concurrent changes, the taxpayer must provide all of the information required for each change separately. For example, the single Form 3115 filed for the taxable year ending December 31, 2014, must include the information required by Part II, line 12, Part IV (including the amount of any § 481(a) adjustment), and any other line(s) on Form 3115 for each change in method of accounting included on that Form 3115.

(d) No acknowledgement of receipt . The IRS does not send an acknowledgement of receipt for a Form 3115 (original or copy) filed under the automatic change procedures.

(e) Correspondence regarding a previ- ously filed Form 3115 . If a taxpayer submits additional correspondence regarding its Form 3115 filed under the automatic change procedures (for example, a revised § 481(a) adjustment or power of attorney), it must attach a copy of the additional correspondence behind a copy of page 1 of the previously filed Form 3115 and submit it to the IRS in Ogden, UT (see the applicable address in section 9.05 of Rev. Proc. 2015–1 (or successor)). Further, if the taxpayer is under examination, before an Appeals office, or before a federal court with respect to any income tax issue, the taxpayer must provide a copy of any additional correspondence it submits regarding its Form 3115 to the examining agent(s), Appeals officer(s), and all counsel to the government, as applicable, no later than the date the taxpayer submits

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the additional correspondence to the IRS in Ogden, UT.

(2) Non-automatic change . (a) When to file Form 3115 . (i) In general . A taxpayer requesting to change a method of accounting under the non-automatic change procedures must complete a Form 3115 as required by SECTION 6.02 and, except as specifically provided in this revenue procedure or other guidance published in the IRB, file that Form 3115 during the requested year of change. See § 1.446–1(e)(3)(i). However, see, for example, SECTIONS 6.03(2)(a)(ii), 6.03(2)(a)(iii), and 6.03(4)(b), which allow a taxpayer in certain limited circumstances additional time to file a Form 3115 after the year of change.

(ii) New member of a consolidated group in CAP . A taxpayer requesting a change in method of accounting to which SECTION 8.02(1)(d) (new member of a consolidated group in CAP) applies must file the Form 3115 on behalf of a new member by the earlier of:

(A) 90 calendar days after the date the new member becomes a member of the consolidated group, or

(B) 30 calendar days after the end of the taxable year in which the new member becomes a member of the consolidated group.

(iii) Certain transactions to which § 381(a) applies . A party to a transaction to which § 381(a) applies requesting consent to make a non-automatic change described in § 1.381(c)(4)–1(a)(4) or (5), or in § 1.381(c)(5)–1(a)(4) or (5) must file the Form 3115 on or before the later of:

(A) the due date for filling a Form 3115 as specified in § 1.446–1(e), or

(B) the earlier of: ( 1 ) the day that is 180 calendar days after the date of distribution or transfer, or

( 2 ) the day on which the acquiring corporation files its federal income tax return for the taxable year in which the distribution or transfer occurred. See §§ 1.381(c)(4)– 1(d)(2)(iii) and 1.381(c)(5)–1(d)(2)(iii). (b) Where to file Form 3115 . A taxpayer requesting consent to change a method of accounting under the nonautomatic change procedures must file its completed Form 3115, together with the appropriate user fee, with the national office at the applicable address in section 9.05 of Rev. Proc. 2015–1 (or successor).

(c) User fee . A taxpayer requesting to change a method of accounting under the non-automatic change procedures must submit the required user fee(s) for its Form 3115. Rev. Proc. 2015–1 (or successor) contains the schedule of user fees and provides guidance regarding the user fee requirements.

(3) Additional required copies of Form 3115 and Consent Agreement . (a) Taxpayer under examination, be- fore an Appeals office, or before a federal court . If the taxpayer is under examination, before an Appeals office, or before a federal court with respect to any income tax issue, the taxpayer must provide an additional signed copy of the original Form 3115 to the examining agent(s), Appeals officer(s), and all counsel to the government, as applicable, no later than the date the taxpayer timely files the Form 3115 (original or Ogden copy, whichever is filed earlier, in the case of an automatic change).

