Notice 96-40: possible changes to procedures to request accounting method changes under Rev. Proc. 92-20: October 18, 1996.
Tax Executives Institute is the principal association of corporate tax executives in North America. Our nearly 5,000 members represent more than 2,700 of the leading corporations in the United States and Canada. TEI represents a cross-section of the business community, and is dedicated to the development and effective implementation of sound tax policy, to promoting the uniform and equitable enforcement of the tax laws, and to reducing the cost and burden of administration and compliance to the benefit of taxpayers and government alike. As a professional association, TEI is firmly committed to maintaining a tax system that works - one that is administrable and with which taxpayers can comply.
Members of TEI are responsible for managing the tax affairs of their companies and must contend daily with the provisions of the tax law relating to the operation of business enterprises. We believe that the diversity and professional training of our members enable us to bring an important, balanced, and practical perspective to the issues arising from the procedures for accounting method changes.
Rev. Proc. 92-20 was issued by the IRS to update and supersede Rev. Proc. 84-74.(4) The purpose of Rev. Proc. 92-20 is to encourage prompt compliance with proper tax accounting principles and to discourage taxpayers from delaying the filing of applications for permission to change from impermissible methods. Through a gradation of incentives, the 1992 rules supply strong inducements for taxpayers both voluntarily and quickly to correct impermissible methods of accounting. The graded incentives provide less favorable treatment for taxpayers compelled to change accounting methods upon examination. Furthermore, the rules provide various window periods within which voluntary accounting method changes may be secured, following contact for examination but before a compulsory change imposed by the Commissioner.
TEI believes that there is definite need to revise Rev. Proc. 92-20. Concededly, where an accounting method falls within one of the enumerated categories of "A," "B," "Designated A," "Designated B," or LIFO methods, the procedure provides clear guidelines for securing consent of the Commissioner. In contrast, the task of distinguishing among permissible and erroneous methods - i.e., pigeonholing a particular method into one of the enumerated categories - remains a factual undertaking, subject to misinterpretations, errors, and good faith differences of opinion. Hence, whereas the disposition of the relevant tax attributes involved in voluntary accounting method changes (i.e., the "year of change" and income adjustment spread period under section 481) are clearly delineated, the boundaries between permissible and impermissible methods are as fuzzy as ever. Indeed, departures from required accounting methods are frequently a result of unintentional misinterpretation of the law (or facts) or are attributable to a lack of timely published guidance from the IRS. This is especially the case where there is a delay in guidance critical to the implementation of a statutory change or where there is a dispute about proper accounting treatment that is so substantial that it will require litigation to resolve. Hence, the various categories of accounting methods within Rev. Proc. 92-20 raise the stakes for taxpayers' misapprehending (or, indeed, not being aware of) the propriety of an accounting method and, thus, undermine IRS's goal of increasing voluntary changes of accounting method.
Moreover, the procedure assigns precious little weight to the concept of substantial compliance.(5) Where there is uncertainty about whether a particular accounting method is a Category A or B method, taxpayers will generally refrain from seeking a voluntary change rather than risk a retroactive adjustment. In addition, if taxpayers discover that they are using a questionable method during a period after the voluntary change windows are closed, they may choose to perpetuate use of that method rather than face the uncertain or more onerous terms and conditions that may be imposed by an examining agent or appeals officer. The incentive to temporize in respect of methods discovered to be erroneous is particularly acute for Coordinated Examination Program (CEP) taxpayers whose only options for consideration of a method change in a nonadversarial setting are the 120- or 30-day windows.(6)
Finally, subsection 10.12 of Rev. Proc. 92-20 provides that if the taxpayer timely files a Form 3115 with the National Office, an examining agent may not propose that a taxpayer change the same method of accounting for a year prior to the year of change prescribed under the procedure. Hence, taxpayers complying with the procedure are generally accorded "back-year" protection against involuntary changes by the IRS in addition to prospective effect for the change in accounting method. Where a taxpayer's requested change is not granted by the National Office, however, the automatic back year protection is forfeited. Regrettably, this feature undermines the key protection - and incentive - accorded to taxpayers by Rev. Proc. 92-20 and opens the door to substantial disputes. All too often subsequent to the submission of Form 3115 by a taxpayer to the National Office, agents seek to raise the same accounting method issue in an earlier examination cycle. Moreover, given the consultations between field agents and the National Office in respect of accounting method changes initiated by CEP taxpayers, the opportunity for field agents to influence the disposition of the taxpayer's request for voluntary change - and thereby vitiate the protection intended by subsection 10.12 - cannot be discounted. Thus, the perception, if not the reality, that the taxpayer's voluntary request for a prospective change will result in a retroactive change retards compliance. We urge that the policy of affording taxpayers "back-year" audit protection not only be reaffirmed, but reinforced in successor guidance to Rev. Proc. 92-20.
