Rp 2007-64

2006–56. Thus, these payments are included in the employee’s gross income,
are reported as wages or other compensation on the employee’s Form W–2, and
are subject to withholding and payment
of employment taxes. See § 1.62–2(c)(3),
(c)(5), and (h)(2), and section 8.06 of this
revenue procedure.
SECTION 8. WITHHOLDING AND
PAYMENT OF EMPLOYMENT TAXES
.01 The portion of a per diem allowance, if any, that relates to the days
of business travel substantiated and that
exceeds the amount deemed substantiated
for those days under section 4.01, 4.02, or
5 of this revenue procedure is treated as
paid under a nonaccountable plan and is
subject to withholding and payment of employment taxes. See § 1.62–2(h)(2)(i)(B).
.02 In the case of a per diem allowance
paid as a reimbursement, the excess described in section 8.01 of this revenue procedure is subject to withholding and payment of employment taxes in the payroll
period in which the payor reimburses the
expenses for the days of travel substantiated. See § 1.62–2(h)(2)(i)(B)(2).
.03 In the case of a per diem allowance
paid as an advance, the excess described
in section 8.01 of this revenue procedure
is subject to withholding and payment of
employment taxes no later than the first
payroll period following the payroll period
in which the days of travel with respect
to which the advance was paid are substantiated. See § 1.62–2(h)(2)(i)(B)(3). If
some or all of the days of travel with respect to which the advance was paid are
not substantiated within a reasonable period of time and the employee does not return the portion of the allowance that relates to those days within a reasonable period of time, the portion of the allowance
that relates to those days is subject to withholding and payment of employment taxes
no later than the first payroll period following the end of the reasonable period. See
§ 1.62–2(h)(2)(i)(A).
.04 In the case of a per diem allowance
only for meal and incidental expenses for
travel away from home paid to an employee in the transportation industry by a
payor that uses the rule in section 4.04(4)
of this revenue procedure, the excess of
the per diem allowance paid for the period over the amount deemed substanti-

October 15, 2007

ated for the period under section 4.02 of
this revenue procedure (after applying section 4.04(4) of this revenue procedure),
is subject to withholding and payment of
employment taxes no later than the first
payroll period following the payroll period in which the excess is computed. See
§ 1.62–2(h)(2)(i)(B)(4).
.05 For example, assume that an employer pays an employee a per diem
allowance under an arrangement that
otherwise meets the requirements of an
accountable plan to cover business expenses for meals and lodging for travel
away from home at a rate of 120 percent
of the federal per diem rate for the localities to which the employee travels. The
employer does not require the employee
to return the 20 percent by which the reimbursement for those expenses exceeds
the federal per diem rate. The employee
substantiates 6 days of travel away from
home: 2 days in a locality in which the
federal per diem rate is $160 and 4 days
in a locality in which the federal per diem
rate is $120. The employer reimburses
the employee $960 for the 6 days of travel
away from home (2 x (120% x $160) + 4
x (120% x $120)), and does not require
the employee to return the excess payment
of $160 (2 days x $32 ($192-$160) + 4
days x $24 ($144-$120)). For the payroll
period in which the employer reimburses
the expenses, the employer must withhold
and pay employment taxes on $160. See
section 8.02 of this revenue procedure.
.06 If a per diem allowance arrangement has no mechanism or process to
determine when an allowance exceeds the
amount that may be deemed substantiated
and the arrangement routinely pays allowances in excess of the amount that may
be deemed substantiated without requiring
actual substantiation of all the expenses or
repayment of the excess amount, the failure of the arrangement to treat the excess
allowances as wages for employment tax
purposes causes all payments made under
the arrangement to be treated as made under a nonaccountable plan. See Rev. Rul.
2006–56.
SECTION 9. EFFECTIVE DATE
This revenue procedure is effective for
per diem allowances for lodging, meal and
incidental expenses, or for meal and incidental expenses only, that are paid to an

818

employee on or after October 1, 2007, with
respect to travel away from home on or after October 1, 2007. For purposes of computing the amount allowable as a deduction for travel away from home, this revenue procedure is effective for meal and
incidental expenses or for incidental expenses only paid or incurred on or after October 1, 2007.
SECTION 10. EFFECT ON OTHER
DOCUMENTS
Rev. Proc. 2006–41 is superseded.
DRAFTING INFORMATION
The principal author of this revenue
procedure is Jeffrey T. Rodrick of the Office of Associate Chief Counsel (Income
Tax and Accounting). For further information regarding this revenue procedure,
contact Mr. Rodrick at (202) 622–4930
(not a toll-free call).