(b) Certain foreign corporations . If SECTION 6.02(6) applies, each controlling domestic shareholder (or, if a member of a consolidated group, its common parent), other than the designated shareholder, must attach a signed copy of the Form 3115 (in the case of an automatic change) or a copy of the jointly executed Consent Agreement (in the case of a nonautomatic change) (see further, SECTION 11.03(2)(a)) to its federal income tax return filed for its taxable year with or within which ends such year of change. Further, SECTION 6.03(3)(a) applies to each controlling domestic shareholder that is under examination, before an Appeals office, or before a federal court with respect to any income tax issue.

(c) Certain foreign partnerships . If SECTION 6.02(7) applies, each partner that is required to file a Form 8865, Return of U.S. Persons With Respect to Certain Foreign Partnerships, as a Category 1 or Category 2 filer must attach a signed copy of the Form 3115 (in the case of an automatic change) or a copy of the jointly executed Consent Agreement (in the case of a non-automatic change) (see further, SECTION 11.03(2)(a)) to its federal income tax return filed for its taxable year with or within which ends such year of change. Further, SECTION 6.03(3)(a) applies to each partner that is required to file

a Form 8865, Return of U.S. Persons With Respect to Certain Foreign Partnerships, as a Category 1 or Category 2 filer that is under examination, before an Appeals office, or before a federal court with respect to any income tax issue.

(4) Extensions of time to file . (a) Automatic extension for Form 3115 . An automatic extension of 6 months from the due date (excluding any extension) of the federal income tax return for the year of change requested on the Form 3115 is granted to file a Form 3115 under the automatic change procedures provided the taxpayer:

(i) timely filed (including any extension) its original federal income tax return for the year of change;

(ii) files an amended return within the 6-month extension period implementing the requested change in method of accounting for the year of change;

(iii) attaches the original Form 3115 to the amended return;

(iv) files a signed copy of the original Form 3115 with the IRS in Ogden, UT (see the applicable address in section 9.05 of Rev. Proc. 2015–1 (or successor) no later than the date the original is filed with the amended return;

(v) provides a signed copy of the original Form 3115 to the examining agent, Appeals officer(s) or all counsel to the government, as applicable, as required by SECTION 6.03(3); and

(vi) attaches a statement to the Form 3115 (original, Ogden, and any other copy required by SECTION 6.03(3)) that the Form 3115 is being filed pursuant to § 301.9100–2(b) of the Procedure and Administration Regulations.

(b) Other extensions of time . Except in unusual and compelling circumstances or as provided in SECTION 6.03(4)(a), a taxpayer is not eligible for an extension of time to file a Form 3115 and is not eligible to make a late election under SECTION 7.03(3)(d) under §§ 301.9100–1 and 301.9100–3. See § 301.9100–3(c)(2) and Rev. Proc. 2015–1 (or successor).

SECTION 7 . TERMS AND CONDITIONS OF CHANGE

.01 In general . A change in method of accounting requested under this revenue procedure for which consent is granted must be implemented pursuant to both the

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terms and conditions provided in this revenue procedure and either the List of Automatic Changes (in the case of an automatic change) or the letter ruling for the change (in the case of a non-automatic change). Notwithstanding the terms and conditions in this revenue procedure, based on the unique facts of a particular case and in the interest of sound tax administration, the national office may prescribe in the letter ruling for a nonautomatic change terms and conditions for the requested change in method of accounting that differ from and override those provided in this revenue procedure.

.02 Section 481(a) adjustment . Except as otherwise provided in this revenue procedure, the List of Automatic Changes (in the case of an automatic change), a letter ruling to the taxpayer (in the case of a non-automatic change), or other guidance published in the IRB, a taxpayer making a change in method of accounting under this revenue procedure must apply § 481(a) and take into account the § 481(a) adjustment in the manner provided in SECTION 7.03. See SECTION 2.06(1); but see SECTION 13.01(3).