1. Definitions. Rev. Proc. 92-20 generally provides that a taxpayer may request a method change within 90 days of the beginning of an examination. Subsection 3.02 of the procedure states that a taxpayer is under examination when it has been contacted "in any manner" by a representative of the IRS. Consequently, since most large enterprises are under continuous audit as part of the CEP program (and, thus, are in constant contact with the examination team), they are effectively precluded from using the 90-day window. TEI believes that the definition of "under examination" for a CEP taxpayer should be modified. Specifically, TEI recommends that an examination of a particular year or years be deemed to commence with the opening conference with the case manager or team coordinator. This approach would be consistent with Rev. Proc. 94-69.(7) Under that procedure, the District Director advises a CEP taxpayer by letter of its rights to make additional disclosures under section 6662 and sets the date on which that procedure's 15-day disclosure window begins. This change would permit CEP taxpayers to avail themselves of the 96-day window.
Subsection 3.02 also states that an examination is considered to end when a taxpayer requests consideration by an appeals officer or federal court. TEI recommends that language be clarified to state that the examination is deemed to end on the date the taxpayer files its protest, files a petition in Tax Court, or pays an assessment.
2. Thirty-day Window. Under subsection 6.04, taxpayers under examination for a continuous period of 18 months may use a special window to file an application for change in accounting method within 30 days of the beginning of the taxable year. To be eligible for the 30-day window period, however, a taxpayer must not have received written notice "specifically citing the method or sub-method to be changed." This written notice may be provided by disclosure of IRS's examination plan, issuance of information document requests, notification of proposed adjustment, or income tax examination changes.
TEI believes that the current written notice standard is far too broad. Examination plans are often framed as broadly as possible, using language such as "review inventory accounting," "investigate spare parts activity," or "review loan fees." TEI is concerned that such overbroad descriptions will be considered to be "specifically cited," even when they do not give taxpayers meaningful notice that the treatment of specific items will be challenged. To avoid disputes over when an issue is raised, thereby precluding use of the 30-day window, the revenue procedure should be revised to provide that the notice requirement will not be satisfied until a Form 5701, Notice of Proposed Adjustment, is issued identifying the method change issue.(8) Examination plans, information requests, or other documents should not be considered as raising an issue. Hence, TEI recommends that the result reached in TAM 9237010 (May 29, 1992) - which concludes that an information document request (IDR) concerning a method of accounting does not constitute adequate notice - should be both expanded (so that an IDR does not constitute the "raising of an issue") and made broadly applicable to all taxpayers.
In response to comments filed by TEI and others in connection with Rev. Proc. 92-20, the IRS developed a different standard for identifying when a uniform capitalization issue is pending under section 263A. Specifically, subsection 4.11 of Rev. Proc. 94-49(9) states that "a [sections] 263A issue is pending if the Service has sent the taxpayer a written notification indicating an adjustment is being made or will be proposed with respect to costs subject to [sections] 263A." The procedure explains that "this will generally occur after the Service has gathered information sufficient to determine that a proposed adjustment is appropriate and justified, although the exact amount of the adjustment may not be determined."(10) While the "pending issue" standard announced in Rev. Proc. 94-49 represents an improvement over the nebulous standard in Rev. Proc. 92-20, the revised standard still empowers field agents to engage in gamesmanship to defeat a taxpayer's voluntary window-period filing. All an agent must show under the revised standard is that some records have been examined - and in case of a CEP taxpayer some records from the current or a prior audit cycle could be dredged up - indicating that a proposed adjustment may be "appropriate." Consequently, we remain convinced that the issuance of Form 5701 during a current examination is the proper trigger for notifying both the taxpayer and the National Office that an accounting method issue is pending at the examination level.
