Rp 97-27

ent participation rates, guarantees, mar­
ket value adjustments, or other pertinent
factors under the contracts. Written com­
ments should be sent to Internal Rev­
enue Service, P.O. Box 7604, Ben
Franklin Station, Washington, DC
20044. Alternatively, submissions may
be hand delivered between the hours of
8 a.m. and 5 p.m. to: CC:DOM:CORP:R
(Notice 97–32), Courier’s Desk, Inter­
nal Revenue Service, 1111 Consti­
tution Avenue, NW, Washington, DC.
Finally, taxpayers may submit com­
ments electronically via the Internal
Revenue Service INTERNET site at
http://www.irs.ustreas.gov/prod/tax_regs/
comments.html. All submitted comments
will be available for public inspection
and copying.

.09 Penalties . . . . . . . . . . . . . . . . 12
.10 Change made as part of an
examination. . . . . . . . . . . . . . 12
SECTION 3. DEFINITIONS . . . .
.01 Taxpayer . . . . . . . . . . . . . . . .
(1) In general . . . . . . . . . . . .
(2) Consolidated group . . . .
.02 Filed . . . . . . . . . . . . . . . . . . .
.03 Mailed . . . . . . . . . . . . . . . . . .
.04 Timely performance of acts .
.05 Year of change . . . . . . . . . . .
.06 Section 481(a) adjustment
period . . . . . . . . . . . . . . . . . .
.07 Under examination . . . . . . . .
(1) In general . . . . . . . . . . . .
(2) Partnerships and S
corporations subject to
TEFRA. . . . . . . . . . . . . . . . . .
.08 Issue under consideration . .
(1) Under examination . . . .
(2) Before an appeals office
........................
(3) Before a federal court .
.09 Change within the LIFO
inventory method . . . . . . . . .

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SECTION 4. SCOPE . . . . . . . . . .
.01 Applicability . . . . . . . . . . . . .
.02 Inapplicability . . . . . . . . . . .
(1) Automatic change . . . . .
(2) Under examination . . . .
(3) Before an appeals
26 CFR 601.204: Changes in accounting periods

office . . . . . . . . . . . . . . . . . .
and in methods of accounting.

(4) Before a federal court .
(Also Part I, §§ 446, 481; 1.446–1, 1.481–1,

1.481–4.)

(5) Consolidated group
member . . . . . . . . . . . . . . . .
Rev. Proc. 97–27
(6) Partnerships and S
corporations . . . . . . . . . . . . .
TABLE OF CONTENTS
PAGE SECTION 5. PROCEDURES FOR
TAXPAYERS NOT UNDER
SECTION 1. PURPOSE . . . . . . . . 11
EXAMINATION . . . . . . . . . . . . . .
.01 In general . . . . . . . . . . . . . . . 11
.01 Submission of application . .
.02 Voluntary compliance . . . . . . 11
(1) In general . . . . . . . . . . .
.03 Significant changes. . . . . . . . 11
(2) Limited relief for late
SECTION 2. BACKGROUND . . . 11
application . . . . . . . . . . . . . .
.01 Change in method of
.02 Terms and conditions of
accounting defined . . . . . . . . 11
change . . . . . . . . . . . . . . . . .
.02 Securing permission to make
(1) In general . . . . . . . . . . .
a method change. . . . . . . . . . 12
(2) Year of change . . . . . . .
.03 Terms and conditions of a
(3) Section 481(a)
method change . . . . . . . . . . . 12
adjustment period . . . . . . . .
.04 No retroactive method
(4) NOL carryback
change . . . . . . . . . . . . . . . . . . 12
limitation for taxpayer
.05 Method change with a
subject to criminal
§ 481(a) adjustment . . . . . . . 12
investigation . . . . . . . . . . . . .
(1) Need for adjustment. . . . 12
(5) Change treated as
(2) Adjustment period . . . . . 12
initiated by the taxpayer . . .
.06 Method change using a
SECTION 6. PROCEDURES FOR
cut-off method . . . . . . . . . . . . 12
TAXPAYERS UNDER
.07 Consistency and clear
EXAMINATION, BEFORE AN
reflection of income . . . . . . . 12
APPEALS OFFICE, OR BEFORE
.08 Separate trades or
A FEDERAL COURT . . . . . . . . . .
businesses . . . . . . . . . . . . . . . 12

