Updated and revised mass automatic accounting method procedure issued.
Rev. Proc. 98-60 retains almost identical procedures and guidance for most of the 25 automatic changes previously addressed by Rev. Proc. 97-37, including the four-year Sec. 481(a) adjustment period. However, the new revenue procedure has added eight new automatic changes, as well as modifying the scope of the depreciation accounting method change. Further, several minor modifications and clarifications have also been made to the predecessor automatic consent procedure.
Eight New "Automatics"
Eight new accounting method changes have been added to those previously authorized by Rev. Proc. 97-37. Many of these accounting method changes were the subject of recent tax legislation or revenue rulings and relate to the accounting method items described below.
1. Year 2000 (Y2K) Costs. Under Rev. Proc. 97-50, costs paid or incurred to convert or replace computer software to recognize dates beginning in the year 2000 should be accounted for as software development or software acquisition costs under the guidance provided in Rev. Proc. 69-21. In Rev. Proc. 69-21, the Service concluded that software development costs so closely resemble the kind of research and experimentation (R&E) expenditures that fall within the purview of Sec. 174 as to warrant similar accounting treatment. Therefore, the costs of
developing software may be deducted under the taxpayer's current method for deducting R&E costs under Sec. 174. Alternatively, purchased software constitutes a capital expenditure that must be capitalized and amortized over three years under Sec. 167(f). Taxpayers that want to change their current accounting method for Y2K costs to conform to a method described in Section 3 or 4 of Rev. Proc. 69-21 may do so automatically under the general automatic change accounting procedures of Rev. Proc. 98-60. See Section 1.02 of the Appendix to Rev. Proc. 98-60 for further guidance.
2. R&E Expenditures. Taxpayers that want to change their method of accounting for R&E expenditures related to a particular project or projects may automatically change to or from:
* Deducting such costs in the period paid or incurred under Sec. 174(a);
* Deferring and amortizing such costs over a period not less than 60 months under Sec. 174(b); and
* Capitalizing such costs indefinitely under Sec. 263 and Regs. Sec. 1.174-1.
This accounting method change must be made using a cut-off method (i.e., the new method applies only to all R&E expenditures paid or incurred during the year of change and in subsequent tax years for the particular project or projects for which the change relates). No audit protection is afforded the taxpayer requesting the change. In addition, the taxpayer must attach to the application a written statement providing certain information required by the Sec. 174 regulations. See Section 2A.01 of the Appendix to Rev. Proc. 98-60 for further guidance.
3. Line Pack Gas and Cushion Gas. Under Rev. Rul. 97-54, the cost of line pack gas or recoverable cushion gas is not depreciable; however, the cost of unrecoverable line pack gas or unrecoverable cushion gas is depreciable. Taxpayers not currently accounting for line pack and cushion gas under this guidance may automatically change to a method consistent with the holding in Rev. Rul. 97-54 under the general automatic change accounting procedures of Rev. Proc. 98-60. See Section 3.02 of the Appendix to Rev. Proc. 98-60 for further guidance.
4. Rule of 78s. Taxpayers currently accounting for stated interest on short-term consumer loans under the Rule of 78s method may automatically change to the constant yield method under the general automatic method change procedures of Rev. Proc. 98-60.
The Rule of 78s method allocates interest over the term of a loan based, in part, on the sum of the periods' digits for the loan term. The constant yield method allocates interest and original issue discount over a loan term based on a constant yield. The Rule of 78s method will generally front load interest, as compared to the constant yield method. However, the Rule of 78s method is no longer an acceptable accounting method. Taxpayers making this accounting method change for the first or second tax year beginning after 1997 are not subject to the general scope limitations under Section 4.02 of Rev. Proc. 98-60. Therefore, the special rules regarding taxpayers under examination, before appeals, before a Federal court or having previously made a change in the same accounting method do not apply. However, if the taxpayer is under examination, before an appeals office or before a Federal court, the taxpayer must provide a copy of the application to the examining agent(s), appeals officer or counsel for the government (as appropriate) when it files the copy of the application with the IRS National Office. See Section 5.04 of the Appendix to Rev. Proc. 98-60 for further guidance.
5. Cooperative Advertising Expenditures. Under Rev. Rul. 98-39, a taxpayer's liability to pay cooperative advertising expenses is deductible in the tax year in which the advertising services are performed (provided the liability can be reasonably estimated), even though the required claim for payment and proof of performance is submitted to the taxpayer in the subsequent tax year (i.e., the all-events test has been met).
Taxpayers currently deferring the recognition of cooperative advertising expenses until the year claim for payment is submitted to the taxpayer may change to a method of deducting such costs in the tax year advertising services are performed under the general automatic accounting procedures of Rev. Proc. 98-60.
Taxpayers making this change in accounting method for the first or second tax year ending on or after Aug. 17, 1998 are not subject to the general scope limitations under Section 4.02 of Rev. Proc. 98-60. See Section 8.05 of the Appendix to Rev. Proc. 98-60 for further guidance.
6. Inventory Shrinkage. Taxpayers that want to change their method of valuing ending inventory to account for estimated inventory shrinkage may do so under the general automatic accounting procedures of Rev. Proc. 98-60, provided the taxpayer is changing to the "retail safe-harbor method" or from not currently deducting estimated shrinkage to a method of estimating inventory shrinkage that clearly reflects income. A taxpayer that wants to change to a self-developed method that clearly reflects income must attach a statement setting forth a detailed description of all aspects of the method.
Taxpayers making this accounting method change are not subject to the general scope limitations under Section 4.02 of Rev. Proc. 98-60. Taxpayers making a change to the "retail safe-harbor method" are afforded no audit protection if, on the date the taxpayer files a copy of the Form 3115, Application for Change in Accounting Method, with the National Office, the taxpayer's present method of estimating inventory shrinkage is an issue under consideration. See Section 9.02 of the Appendix to Rev. Proc. 98-60 for further guidance.