3. "Designated A" Methods. Subsection 3.07 of Rev. Proc. 92-20 defines a "Designated A" method of accounting as a Category A method that has been classified as a "Designated A" method in the Internal Revenue Bulletin. For six years following designation, an accounting method change from a "Designated A" method is subject to special rules contained in section 7 of the procedure. Only one accounting method has so far merited the scarlet letter "Designated A" under the revenue procedure."
TEI believes that the "designation" of Category A methods should be extremely limited. Designation should be reserved for statutorily imposed methods for which no dispute exists concerning the application of the method. In particular, the Commissioner should refrain from designating Category A methods that arise from interpretative regulations or even legislative regulations that are not expressly prescribed by a statute's legislative history. Taxpayers should not be punished for failing to anticipate how the IRS would interpret the specifics of a complex or vague legislative mandate.
Under Rev. Proc. 92-20, the special procedures for changing from a Designated A method are the exclusive means to adopt a change. It is unclear, however, which set of procedures applies to requests for changes that are pending at the time the "designating" document is published in the Internal Revenue Bulletin. Any delay between the effective date of the required use of an accounting method and the date the method is designated will create uncertainty in the minds of taxpayers and potentially retard voluntary changes.
In addition, since Supreme Court rulings interpreting the tax laws are generally retroactive, designation of methods resolved through Supreme Court decision should be eschewed. Indeed, the very fact that a method of accounting requires adjudication by the Supreme Court is evidence that a substantial interpretative dispute exists between taxpayers and the IRS concerning the propriety of the method. In cases involving accounting method changes that are required as a result of a decision by the Supreme Court, a grace period for filing the request for change and automatic consent of the Commissioner would be proper. Hence, TEI recommends that taxpayers be permitted to file a request for voluntary change to obtain a prospective spread for positive income adjustments for a period of up to one taxable year following the issuance of IRS guidance implementing a U.S. Supreme Court decision on an accounting method. In the event that the IRS has already raised the accounting method issue through the issuance of a Form 5701 prior to a taxpayer's filing of a request for change, the IRS should permit positive adjustments to be spread beginning with the most recent year under examination. At a minimum, the IRS should clarify the effect of a Supreme Court decision occurring during the various window periods under the revenue procedure.
4. Designated B Methods. Subsection 3.09 of the revenue procedure declares that accounting methods deemed impermissible by revenue ruling or a court ruling (i.e., a Category B method) may be converted to a Category A method - i.e., an accounting method that violates a statute, a regulation, or is contrary to a Supreme Court decision - when two years elapse following designation of the method as a "Designated B." The designation process converts what heretofore had been an arguably proper method of accounting into an improper method. The concept of designating certain accounting methods unacceptable and requiring different terms and conditions for changes in method first appeared in Rev. Proc. 80-51.(12) Thus, while designation is not a new concept, the inability of CEP taxpayers under Rev. Proc. 92-20 to make voluntary changes (because of overlapping audit cycles), to obtain prospective-only adjustments, or to select the new method raises serious issues of due process and fairness because of the lack of notice that a method is to be designated. Issues that have been designated as improper Category B methods have generally emerged through the examination process, with examining agents concluding a challenged method fails to clearly reflect income. The taxpayer's method, however, may have been customary, accepted for financial accounting purposes, and even preferred industry accounting practice. This is not to suggest that the IRS cannot challenge such methods, but to propose that, when longstanding accounting practices are to be upended, the sounder approach to tax administration involves the promulgation of proposed regulations with a comment period, the prospective application of the permissible method, and the use of either the cut-off implementation method or a prospective spread of a section 481(a) amount.