.03 Section 481(a) adjustment period . (1) In general . Except as otherwise provided in this revenue procedure, the List of Automatic Changes (in the case of an automatic change), a letter ruling to the taxpayer (in the case of a non-automatic change), or other guidance published in the IRB, the § 481(a) adjustment period is one taxable year (year of change) for a negative § 481(a) adjustment and four taxable years (year of change and next three taxable years) for a positive § 481(a) adjustment. Except as otherwise provided in this revenue procedure, the List of Automatic Changes (in the case of an automatic change), or other guidance published in the IRB, a taxpayer must take a positive § 481(a) adjustment into account ratably over the § 481(a) adjustment period. Where multiple eligible taxpayers or trades or businesses request an identical change in method of accounting for the same item on a single Form 3115 pursuant to section 15.07(4) of Rev. Proc. 2015–1 (or successor), each taxpayer or trade or business has its own § 481(a) adjustment period, applied to its own § 481(a) adjustment.

(2) Short period as a separate taxable year .

(a) In general . If the year of change or any other taxable year during the § 481(a) adjustment period for a positive § 481(a) adjustment is a short taxable year, the taxpayer must take the § 481(a) adjustment into account as if that short taxable year were a full 12-month taxable year. See Rev. Rul. 78–165, 1978–1 C.B. 276.

(b) Examples . Example 1 . A calendar year taxpayer receives permission to change its method of accounting beginning with the 2014 calendar year in a situation not described in SECTION 7.03(3) or 7.03(4). The § 481(a) adjustment for this change in method of accounting is a positive adjustment of $60,000 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, 2015. The taxpayer must include $15,000 of the § 481(a) adjustment in gross income for the short period from January 1, 2015, through September 30, 2015.

Example 2 . Corporation X, a calendar year taxpayer, received permission to change its method of accounting beginning with the 2014 calendar year. The § 481(a) adjustment for this method of accounting change is a positive adjustment of $60,000 and the adjustment period is four taxable years. On July 1, 2015, 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 2014. Corporation X must include $15,000 of the § 481(a) adjustment in gross income for its short period for January 1, 2015, through June 30, 2015. In addition, Corporation Z must include $15,000 of the § 481(a) adjustment in gross income for calendar year 2015.

(c) Certain transfers to which § 381(a) applies . For a § 381 transaction that is described in SECTION 3.04(4) and that occurs between members of a consolidated group, for purposes of this revenue procedure, the portion of the § 481(a) adjustment attributable to the short taxable year of the transferor ending on the date of the § 381(a) transaction must be treated as an intercompany item as defined in § 1.1502–13(b)(2) and taken into account under the rules of § 1.1502–13. 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.

(3) Shortened adjustment periods . The four-year § 481(a) adjustment period provided in SECTION 7.03(1) for a positive § 481(a) adjustment does not apply in the following situations:

(a) Cooperatives . For a cooperative within the meaning of § 1381(a), the § 481(a) adjustment period for a positive § 481(a) adjustment generally is one taxable year (year of change). See Rev. Rul. 79–45, 1979–1 C.B. 284. (b) Taxpayers under examination with positive § 481(a) adjustments . The § 481(a) adjustment period is two taxable years (year of change and next taxable year) for a positive § 481(a) adjustment for a change in method of accounting requested when a taxpayer is under examination, unless SECTION 8.02(1)(a) (change filed in a three-month window), 8.02(1)(b) (change filed in a 120-day window), 8.02(1)(c) (present method not before the director) or 8.02(1)(d) (new member of a consolidated group in CAP) applies.

(c) De minimis election . A taxpayer may elect a one-year § 481(a) adjustment period (year of change) for a positive § 481(a) adjustment that is less than $50,000. To make this election, the taxpayer must complete the appropriate line on the Form 3115 and take the entire § 481(a) adjustment into account in the year of change when it implements the change in method of accounting.

(d) Eligible acquisition transaction election .