Taxpayers wishing to change from one self-developed method to another self-developed method must request and receive permission to make the accounting method change under the manual accounting method procedures described in Rev. Proc. 97-27.
7. Mark-to-Market Receivables. Taxpayers required to discontinue the use of the mark-to-market method of accounting for nonfinancial customer paper to comply with Sec. 475(c) may do so automatically under the general automatic change procedures of Rev. Proc. 98-60, provided the change is made for the taxpayer's first tax year ending after July 22, 1998.
Alternatively, taxpayers that are dealers in securities only because of dealings in nonfinancial customer paper and wanting to discontinue use of the mark-to-market method of accounting for all securities (including nonfinancial customer paper) may do so automatically under the general automatic change procedures of Rev. Proc. 98-60.
Taxpayers must clearly indicate which method change described above is being made. Further, the taxpayer must attach a statement to the Form 3115, describing all items marked to market that will no longer be accounted for under that method.
Taxpayers making this accounting method change are not subject to the general scope limitations under Section 4.02 of Rev. Proc. 98-60, and are afforded no audit protection as to their application of their previous accounting methods. See Section 10A.01 of the Appendix to Rev. Proc. 98-60 for further guidance.
8. Pool of Debt Instruments. Taxpayers required to change their method of accounting for a pool of debt instruments to comply with the Taxpayer Relief Act of 1997 (TRA '97) may do so under the general automatic revenue procedures of Rev. Proc. 98-60, provided the change in method is for the taxpayer's first tax year beginning after Aug. 5, 1997. The TRA '97 extended the special rules of Sec. 1272(a)(6) when determining the daily portions of original issue discount for certain debt instruments subject to prepayments. The Service has not yet issued any further guidance as to what constitutes a "pool" of debt instruments; the only guidance is the example of credit card receivables in the TRA '97's legislative history.
Taxpayers that have already filed tax returns for their first tax year beginning after Aug. 5, 1997 without complying with Sec. 1272(a)(6) may still make an automatic accounting method change, by amending their returns no later than April 30, 1999 and attaching an original Form 3115 requesting this change in accounting method. A copy of the Form 3115 must be filed with the IRS National Office no later than when the taxpayer's amended return is filed.
Taxpayers making this change in accounting method are not subject to the general scope limitations under Section 4.02 of Rev. Proc. 98-60 and are afforded no audit protection as to their application of their previous method of accounting. See Section 12.02 of the Appendix to Rev. Proc. 98-60 for further guidance.
Rev. Proc. 98-60 is the exclusive procedure for changing from permissible or impermissible methods of depreciation to other permissible methods. Prior to Rev. Proc. 98-60, taxpayers accounting for depreciation on an impermissible method could apply for an accounting method change for underdepreciated properties under either the manual change procedures of Rev. Proc. 97-27 or the automatic change procedures of Rev. Proc. 97-37; however, overdepreciated property changes had to be filed under Rev. Proc. 97-27.
Despite this expansion of the scope of changes qualifying for automatic consent, certain depreciation changes remain outside the scope of the automatic change procedure. IRS consent must be obtained under the manual change procedures of Rev. Proc. 97-27 for changes to or from the income forecast method, changes to reclassify some types of Sec. 1250 property (land improvements) to a specialized industry asset class, and several other types of depreciation accounting method changes specifically excluded from the automatic consent procedure by Sections 2.01(2)(b) or 2.02(2)(b) of the Appendix to Rev. Proc. 98-60. In addition, Sections 2.01(3)(b) and 2.02(4)(d) of that appendix require certain taxpayers to provide various additional statements (if applicable) and attach them to a completed Form 3115; several new statements and representations must be made for public utility property. See Sections 2.01 and 2.02 of the Appendix to Rev. Proc. 98-60 for further guidance.
Taxpayers with a ruling request or application for accounting method change pending may request that the change be automatically granted under Rev. Proc. 98-60, if applicable. In doing so, the Service will refund the user fee previously paid, but may require the taxpayer to make modifications to the application or ruling request already filed. To take advantage of these transition rules, taxpayers must have notified the IRS National Office prior to the later of Feb. 1,1999 or the issuance of the ruling granting or denying consent. If the Service was not notified, the ruling request or application will be processed under the applicable guidance in effect at the time the request or application was filed. See Section 13.02 of Rev. Proc. 98-60 for further guidance.
Other Modifications and Clarifications
Rev. Proc. 98-60 also provides other important modifications and clarifications, including:
* The year of change is included in the five-year prohibition period when counting the number of years since the same method of accounting was last changed.
* An automatic six-month extension from the due date of the return for the year of change (excluding extensions) is available for taxpayers that follow the prescribed guidance.
* Taxpayers may not use the automatic change procedures of Rev. Proc. 98-60 to change a capitalization method for package design costs when such package designs have an ascertainable useful life.
* A taxpayer that wants to re-elect the LIFO inventory method during the five-year prohibition period may do so automatically by filing Form 970, Application to Use LIFO Inventory Method.
* Taxpayers that have previously entered into a bulk bargain purchase and wish to change to the IPIC (simplified LIFO) method for their entire LIFO inventory must first comply with the decision in Hamilton Industries, Inc., 97 TC 120 (1991).
* The district director is to ascertain if a change in accounting method was made in compliance with Rev. Proc. 98-60.
FROM GARY HECIMOVICH, CPA, AND CURTIS OTTLEY, CPA, WASHINGTON, DC
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|Title Annotation:||IRS Revenue Procedure 98-60|
|Publication:||The Tax Adviser|
|Date:||Mar 1, 1999|
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