Under Rev. Proc. 84-74, the designation of Category B methods as improper was not unduly onerous so long as taxpayers had the right to voluntarily change methods (prior to an issue's being raised on examination) and to secure a prospective spread of any positive adjustment. Under Rev. Proc. 92-20, however, a taxpayer under continuous examination that employs a Category B method that is newly designated must weigh a number of unpleasant options to determine the best time to file a request for change. To say that the CEP taxpayer should file Form 3115 immediately is to ignore the requirement imposed under subsection 6.06 that the taxpayer obtain the consent from the District Director - a requirement likely to produce an outcome least favorable to the taxpayer (i.e., a prospective spread for negative adjustments and retroactive examination changes for positive adjustments.) TEI believes that employing the designation process in this fashion is highly improper.(13)
5. Application Procedures
a. Consent of Appeals Officer or Government Counsel. Special procedures apply when a taxpayer's return is under consideration by an appeals office or federal court. Subsection 4.02 requires that an appeals officer give written consent to any application for change in method under Rev. Proc. 92-20. A similar rule in subsection 4.03 requires written consent of the government's counsel if any of the taxpayer's returns are before a federal court.(14) The procedure states that if an issue is not pending with respect to the method of accounting that is the subject of the proposed change, the appeals officer (or counsel) will ordinarily give permission to file for the proposed change. The potential use of the consent requirement as a bargaining chip in the appeals or litigation process is perceived as a significant threat by most taxpayers. Thus, the consent requirement undermines the stated goal of obtaining voluntary compliance in changes to accounting methods.
The purpose of the consent requirement is presumably to ensure that no issue is pending in appeals or court concerning the proposed change in method and, further, to apprise the appeals and litigation counsel of the pending application. The Commissioner's approval of accounting method changes is generally conditioned on the absence of an issue with respect to the method of accounting in a year preceding the year of change. Thus, TEI recommends that the procedure be revised to require a separate affirmation by the taxpayer on Form 3115 that no issue is pending in respect of the proposed change. If the National Office desires advance confirmation that no issue exists, the name and telephone number of the appeals officer or government counsel should be incorporated into the Form 3115. In addition, a courtesy copy of Form 3115 should be provided by the taxpayer to the appeals officer or IRS counsel at the time of application.(15)
b. Administrative Requirement. TEI also objects to the imposition of the consent requirement on administrative grounds. All too often a taxpayer's protest may languish in limbo for months between the filing date and its assignment to an appeals officer. The delay, particularly for CEP taxpayers, is often exacerbated by the opportunity afforded the revenue agent to review and rebut the assertions made in the taxpayer's protest. Paragraph 10.03(2) provides a 45-day period within which a taxpayer may perfect the application for change in accounting method following receipt of a notice from the National Office. If the consent requirement is retained, TEI believes it proper for the Commissioner to provide an exception to the 45-day period for delays caused by IRS personnel in providing necessary information to complete an application.
6. Terms and Conditions of Change. Subsection 10.01 of the procedure states that taxpayers are not guaranteed to receive any of the terms and conditions set forth in the procedure "in situations in which it would not be in the best interest of sound tax administration to permit the requested change." This provision could undermine the very purpose of the procedure. If the IRS invokes this paragraph with any degree of frequency, the entire structure of the procedure's graded incentives will become superfluous. Again, taxpayers may choose to perpetuate an arguably erroneous method rather than risk the uncertainty of the terms and conditions for an approved change in method.
Comments in Response to
In Notice 96-40, the IRS raises a number of questions to elicit commentator views on issues identified by the IRS for consideration. A similar approach was adopted in the IRS's announcement of its interest-netting study.(16) TEI appreciates the opportunity to offer suggestions before the development of the IRS's revenue procedures. Nonetheless, we believe our comments on specific proposed rules will be more focused than responses to open-ended questions to which there may be an array of diverse, but reasonable responses. Consequently, in view of the array of comments that the IRS will likely receive to its questions and the range of interpretations the IRS may assign such responses in fashioning guidance, we urge that the IRS afford taxpayers an opportunity to comment on revised guidance replacing or updating Rev. Proc. 92-20.
1. What are the consequences to the Service and the taxpayer when the district director, as part of an examination, or an appeals officer, as part of a settlement, makes an adjustment that involves a method of accounting? For example, under what circumstances does such an adjustment constitute a change in method of accounting imposed by the Service (e.g., only if the adjustment includes a section 481(a) adjustment)? When does such a change become final (e.g., when the taxpayer agrees to assessment of the tax, when the period of limitation for filing a claim for refund becomes final, or some other point)? What are the effects of such a change on the taxable years for which a return has been filed and taxable years for which a return has not yet been filed?