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FURTHER INFORMATION: For further
information regarding this notice, con­
tact Ms. Katherine A. Hossofsky at
(202) 622–3970 (not a toll-free call).
PROCEDURAL INFORMATION: This
document serves as an ‘‘administrative
pronouncement’’ as that term is defined
in § 1.6661–3(b)(2) of the Income Tax
Regulations and may be relied upon to
the same extent as a revenue ruling or
revenue procedure.

10

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.01 Taxpayer under
examination . . . . . . . . . . . . .
(1) In general . . . . . . . . . . .
(2) 90-day window period .
(3) 120-day window period
(4) Consent of district
director . . . . . . . . . . . . . . . .
.02 Taxpayer before an appeals
office . . . . . . . . . . . . . . . . . .
.03 Taxpayer before a federal
court . . . . . . . . . . . . . . . . . . .
.04 Terms and conditions of
change . . . . . . . . . . . . . . . . .
SECTION 7. SECTION 481(a)
ADJUSTMENT PERIOD . . . . . . .
.01 In general . . . . . . . . . . . . . .
.02 Short period as a separate
taxable year . . . . . . . . . . . . .
.03 Shortened or accelerated
adjustment periods . . . . . . .
(1) De minimis rule . . . . . .
(2) Cooperatives . . . . . . . . .
(3) Ceasing to engage in the
trade or business . . . . . . . . .

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SECTION 8. GENERAL
APPLICATION PROCEDURES .
.01 Application—Service
discretion . . . . . . . . . . . . . . .
.02 Terms and
conditions—Service
discretion . . . . . . . . . . . . . . .
.03 Compliance with provisions
.04 Facts and circumstances
considered in processing
applications . . . . . . . . . . . . .
.05 Specific rules in connection
with prior applications . . . .
(1) Method change made . .
(2) Method change not
made . . . . . . . . . . . . . . . . . . .
.06 Where to file . . . . . . . . . . . .
.07 User fee . . . . . . . . . . . . . . . .
.08 Signature requirements . . . .
.09 Incomplete Form 3115—21
day rule . . . . . . . . . . . . . . . .
.10 Conference in the national
office . . . . . . . . . . . . . . . . . .
.11 Consent Agreement . . . . . . .
(1) In general . . . . . . . . . . .
(2) Signature requirements .
(3) 45-day requirement . . . .
(4) Change in method of
accounting not made by the
taxpayer . . . . . . . . . . . . . . . .
.12 Two or more trades or
businesses . . . . . . . . . . . . . .
(1) In general . . . . . . . . . . .
(2) Information required . . .
(3) Separate Forms 3115
required . . . . . . . . . . . . . . . .
.13 Consolidated groups . . . . . .
(1) In general . . . . . . . . . . .

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(2) Separate Forms 3115
not required . . . . . . . . . . . . . 19
.14 Applicability of Rev. Proc.
97–1 and Rev Proc. 97–4 . . 19
.15 Effect on other offices of the
Service . . . . . . . . . . . . . . . . . 19
SECTION 9. AUDIT
PROTECTION FOR TAXABLE
YEARS PRIOR TO YEAR OF
CHANGE . . . . . . . . . . . . . . . . . . . .
.01 In general . . . . . . . . . . . . . .
.02 Exceptions . . . . . . . . . . . . . .
(1) Change not made or
made improperly . . . . . . . . .
(2) Change in sub-method .
(3) Prior year
Service-initiated change . . .
(4) Criminal investigation .