(i) In general . A taxpayer may elect a one-year § 481(a) adjustment period (year of change) for all (but not some) positive § 481(a) adjustments for the year of change if an eligible acquisition transaction, as defined in SECTION 7.03(3)(d)(iii), occurs during the year of change or in the subsequent taxable year on or before the due date (including any extension) for filing the taxpayer’s federal income tax return for the year of change. The election, once made, is irrevocable and applies to all changes in method of accounting the taxpayer makes pursuant to this revenue procedure for the year of change. A taxpayer may make this election even if the taxpayer executes a Consent Agreement that contains a longer § 481(a) adjustment period in the case of a Form 3115 filed under the non-automatic change procedures. To make this election, a taxpayer must file, in duplicate, the election statement that contains the required information in SECTION 7.03(3)(d)(ii). The taxpayer must attach the original election statement to

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T Corporation in the consolidated return of the X Group. T Corporation is a calendar year taxpayer. X Corporation’s acquisition of additional shares of T Corporation stock causes T Corporation’s taxable year to end under § 1.1502–76(b). On August 1, 2015, T Corporation files the original and Ogden copy of a Form 3115 under the automatic change procedures to change its method of accounting for T Corporation’s short taxable year ending June 30, 2015 (year of change), which results in a positive § 481(a) adjustment of $1,000,000. T Corporation follows the procedures in SECTION 7.03(3)(d) to elect a one-year adjustment period for all changes in method of accounting made by T Corporation pursuant to this revenue procedure for its short taxable year ending June 30, 2015 (year of change). Pursuant to this election, T Corporation must take into account the entire $1,000,000 § 481(a) adjustment for this change in method of accounting in determining T Corporation’s taxable income for its short taxable year ending June 30, 2015 (year of change).

Example 3 . During 2014, P Partnership, a calendar year taxpayer consisting of Partners A, B, C, and D, files a Form 3115 under the non-automatic change procedures for a change in method of accounting for 2014 (year of change) that results in a positive § 481(a) adjustment of $1,200,000. P Partnership receives consent for that change in method of accounting in a letter ruling dated February 12, 2015. On February 26, 2015, Partner A, who already owns 10% interest in P Partnership purchases all of Partner B ’s 20% interest in P Partnership. P Partnership is a calendar year taxpayer. On April 15, 2015, P Partnership files the original and Ogden copy of a Form 3115 under the automatic change procedures for 2014 (year of change), which results in a positive § 481(a) adjustment of $1,000,000. P Partnership obtains from each of Partners A, B, C, and D a written agreement that each partner agrees to not apply the limitation on tax in § 481(b) and § 1.481–2 for any § 481(a) adjustment for all changes in method of accounting made by P Partnership pursuant to Rev. Proc. 2015–13 for P Partnership’s 2014 year of change, and otherwise follows the procedures in SECTION 7.03(3)(d) to elect a one-year adjustment period for all changes in method of accounting made by P Partnership pursuant to this revenue procedure for 2014 (year of change). Pursuant to this election, P Partnership must take into account both the entire $1,200,000 § 481(a) adjustment for the non-automatic change in method of accounting and the entire $1,000,000 § 481(a) adjustment for the automatic change in method of accounting in determining P Partnership’s business income (or loss) for 2014 (year of change). (4) Accelerated adjustment periods . The four-year § 481(a) adjustment period for a positive § 481(a) adjustment provided in SECTION 7.03(1) is accelerated in the following situations:

(a) Ceasing to engage in the trade or business . A taxpayer that ceases to engage in a trade or business, as defined in SECTION 3.04, must take the remaining balance of any § 481(a) adjustment relating to that trade or business into account in

the taxpayer’s timely filed (including any extension) original federal income tax return for the year of change (even if a non-automatic change is pending with the national office) and file the copy, which must be signed by the Form(s) 3115 filer, with the IRS, no later than the date the taxpayer files the original election statement with its original federal income tax return for the year of change. See also SECTION 6.03(4)(b). The taxpayer must submit the signed copy to the following address: Internal Revenue Service; Attn: Eligible Acquisition Transaction Office, CC:ITA; 1111 Constitution Ave., N.W.; Washington DC 20224. Further, a passthrough entity must retain in its books and records for the year of change each owner or beneficiary’s agreement to not apply § 481(b) and § 1.481–2 to support the statement required by SECTION 7.03(3)(d)(ii)(G). (ii) Election Statement . The eligible acquisition transaction election statement must include:

(A) the name and taxpayer identification number of the Form(s) 3115 filer;

(B) the name of the applicant (taxpayer making the change in method of accounting) on the Form(s) 3115;

(D) the date of the eligible acquisition transaction;

(E) the Form(s) 3115 filer’s signature and date;