26 CFR 601.204: Changes in accounting periods and
in methods of accounting.
(Also Part I, §§ 442, 898; 1.442–1.)

Rev. Proc. 2007–64
SECTION 1. PURPOSE
This revenue procedure modifies a
scope provision and one of the terms and
conditions under which the Internal Revenue Service grants approval of requests
by corporations for changes in annual accounting periods filed under Rev. Proc.
2006–45, 2006–45 I.R.B. 851. Specifically, this revenue procedure modifies the
scope provision regarding a corporation
that exits a consolidated group. See section 4.02(13) of Rev. Proc. 2006–45. In
addition, this revenue procedure modifies
the terms and conditions relating to recordkeeping and book conformity in the case of
a controlled foreign corporation (“CFC”)
that has a majority U.S. shareholder year
(as defined in § 898(c)(3) of the Internal
Revenue Code) and that is changing to
a one-month deferral year described in
§ 898(c)(2) or to a 52–53-week taxable
year that references such one-month deferral year. See section 6.02 of Rev. Proc.
2006–45.

2007–42 I.R.B.

SECTION 2. BACKGROUND
.01 Section 442 and § 1.442–1(a) of the
Income Tax Regulations generally provide
that a taxpayer that wants to change its
annual accounting period and use a new
taxable year must obtain the approval of
the Commissioner.
.02 Section 1.442–1(b)(2) provides that
a change in annual accounting period will
be approved only if the taxpayer agrees
to the Commissioner’s prescribed terms,
conditions, and adjustments for effecting
the change.
.03 Rev. Proc. 2006–45 provides the
exclusive procedures for certain corporations to obtain automatic approval of the
Commissioner to change their annual accounting periods.
.04 Section 4.02(13) of Rev. Proc.
2006–45 excludes from the scope of the
revenue procedure a corporation that
ceases to be a member of a consolidated
group during the consolidated group’s first
effective year (as defined in section 5.05
of Rev. Proc. 2006–45).
.05 The Service has determined that it
is appropriate to modify the scope of Rev.
Proc. 2006–45 to clarify that any corporation leaving a consolidated group is excluded from the automatic change procedures under Rev. Proc. 2006–45 during the consolidated group’s taxable year
(without regard to a change in the consolidated group’s accounting period) in which
the corporation ceases to be a member of
the consolidated group. A corporation that
ceases to be a member of a consolidated
group must continue to use the annual accounting period of the consolidated group,
unless the corporation receives approval
under Rev. Proc. 2002–39, 2002–1 C.B.
1046, to change its annual accounting period (or is required to change its annual accounting period upon joining another consolidated group).
.06 Section 898(c)(2) provides that a
specified foreign corporation (i.e., a CFC)
may elect, in lieu of the taxable year under § 898(c)(1)(A) (i.e., the majority U.S.
shareholder year as defined in § 898(c)(3)),
a taxable year beginning one month earlier than the majority U.S. shareholder year
(i.e., one-month deferral year described in
§ 898(c)(2)).
.07 Section 4.02(8) of Rev. Proc.
2006–45 includes in the scope of the revenue procedure a CFC that has a majority

2007–42 I.R.B.