Taxpayers, agents, and appeals officers have generally been able to resolve accounting method issues for a substantial period of time notwithstanding a void of guidance that the National Office perceives and contemplates filling. We believe, however, that rigid guidelines limiting the flexibility of taxpayers and the field or appeals to settle issues would be counterproductive and increase disputes and litigation. Field agents and appeals officers, as the IRS personnel most knowledgeable of the taxpayer's facts and circumstances, should be accorded discretion to determine whether an adjustment constitutes an accounting method and, if so, the proper manner of implementing the change in method. If field personnel desire assistance, or if taxpayers' believe that a different perspective is necessary and appropriate on a particular issue, the technical advice process may be employed to obtain National Office guidance.
One acceptable form of guidance would be to state that an adjustment does not constitute a change in accounting method unless (i) the adjustment is identified specifically as involving a change in method of accounting, (ii) a prospective section 481(a) adjustment (with the year of change being the taxable period in which the agreement between the IRS and taxpayer is reached) is permitted, and (iii) the taxpayer and IRS agree to the change.(17) In appropriate cases (e.g., LIFO method changes), however, the "cutoff" method should be employed to effect the change in accounting method. Under our proposal, the interim years between the examination year and the year the agreement is reached are ignored except to calculate any necessary positive or negative adjustment to be spread prospectively in order to prevent duplications or omissions from income.
Regardless whether our proposal is accepted, several issues have been identified concerning the uneven application of the accounting method rules currently. Specifically, TEI is concerned about the failure of the IRS to permit taxpayers on examination to change from an impermissible method to a permissible method of accounting. In Rev. Rul. 90-38,(18) the IRS cites Diebold, Inc. v. United States(19) for the proposition that "the treatment of a material item in the same way in determining the gross income or deductions in two or more consecutively filed tax returns represents consistent treatment of that item for purposes of section 1.446-1(e)(2)(ii)(a) of the regulations." Subsection 2.01 of Rev. Proc. 92-20 reaffirms the IRS's position. As a result, taxpayers that erroneously follow the financial statement treatment of leased property as owned (or vice-versa) for two or more years have been denied the benefit of a favorable adjustment on examination because of the purported "adoption" of an erroneous accounting method. Another example of a taxpayer-favorable adjustment involving a change in accounting method would involve the taxpayer's erroneously following the financial statement classification of property as inventory rather than treating it as fixed assets subject to an allowance for depreciation.
TEI objects to the gamesmanship by which agents have attempted to lock taxpayers into erroneous - but better-for-the-fisc - accounting methods. The philosophy underlying the provision and practiced by agents cannot help but foster taxpayer cynicism and undermine voluntary compliance in situations where the equities are reversed. TEI believes that as long as amounts or items that would otherwise be duplicated or omitted are accounted for through a section 481(a) adjustment period, taxpayers should be permitted to make favorable adjustments in open tax years. There is no good policy reason to preclude taxpayers from retroactively changing from an erroneous to a permissible method by filing amended returns. In other words, any guidance that the IRS issues in respect of accounting method changes initiated during examination or on appeals settlements should be even handed. Thus, unless the government eschews proposing accounting method changes resulting in positive adjustments during examination, taxpayers should be permitted to raise affirmative accounting method changes with negative adjustments to the earliest open years under examination.
Another issue in respect of accounting method changes imposed during examination or in appeals settlements is the strong potential for untimely action on the issue. Specifically, where an accounting method issue is raised and technical advice is requested or where a Form 3115 is filed voluntarily, the IRS should be compelled to act within a specific period of time from the filing, say 180 days. In the case of a voluntary taxpayer-filed Form 3115 the change should be deemed granted unless denied by the Commissioner. In the case of an agent or appeals officer initiated technical advice request with which the taxpayer does not agree, the proposed ruling in the technical advice request should be deemed denied unless acted upon by the National Office. Without such a limitation, technical advice requests or applications for change in accounting method filed on Form 3115 may languish for several years. Meanwhile taxpayers will be compelled to file tax returns under accounting methods that may or may not be permitted and incur interest on subsequent adjustments. Hence, just as agents are striving to improve the currency of examinations, the National Office should strive to reduce its response time especially in respect of accounting method changes.