(F) the following statement:

“The Form(s) 3115 filer elects a one-year adjustment period pursuant to SECTION 7.03(3)(d) of Rev. Proc. 2015–13 for all changes in method of accounting made by the applicant (the taxpayer) pursuant to Rev. Proc. 2015–13 for the year of change. The filer agrees that the limitation on tax in § 481(b) and § 1.481–2 will not be applied for any § 481(a) adjustment for all changes in method of accounting made by the taxpayer.�; and

(G) if the taxpayer is a pass-through entity, such as a partnership, S corporation, or trust, the following representation:

“The taxpayer represents that it has obtained (either directly or by delegation) from each owner or beneficiary, as applicable, who was an owner or beneficiary during the year

of change a written agreement that the owner or beneficiary agrees to not apply the limitation on tax in § 481(b) and § 1.481–2 for any § 481(a) adjustment for all changes in method of accounting made by the taxpayer pursuant to Rev. Proc. 2015–13 for the year of change.”

(iii) Eligible acquisition transaction . An eligible acquisition transaction means:

(A) For a CFC or a corporation that is not an S corporation, (1) an acquisition of stock ownership interest in the taxpayer by another party that either results in the acquisition of control of the taxpayer or causes the taxpayer’s taxable year to end, or (2) an acquisition of assets in a transaction to which § 381(a) applies, and

(B) For all other taxpayers, an acquisition of an ownership interest in the taxpayer by another party that does not cause the taxpayer to cease to exist for federal income tax purposes (for example, the sale or exchange of a partnership interest that does not cause a technical termination of the partner under § 708(b)(1)(B)).

(iv) Examples . Example 1 . X Corporation enters into an agreement to sell all of X Corporation’s stock ownership interest in T Corporation, a wholly-owned subsidiary of X, to Z Corporation. T Corporation is a calendar year taxpayer. In the course of Z Corporation’s due diligence review of T Corporation, Z Corporation discovers that T Corporation improperly defers advance payments for services. Z Corporation requests that prior to its acquisition of T Corporation’s stock, T Corporation change its method of accounting for advance payments for services to a proper deferral method for 2014. On February 28, 2015, Z Corporation acquires X Corporation’s stock ownership interest in T Corporation. On March 14, 2015, T Corporation files for an extension of time to file its 2014 federal income tax return. On September 15, 2015, T Corporation files the original and Ogden copy of a Form 3115 under the automatic change procedures to change its method of accounting for advance payments for services for 2014 (year of change), which results in a positive § 481(a) adjustment of $1,000,000. T Corporation follows the procedures in SECTION 7.03(3)(d) to elect a one-year adjustment period for all changes in method of accounting that it makes pursuant to this revenue procedure for 2014 (year of change). Pursuant to this election, T Corporation must take into account the entire $1,000,000 § 481(a) adjustment for its change in method of accounting for advance payments for services in determining its taxable income for 2014 (year of change).

Example 2 . On December 31, 2014, X Corporation, the common parent of an affiliated group of corporations (X Group) that file a consolidated return, owns 65% of the stock of T Corporation. On June 30, 2015, X Corporation purchases additional shares of T Corporation’s stock sufficient to include

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computing taxable income in the taxable year of the cessation.

(b) S election effective for year of LIFO discontinuance . If a C corporation elects to be treated as an S corporation for the taxable year in which it discontinues use of the LIFO inventory method of accounting, § 1363(d) requires an increase in the taxpayer’s gross income for the LIFO recapture amount (as defined in § 1363(d)(3)) for the taxable year preceding the year of change (the taxpayer’s last taxable year as a C corporation), and a corresponding adjustment to the basis of the taxpayer’s inventory as of the end of the taxable year preceding the year of change. Any increase in income tax as a result of the inclusion of the LIFO recapture amount is payable in four equal installments, beginning with the taxpayer’s last taxable year as a C corporation as provided in § 1363(d)(2). The corporation must take into account any corresponding basis adjustment in computing the § 481(a) adjustment (if any) that results from discontinuing the LIFO method of accounting.