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SECTION 10. EFFECT OF
CONSENT . . . . . . . . . . . . . . . . . . . 19
.01 In general . . . . . . . . . . . . . . 19
.02 Retroactive change or
modification . . . . . . . . . . . . . 20

SECTION 11. REVIEW BY
DISTRICT DIRECTOR . . . . . . . . 20
.01 In general . . . . . . . . . . . . . . 20
.02 National office
consideration . . . . . . . . . . . . 20

SECTION 12.

INQUIRIES . . . .

SECTION 13. EFFECTIVE
DATE . . . . . . . . . . . . . . . . . . . . . . .
.01 In general . . . . . . . . . . . . . .
.02 Transition rules . . . . . . . . . .
(1) Currently pending
Forms 3115 . . . . . . . . . . . . .
(2) New Forms 3115 . . . . . .
(3) Open window periods
under Rev. Proc. 92–20 . . . .
SECTION 14. EFFECT ON
OTHER DOCUMENTS . . . . . . . .
.01 Rev. Proc. 92–20 . . . . . . . . .
.02 Rev. Proc. 93–48 (notional
principal contracts) . . . . . . .
.03 Notice 89–15 (long-term
contracts) . . . . . . . . . . . . . . .

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SECTION 15. PAPERWORK
REDUCTION ACT . . . . . . . . . . . .

20

DRAFTING INFORMATION . . .

21

SECTION 1. PURPOSE
.01 In general. This revenue proce­
dure provides the general procedures
under § 446(e) of the Internal Revenue
Code and § 1.446–1(e) of the Income
Tax Regulations for obtaining the con­
sent of the Commissioner of Internal
Revenue to change a method of ac­
counting for federal income tax pur­
poses. This revenue procedure modifies

and supersedes Rev. Proc. 92–20,
1992–1 C.B. 685.
.02 Voluntary compliance.
(1) This revenue procedure pro­
vides incentives to encourage prompt
voluntary compliance with proper tax
accounting principles. Under this ap­
proach, a taxpayer generally receives
more favorable terms and conditions
(for example, a later year of change and
a longer § 481(a) adjustment period for
a positive adjustment) if the taxpayer
files its request for a change in account­
ing method before the Internal Revenue
Service contacts the taxpayer for exami­
nation. A taxpayer that is contacted for
examination and required to change its
method of accounting by the Service
generally receives less favorable terms
and conditions and may also be subject
to penalties.
(2) Although prompt voluntary
compliance can generally be encouraged
through incentives, the Service recog­
nizes that this approach may not be
appropriate or effective in all cases. For
example, a number of taxpayers have
deferred making changes required by
amendments to the Internal Revenue
Code or the Income Tax Regulations.
Because it is generally not appropriate
to permit changes on a basis more
favorable than applicable under the gov­
erning statute or regulation, the Service
may, in other published guidance, pro­
vide special terms and conditions that
are designed to place the taxpayer in a
position no more favorable than if the
taxpayer had timely complied with the
required change. See, for example, Rev.
Proc. 93–48, 1993–2 C.B. 580 (regard­
ing changes in method of accounting for
notional principal contracts to comply
with the requirements of § 1.446–3).
.03 Significant changes. Many of the
complex rules and requirements of Rev.
Proc. 92–20 have been simplified or
eliminated. For example, the Category
A, Category B, Designated A, and Des­
ignated B classifications have been
eliminated, the 90–day window at the
beginning of an examination has been
eliminated, the 30-day window for tax­
payers under continuous examination
has been expanded to 90 days and the
number of consecutive months the tax­
payer is required to be under examina­
tion has been reduced from 18 to 12, the
definition of ‘‘under examination’’ has
been clarified, the consent requirement
for taxpayers before an appeals office or
a federal court has been replaced with a
notification procedure, the various
§ 481(a) adjustment periods have been