2. Are the various window periods of Rev. Proc. 92-20 effective in encouraging prompt voluntary compliance with proper tax accounting principles?
a. Window periods. The window periods in Rev. Proc. 92-20 generally are counterproductive to voluntary compliance, especially for CEP taxpayers who discover that they are employing a questionable or impermissible method of accounting. Taxpayers generally discover questionable or erroneous methods in the course of preparing a tax return. Since it is highly unlikely that the discovery of such methods will coincide with any of the "open" windows, there will always be incentives (i) to withhold temporarily a change from an erroneous method or (ii) to withhold any change where the status of the method under the various categories of accounting methods is unclear. Consequently, the Institute urges the IRS to eliminate the windows. In the event the window periods are retained, however, CEP taxpayers should, at a minimum, be permitted to use the 90-day window following the initiation of a new examination cycle. In addition, the IRS should expand the 30-day window to 90 days. Finally, if the window period structure of Rev. Proc. 92-20 is retained, the "back-year" audit protection must be reinforced to prevent erosion of the principal incentive for CEP taxpayers.
b. "Protective" 3115. A different approach to improving voluntary compliance in accounting methods would be to permit taxpayers to file a "protective" Form 3115 identifying the accounting method that the taxpayer presently uses and requesting the IRS to advise whether the method is permissible or not. Where the identified method is determined to be impermissible, taxpayers who cooperate with the IRS by voluntarily identifying the method, disclosing the issue, and seeking clarification should be permitted to change prospectively to a new accounting method.
3. Should the distinction between Category A and Category B methods of accounting be modified or eliminated? If so, what alternatives should the Service consider?
As previously stated, the application of an accounting method to a taxpayer's facts and circumstances is the principal source of errors - errors that will not be eliminated through the guidance process. In our view, the more distinctions that taxpayers and agents are compelled to draw under the change in accounting method procedures, the greater the likelihood of errors and disputes concerning the disposition of an item. Moreover, whereas the gradation of incentives within Rev. Proc. 92-20 is designed to provide taxpayers with incentives to change methods voluntarily, it also clearly provides agents with incentives to classify Category B methods as Category A methods in order to impose a retroactive change. This latter incentive compels us to conclude that the fewer categories, the better. At a minimum, the Designated A and Designated B methods are ripe for elimination. Indeed, the IRS should consider adopting an "issue raised" standard (as modified to incorporate our recommendation of when an issue is deemed raised) as the sole limitation restricting the availability of a voluntary, prospective change in accounting method.
4. Should the Service provide more automatic consent procedures for more accounting method changes? If so, for what changes?
Subsection 9.03 of Rev. Proc. 96-1(20) provides a list of notices, announcements, and rulings pursuant to which taxpayers may obtain automatic consent for changes in methods of accounting. In addition, Rev. Proc. 96-31,(21) which provides a taxpayer with an automatic consent procedure to change its method of accounting for depreciation or amortization where it has claimed less than the full amount of depreciation allowable, was added to the list of automatic consent procedures.(22)
We encourage the IRS to expand its use of automatic consent procedures. Indeed, the IRS should consider making the automatic consent procedure with a prospective year of change and prospective section 481(a) adjustments (or, in appropriate cases the cut-off method), say over 6 years, the general rule for voluntary accounting method changes. For taxpayers, the single largest impediment to a voluntary change in method (or accepting an examination adjustment or appeals settlement) is the risk that the National Office, examining agent, or appeals officer will seek to impose a detrimental change retroactively to open tax years.
Our recommendation for expanding the use of automatic consent procedures with prospective-only adjustments would be especially useful where taxpayers are required to modify their accounting methods in order to comply with new pronouncements from the Financial Accounting Standards Board (FASB). Indeed, there is recent precedent for granting automatic consent procedures for changes in accounting methods as a result of pronouncements by the FASB affecting broad groups of taxpayers. In Notice 96-30,(23) the IRS provided automatic consent procedures for all not-for-profit organizations described in section 501(c), which were compelled to adopt Statement of Financial Accounting Standard 116, to change their method of accounting for contributions. Where the FASB issues new accounting standards that do not involve accounting methods that deviate from a statute, regulation, or Supreme Court decision, the IRS should issue similar prompt guidance providing an automatic consent procedure for changes in accounting method by taxable, for-profit enterprises.
