SECTION 3. RULES OF

APPLICATION

.01 Effective Date

Transactions entered into on or after November 2, 2006, that are the same as, or substantially similar to, the transac

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tions described in this notice, and in effect on or after January 1, 2011, are identified as transactions of interest for purposes of § 1.6011–4(b)(6) and §§ 6111 and 6112 as of October 21, 2015. Persons engaged in transactions entered into on or after November 2, 2006, and in effect on or after January 1, 2011, must disclose the transactions as described in § 1.6011–4 for each taxable year in which the taxpayer participated in the transactions, provided that the period of limitations for assessment of tax had not ended on or before October 21, 2015. Material advisors who make a tax statement on or after January 1, 2011, with respect to transactions in effect on or after January 1, 2011, have disclosure and list maintenance obligations under §§ 6111 and 6112. See §§ 301.6111–3, 301.6112–1.

Independent of their classification as transactions of interest, transactions that are the same as, or substantially similar to, the transaction described in this notice may already be subject to the requirements of §§ 6011, 6111, or 6112, or the regulations thereunder. If a transaction is identified as a listed transaction under section 2.01 of Notice 2015–73, and as a transaction of interest under this notice, the transaction is identified as a listed transaction. Persons satisfying the disclosure requirements for a listed transaction under Notice 2015–73 are deemed to have satisfied the disclosure requirements under this notice.

When the Treasury Department and the IRS have gathered enough information to make an informed decision as to whether these transactions are a tax avoidance type of transaction, the Treasury Department and the IRS may take one or more administrative actions, including removing the transactions from the transactions of interest category in published guidance, designating the transactions as a listed transaction, or providing a new category of reportable transactions. In the interim, in appropriate situations, the IRS may challenge the taxpayer’s position taken as part of these transactions under §§ 1260, 1001, or other provisions of the Code or under judicial doctrines, such as substance over form.

.02 Participation

Under § 1.6011–4(c)(3)(i)(E), for each year in which a transaction described in this notice (basket contract) is open, only the following parties are treated as participating in the transaction of interest identified in this notice: (1) the purchaser of the basket contract, (2) if the purchaser of the basket contract is a partnership, any general partner of the purchaser, (3) if the purchaser of the basket contract is a limited liability company, any managing member of the purchaser, and (4) the counterparty to the basket contract.

.03 Time for Disclosure

For rules regarding the time for providing disclosure of a transaction described in this notice, see § 1.6011–4(e) and § 301.6111–3(e). However, if, under § 1.6011–4(e), a taxpayer is required to file a disclosure statement with respect to the transaction of interest described in this notice after October 21, 2015, and prior to January 19, 2016, that disclosure statement will be considered to be timely filed if the taxpayer alternatively files the disclosure with the Office of Tax Shelter Analysis by January 19, 2016.

.04 Material Advisor Threshold Amount

The threshold amounts are the same as those for listed transactions. See § 301.6111–3(b)(3)(i)(B).

.05 Penalties

Persons required to disclose these transactions under § 1.6011–4 who fail to do so may be subject to the penalty under § 6707A. Persons required to disclose these transactions under § 6111 who fail to do so may be subject to the penalty under § 6707(a). Persons required to maintain lists of advisees under § 6112 who fail to do so (or who fail to provide such lists when requested by the IRS) may be subject to the penalty under § 6708(a). In addition, the IRS may impose other penalties on parties involved in these transactions or substantially similar transactions, including the accuracy-related penalty under §§ 6662 or 6662A.

The Treasury Department and the IRS recognize that some taxpayers may have filed tax returns taking the position that

they were entitled to the purported tax benefits of the type of transaction described in this notice. These taxpayers should take appropriate corrective action and ensure that their transactions are disclosed properly.

.06 Requests for a Change in Method of Accounting

(1) Background . Section 446(e) and § 1.446–1(e) provide that, except as otherwise provided, a taxpayer must secure the consent of the Commissioner before changing a method of accounting for federal income tax purposes. Section 1.446– 1(e)(3)(i) provides that, to obtain the Commissioner’s consent to an accounting method change, a taxpayer must file a Form 3115, Application for Change in Accounting Method, during the taxable year in which the taxpayer desires to make the proposed change. Section 1.446– 1(e)(3)(ii) authorizes the Commissioner to prescribe administrative procedures setting forth the limitations, terms, and conditions deemed necessary to permit a taxpayer to obtain consent to change a method of accounting in accordance with § 446(e).

Rev. Proc. 2015–13, 2015–5 I.R.B. 419, as clarified and modified by Rev. Proc. 2015–33, 2015–24 I.R.B. 1067, provides the procedures for obtaining the consent of the Commissioner to change a method of accounting for Federal income tax purposes. Under the non-automatic change procedures of Rev. Proc. 2015–13, a taxpayer generally must file a Form 3115 during the year of change. When a taxpayer computes its taxable income using a method of accounting that differs from the method of accounting used during the preceding taxable year, a § 481(a) adjustment is required to prevent the duplication or omission of taxable income. Except as otherwise provided in Rev. Proc. 2015–13, a letter ruling to the taxpayer, or in other guidance published in the Internal Revenue Bulletin, section 7.03 of Rev. Proc. 2015–13 provides that a positive § 481(a) adjustment is taken into account ratably over four taxable years, and a negative § 481(a) adjustment is taken into account in one taxable year. A taxpayer that timely files a Form 3115 under Rev. Proc. 2015–13 generally receives audit protection for taxable years

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prior to the year of change, as provided in section 8 of Rev. Proc. 2015–13.