(c) S election effective for a year after LIFO discontinuance . If a C corporation elects to be treated as an S corporation for a taxable year after the taxable year in which it discontinued use of the LIFO inventory method of accounting, the corporation must include the remaining balance of any positive § 481(a) adjustment in its gross income in its last taxable year as a C corporation. If this inclusion results in an increase in tax for its last taxable year as a C corporation, this increase in tax is payable in four equal installments, beginning with the taxpayer’s last taxable year as a C corporation as provided in § 1363(d)(2), unless the taxpayer is required to take the remaining balance of the § 481(a) adjustment into account in the last taxable year as a C corporation under another acceleration provision in SECTION 7.03(4).

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

(i) In general . For a transfer within a consolidated group to which § 351 applies that is described in SECTION 3.04(5), the transferor member must continue to take the § 481(a) adjustment (arising from a method of accounting of the transferor that the transferee adopts and uses) into

account pursuant to the applicable terms and conditions. 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 the first sentence of this SECTION 7.03(4)(d)(i) or in SECTION 3.04(4). (ii) Exception . The provisions of SECTION 7.03(4)(d)(i) cease to apply and the transferor member must take any remaining balance of the § 481(a) adjustment into account in the earliest of the following taxable years:

(A) if the transferor ceases to be a member of the consolidated group, in the last consolidated return year in which the transferor member is included in the consolidated group;

(B) if 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 consolidated group, in the last consolidated return year in which that transferee member is a member of the consolidated group; or

In applying the preceding sentence, the rules in § 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 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.

.04 Changes within the LIFO method of accounting . Except as specifically provided in the Code or other guidance published in the IRB, a taxpayer must implement a change within the LIFO inventory method of accounting using a cut-off basis. Announcement 91–173, 1991–47 I.R.B. 29 (regarding LIFO taxpayers changing their method of accounting for certain bulk bargain purchases of inventory to comply with Hamilton Industries, Inc. v. Commissioner, 97 T.C. 120 (1991)), is an example of other guidance that requires a § 481(a) adjustment. A change within the LIFO inventory method of accounting is a change from one LIFO inventory method or sub-method to another LIFO inventory method or submethod. A change within the LIFO inventory method does not include a change in method of accounting that a taxpayer not using the LIFO inventory method of accounting could make (for example, a method of accounting governed by § 471 or § 263A).

.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. For purposes of this SECTION 7.05, if the taxpayer is a member of a consolidated group, the taxpayer is the consolidated group.

.06 Maintenance of adequate records . The taxpayer must maintain accounting records for the year of change and subsequent taxable years to support the method of accounting for which consent is granted to the taxpayer. Accounting records include the taxpayer’s regular books of ac

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count and such other records and data as may be necessary to support the entries on its books of account and on its return, including for example, a reconciliation of any differences between the method of accounting used in its accounting records and the method of accounting used for federal income tax purposes.

.07 Certain foreign corporations . If the change in method of accounting is on behalf of a CFC or a 10/50 corporation, 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 (or any positive component of a § 481 adjustment) necessary to prevent the duplication of an expense item must take 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 (or any positive component of a § 481 adjustment) necessary to prevent the omission of amounts of an income item must take 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 (or any negative component of a § 481 adjustment) necessary to prevent the omission of amounts of an expense item is allocated to the class of gross income that has the same source, separate limitation classification, character, and 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 (or any negative component of a § 481 adjustment) necessary to prevent the duplication of amounts of an income item offsets gross income that has the same source, separate limitation classification, character, and treatment for purposes of subpart F as the foreign corporation’s income had 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 § 952 and its earnings and profits under §§ 964 and 986(b); (4) The written statement required by § 1.964–1(c)(3)(i) and (ii) must be filed by each controlling domestic shareholder (or its common parent) with its federal income tax return for its taxable year with or within which ends the foreign corporation’s year of change;

(5) The shareholder(s) 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). This condition is satisfied if the shareholder(s) of the foreign corporation reconcile(s) the results obtained under the method used in keeping the foreign corporation’s books and records and the method used for federal income tax purposes and maintain(s) sufficient records to support such reconciliation;