U.S. shareholder year and that is changing to a one-month deferral year or to a
52–53-week taxable year that references
such one-month deferral year.
.08 With respect to the terms and conditions of change under Rev. Proc. 2006–45,
section 6.02(1) of that revenue procedure
generally requires that a corporation compute its income and keep its books and
records (including financial statements
and reports to creditors) on the basis of
the requested taxable year. That section
further requires that the books and records
of the corporation be closed as of the last
day of the first effective year and that the
corporation conform the accounting period used for financial statement purposes
and reports to creditors concurrently.
.09 The Service has determined that in
the case of a CFC changing to a one-month
deferral year or to a 52–53-week taxable
year that references such one-month deferral year, the CFC is not required to issue
financial statements and reports to creditors on the basis of the requested year as
otherwise required by section 6.02(1) of
Rev. Proc. 2006–45. However, as required by section 6.02(1) of Rev. Proc.
2006–45, the CFC must close its books and
records as of the last day of the first effective year and, every year after the first
effective year, must close its books and
records as of the last day of the requested
taxable year, either a one-month deferral
year or a 52–53-week taxable year that references such one-month deferral year. The
CFC must also compute its income and
earnings and profits for U.S. tax purposes
on the basis of the requested year.
SECTION 3. SCOPE
.01 Corporations leaving a consolidated group. This revenue procedure
applies to a corporation leaving a consolidated group that wants to change its
annual accounting period in the year the
corporation ceases to be a member of the
consolidated group.
.02 CFCs changing to one-month deferral year or to a 52–53-week taxable
year that references such one-month deferral year. This revenue procedure also
applies to a CFC that has a majority U.S.
shareholder year, and that is properly
applying under Rev. Proc. 2006–45 to
change to a one-month deferral year or to

819

a 52–53-week taxable year that references
such one-month deferral year.
SECTION 4. MODIFICATIONS
.01 Section 4.02(13) is modified to
read as follows: “Corporation that exits
a consolidated group. A corporation that
ceases to be a member of a consolidated
group and wants to change its annual accounting period during the consolidated
group’s taxable year in which the corporation ceases to be a member of the
consolidated group. For purposes of the
prior sentence, the consolidated group’s
taxable year is determined without regard
to a change in the consolidated group’s annual accounting period. A corporation that
ceases to be a member of a consolidated
group must continue to use the annual accounting period of the consolidated group,
unless the corporation receives approval
under Rev. Proc. 2002–39 to change its
annual accounting period (or is required to
change its annual accounting period upon
joining another consolidated group). A
corporation that ceases to be a member of
a consolidated group during the consolidated group’s first effective year is not a
member of the consolidated group for purposes of the consolidated group’s change
in accounting period. See section 7.02(7)
of this revenue procedure.
(a) Example 1. On March 31, 2006, ABC Corporation ceases to be a member of a consolidated group
that has a taxable year ending on November 30. ABC
Corporation is not eligible to change its annual accounting period under this revenue procedure to a taxable year beginning before December 1, 2006.
(b) Example 2. Assume the same facts as Example 1, except that the consolidated group changes its
annual accounting period to a taxable year ending on
August 31, effective August 31, 2006. ABC Corporation is not eligible to change its annual accounting
period under this revenue procedure to a taxable year
beginning before December 1, 2006.
(c) Example 3. Assume the same facts as Example 2, except that the consolidated group changes its
annual accounting period to a taxable year ending on
January 31, effective January 31, 2006. ABC Corporation is not eligible to change its annual accounting
period under this revenue procedure to a taxable year
beginning before February 1, 2007.”

.02 Section 6.02 of Rev.
Proc.
2006–45 is modified to add paragraph
(4) as follows: “(4) CFCs changing to
a year described in § 898(c)(2) or to a
52–53-week taxable year that references
such one-month deferral year. The terms
and conditions regarding financial statements and reports to creditors in section

October 15, 2007

6.02(1) of this revenue procedure do not
apply in the case of a CFC that has a majority U.S. shareholder year (as defined
in § 898(c)(3)), and that is changing to
a one-month deferral year described in
§ 898(c)(2) or to a 52–53-week taxable
year that references such one-month deferral year. Such a CFC is nevertheless
required to close its books and records
as of the last day of the first effective
year and every year thereafter to close its
books and records on the last day of the
requested taxable year, and to compute its
income and earnings and profits for U.S.

October 15, 2007

tax purposes on the basis of the requested
taxable year.

section 5.05 of Rev. Proc. 2006–45) ends
on or after October 18, 2006.

SECTION 5. EFFECT ON OTHER
DOCUMENTS

DRAFTING INFORMATION

Rev. Proc. 2006–45 is modified and
clarified.
SECTION 6. EFFECTIVE DATE
This revenue procedure is effective for
changes in annual accounting periods for
which the first effective year (as defined in

820

The principal author of this revenue
procedure is Jeffrey S. Marshall of the Office of Associate Chief Counsel (Income
Tax and Accounting). For further information regarding this revenue procedure,
contact Mr. Marshall at (202) 622–4960
(not a toll-free call).

2007–42 I.R.B.