TEI appreciates this opportunity to comment on Notice 96-40, relating to the IRS's study of changes to the procedures to obtain the consent of the Commissioner for changes in accounting methods. These comments were prepared under the aegis of the Institute's Federal Tax Committee whose chair is David L. Klausman of Westinghouse Electric Inc. If you should have any questions concerning the Institute's comments, they should be directed to Mr. Klausman at (412) 642-3354 or to Jeffery P. Rasmussen of the Institute's professional staff at (202) 638-5601. (1) 1996-33 I.R.B. 11. (2) 1992-1 C.B. 685. (3) TET's earlier comments were published in the November-December 1992 issue of The Tax Executive (44 Tax Exec 473). (4) 1984-2 C.B. 736. (5) In our previous letter, we argued that taxpayers establishing substantial compliance with the uniform capitalization rules should not be penalized with the more burdensome Category A method change requirements for relatively minor adjustments to their overall cost accounting calculations. A taxpayer that made a good faith effort to comply with section 263A, but that missed on some of the regulation's more subtle details, is in a far different posture from one that ignored the statute or regulation entirely. In addition, in some cases, the detailed records required to adjust the uniform capitalization calculations perfectly simply may not exist. We believe that Rev. Proc. 94-49, 1994-2 C.B. 705, which permitted taxpayers generally to avail themselves of automatic consent procedures in order to implement the final section 263A regulations, adopts the proper policy. We recommend that comparable guidance permitting automatic consent for changes in section 263A accounting methods be promulgated and incorporated in successor updates to Rev. Proc. 96-1. (6) Taxpayers under examination for a continuous period of 18 months may make an application for change of accounting method without the consent of the District Director during the first 30 days of any tax year. Furthermore, taxpayers may file a request for change in method without the consent of the District Director during a 120-day period following the close of an examination. (7) 1994-1 C.B. 804. (8) See, e.g., Rev. Proc. 90-36, 1990-2 C.B. 357, suggesting that an improper method of accounting becomes a pending issue when a Form 5701 is issued. (9) 1994-2 C.B. 705. (10) Id. at 708. (11) See Rev. Proc. 93-48, 1993-2 C.B. 580, concerning changes to comply with the regulations on notional principal contracts. (12) Paragraph 5.12(2), 1980-2 C.B. 818, 824. (13) To imply, as the revenue procedure does, that a revenue ruling or other designating document that establishes a Designated Category B accounting method is, following a lapse of two years, equivalent to a Supreme Court decision, act of Congress, or even regulations promulgated pursuant to the Administrative Procedures Act constitutes regulatory overreaching. (14) Both rules have been carried over from Rev. Proc. 84-74. (15) The proposals to notify the appeals officer (or IRS litigation counsel) and include the name and phone number of the appeals officer (or counsel) are similar to the requirements imposed under subsection 10.06 where a taxpayer seeks to avail itself of the 120- or 30-day window periods. (16) Notice 96-18, 1996-14 I.R.B. 27. (17) The change in method must necessarily be agreed by both the taxpayer and the IRS. If the settlement is not agreed, the taxpayer may wish to challenge the denial of its method through litigation. On the other hand, the IRS may desire to concede the "method" aspect of an issue in order to settle a case on terms it considers to be favorable overall while preserving its right to challenge the taxpayer's accounting method in subsequent years. (18) 1990-1 C.B. 57. (19) 891 F.2d 1579 (Fed. Cir. 1989). (20) 1996-1 I.R.B. 8, at 33-34. (21) 1996-20 I.R.B. 11. (22) The procedure for effecting a change under Rev. Proc. 96-31, however, should not be the standard. We believe that the better course is to permit taxpayers to make the change in the tax return for the year of change by filing a Form 3115 with the tax return for the year of change and, if necessary, filing an additional copy with the National Office. (23) 1996-20
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|Date:||Nov 1, 1996|
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