(6) If a foreign corporation loses its status as a CFC or 10/50 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 under § 952 (if applicable) and earnings and profits under §§ 964 and 986(b), on the final day on which it is a CFC or 10/50 corporation, the balance of the § 481(a) adjustment not previously taken into account;

(7) Each U.S. shareholder of a CFC (or its common parent) must comply with its obligations to report changes in the ownership of the CFC on Form 5471, Infor- mation Return of U.S. Persons With Re- spect To Certain 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 foreign 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 take into account, prior to the disposition, the remaining balance of the § 481(a) adjustment in computing its sub

part F income under § 952 and earnings and profits under §§ 964 and 986(b). This condition also applies if the foreign corporation issues stock so that either of the situations applies to the United States person. 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.

.08 Trade or business of a domestic corporation, domestic partnership, or other United States person that affects the amount of foreign source taxable income . If the change in method of accounting is on behalf of a trade or business of a domestic corporation, domestic partnership, or other United States person that affects the amount of foreign source taxable income, the following additional terms and conditions apply:

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

(2) A positive § 481(a) adjustment (or any positive component of a § 481 adjustment) necessary to prevent the duplication of an expense item must take the same source, separate limitation classification, and character as the gross income that was offset by the expense in the prior year or years. A positive § 481(a) adjustment (or any positive component of a § 481 adjustment) necessary to prevent the omission of amounts of an income item must take the same source, separate limitation classification, and character as the income would have had in the prior year or years. A negative § 481(a) adjustment (or any negative component of a § 481 adjustment) necessary to prevent the omission of amounts of an expense item is allocated to the class of gross income that has the same source, separate limitation classification, and character as the income that would have been offset by the expense in the prior year or years. A negative § 481(a) adjustment (or any negative component of a § 481 adjustment) necessary to prevent the duplication of amounts of an income item offsets gross income that has the same source, separate limitation

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classification, and character as the income had 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 taxable income of the United States person;

(4) The United States person must maintain records and accounts of the trade or business for the year of change and for subsequent taxable years, in conformity with the method of accounting granted to the United States person. This condition is satisfied if the United States person reconciles the results obtained under the method used in keeping the trade or business’ books and records and the method used for federal income tax purposes and maintains sufficient records to support such reconciliation; and

(5) The United States person complies with its obligation to file Form 926, Re- turn by a U.S. Transferor of Property to a Foreign Corporation, with respect to a transfer of assets of the trade or business to a foreign corporation during the adjustment period.

.09 Foreign partnerships . If the change in method of accounting is made by a foreign partnership, the following additional terms and conditions apply:

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

(2) A positive § 481(a) adjustment (or any positive component of a § 481 adjustment) necessary to prevent the duplication of an expense item must take the same source, separate limitation classification, and character as the gross income that was offset by the expense in the prior year or years. A positive § 481(a) adjustment (or any positive component of a § 481 adjustment) necessary to prevent the omission of amounts of an income item must take the same source, separate limitation classification, and character as the income would have had in the prior year or years. A negative § 481(a) adjustment (or any negative component of a § 481 adjustment) necessary to prevent the omission of amounts of an expense item is allocated to the class of gross income that has the same source, separate limitation classifi

cation, and character as the income that would have been offset by the expense in the prior year or years. A negative § 481(a) adjustment (or any negative component of a § 481 adjustment) necessary to prevent the duplication of amounts of an income item offsets gross income that has the same source, separate limitation classification, and character as the income had 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 income of the foreign partnership;

(4) The foreign partnership must maintain records and accounts for the year of change and for subsequent taxable years in conformity with the method of accounting granted to the foreign partnership. This condition is satisfied if the foreign partnership reconciles the results obtained under the method used in keeping its books and records and the method used for federal income tax purposes and maintains sufficient records to support such reconciliation;

(5) Each partner (and any subsequent transferee) of the foreign partnership complies with its obligation to file Form 926, Return by a U.S. Transferor of Property to a Foreign Corporation, with respect to a transfer of assets of the foreign partnership to a foreign corporation during the adjustment period; and

(6) Each partner (and any subsequent transferee) of the foreign partnership complies with its obligation to file Form 8865, Return of U.S. Persons with respect to Certain Foreign Partnerships, during the adjustment period.