Section 11.02 of Rev. Proc. 2015–13 states that the national office will deny any Form 3115 requesting consent to make a change in method of accounting in any situation in which the national office determines that permitting the requested change in method of accounting would not clearly reflect income or would otherwise not be in the interest of sound tax administration. As part of this determination, the national office will consider whether the change in method of accounting would clearly and directly frustrate compliance efforts of the IRS in administering the income tax laws. The national office will consider all the facts and circumstances and exercise discretion under §§ 446(e) and 481(c) in a manner that generally minimizes distortions of income across taxable years, as well as on an annual basis.

Rev. Rul. 90–38, 1990–1 C.B. 57, provides that, if a taxpayer uses an erroneous method of accounting for two or more consecutive taxable years, the taxpayer has adopted a method of accounting. The ruling further provides that a taxpayer may not, without the Commissioner’s consent, retroactively change from an erroneous to a permissible method of accounting by filing an amended return. See also Rev. Proc. 2015–13, section 2.03(1).

(2) In general . ⁶

(a) Deferral transaction . A taxpayer that wants to change a method of accounting for a transaction described in this notice, for a transaction from which the taxpayer’s only tax benefit is a deferral of income into a later taxable year (a “deferral transaction”), may change its method of accounting for the deferral transaction by either: (1) filing amended returns in accordance with section 3.06(3) of this notice, or (2) if eligible, requesting a change in method of accounting under the non-automatic change procedures of Rev. Proc. 2015–13 subject to the rules provided in section 3.06(4) of this notice.

(b) Conversion transaction . The IRS has determined that it is not in the interest of sound tax administration to permit a prospective change in method of account

ing for a transaction within the scope of this notice that involves the conversion of ordinary income or short-term capital gain or loss into long-term capital gain or loss (a “conversion transaction”). Accordingly, the IRS will not process applications for any changes in method of accounting filed under the non-automatic change procedures of Rev. Proc. 2015–13 for a conversion transaction within the scope of this notice. A taxpayer may, however, change its method of accounting for a conversion transaction within the scope of this notice by filing an amended return in accordance with section 3.06(3) of this notice.

(3) Change in method of accounting by filing amended returns .

(a) In general . In accordance with § 1.446–1(e)(3)(ii) and Rev. Rul. 90–38, consent is hereby granted for any taxpayer that has engaged in a transaction within the scope of this notice, to file amended returns to retroactively change from an impermissible method of accounting to a permissible method of accounting for the transaction. This consent is granted only if the taxpayer files such amended returns using a permissible method of accounting for such transactions for the first taxable year in which the taxpayer used the impermissible method of accounting for any such transaction (or if the period of limitations has expired for such taxable year, for the first taxable year for which the period of limitations has not expired) and for each subsequent taxable year in which the taxpayer’s use of the impermissible method of accounting for these transactions affected the taxpayer’s taxable income. If the period of limitations has expired for the first taxable year in which a taxpayer used the impermissible method of accounting for these transactions and the taxpayer files amended returns pursuant to this notice, the amended return for the first taxable year for which the period of limitations has not expired must include the entire amount of the § 481(a) adjustment, whether positive or negative, attributable to the change in accounting method as ordinary in character. The terms, conditions, and administrative procedures of Rev. Proc. 2015–13, as clari

fied and modified by Rev. Proc. 2015–33, do not apply to a taxpayer changing its method of accounting by amending its Federal income tax returns under section 3.06(3) of this notice. (b) Manner of making change . A taxpayer filing amended returns under this notice must comply with the requirements of § 1.6011–4 including, but not limited to, attaching to the amended return any disclosure statements that may be required in accordance with § 1.6011– 4(a) and (e). In addition, a taxpayer filing an amended return under this section 3.06(3)(b) must write “FILED UNDER NOTICE 2015–74” at the top of any amended paper return or, with respect to any amended return submitted electronically, must indicate “FILED UNDER NOTICE 2015–74.”

(4) Filing Form 3115 under Rev. Proc. 2015–13 for a deferral transaction . A taxpayer that wants to change its method of accounting under Rev. Proc. 2015–13 for a deferral transaction described in this notice, must use the non-automatic change procedures in Rev. Proc. 2015–13. Consistent with the discretion granted to the National Office under sections 7.01 and 7.03 of Rev. Proc. 2015–13, a taxpayer making a change in method of accounting under Rev. Proc. 2015–13 to the method described in this notice must take into account the entire amount of a positive § 481(a) adjustment in the taxable year of change.