11

replaced with a single 4-year § 481(a)
adjustment period for both positive and
negative adjustments, and several of the
terms and conditions relating to the
§ 481(a) adjustment have been elimi­
nated.
SECTION 2. BACKGROUND
.01 Change in method of accounting
defined.
(1) Section 1.446–1(e)(2)(ii)(a)
provides that a change in method of
accounting includes a change in the
overall plan of accounting for gross
income or deductions, or a change in the
treatment of any material item. A mate­
rial item is any item that involves the
proper time for the inclusion of the item
in income or the taking of the item as a
deduction. In determining whether a
taxpayer’s accounting practice for an
item involves timing, generally the rel­
evant question is whether the practice
permanently changes the amount of the
taxpayer’s lifetime income. If the prac­
tice does not permanently affect the
taxpayer’s lifetime income, but does or
could change the taxable year in which
income is reported, it involves timing
and is therefore a method of accounting.
See Rev. Proc. 91–31, 1991–1 C.B. 566.
(2) Although a method of account­
ing may exist under this definition with­
out a pattern of consistent treatment of
an item, a method of accounting is not
adopted in most instances without con­
sistent treatment. The treatment of a
material item in the same way in deter­
mining the gross income or deductions
in two or more consecutively filed tax
returns (without regard to any change in
status of the method as permissible or
impermissible) represents consistent
treatment of that item for purposes of
§ 1.446–1(e)(2)(ii)(a). If a taxpayer
treats an item properly in the first return
that reflects the item, however, it is not
necessary for the taxpayer to treat the
item consistently in two or more con­
secutive tax returns to have adopted a
method of accounting. If a taxpayer has
adopted a method of accounting under
these rules, the taxpayer may not change
the method by amending its prior in­
come tax return(s). See Rev. Rul. 90–38,
1990–1 C.B. 57.
(3) A change in the characteriza­
tion of an item may also constitute a
change in method of accounting if the
change has the effect of shifting income
from one period to another. For ex­
ample, a change from treating an item
as income to treating the item as a

deposit is a change in method of ac­
counting. See Rev. Proc. 91–31.
(4) A change in method of ac­
counting does not include correction of
mathematical or posting errors, or errors
in the computation of tax liability (such
as errors in computation of the foreign
tax credit, net operating loss, percentage
depletion, or investment credit). See
§ 1.446–1(e)(2)(ii)(b).
.02 Securing permission to make a
method change. Section 446(e) and
§ 1.446–1(e) state that, except as other­
wise provided, a taxpayer must secure
the consent of the Commissioner before
changing a method of accounting for
federal income tax purposes. Section
1.446–1T(e)(3)(i) requires that, in order
to obtain the Commissioner’s consent to
a 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.
.03 Terms and conditions of a method
change. Section 1.446–1(e)(3)(ii) autho­
rizes the Commissioner to prescribe ad­
ministrative 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).
The terms and conditions the Commis­
sioner may prescribe include the year of
change, whether the change is to be
made with a § 481(a) adjustment or on
a cut-off basis, and the § 481(a) adjust­
ment period.
.04 No retroactive method change.
Unless specifically authorized by the
Commissioner, a taxpayer may not re­
quest, or otherwise make, a retroactive
change in method of accounting, regard­
less of whether the change is from a
permissible or an impermissible method.
See generally Rev. Rul. 90–38.
.05 Method change with a § 481(a)
adjustment.
(1) Need for adjustment. Section
481(a) requires those adjustments neces­
sary to prevent amounts from being
duplicated or omitted to be taken into
account when the taxpayer’s taxable
income is computed under a method of
accounting different from the method
used to compute taxable income for the
preceding taxable year. When there is a
change in method of accounting to
which § 481(a) is applied, income for
the taxable year preceding the year of
change must be determined under the
method of accounting that was then
employed, and income for the year of
change and the following taxable years

must be determined under the new
method of accounting as if the new
method had always been used.
Example. A taxpayer that is not required to use
inventories uses the overall cash receipts and
disbursements method and changes to an overall
accrual method. The taxpayer has $120,000 of
income earned but not yet received (accounts
receivable) and $100,000 of expenses incurred but
not yet paid (accounts payable) as of the end of
the taxable year preceding the year of change. A
positive § 481(a) adjustment of $20,000 ($120,000
accounts receivable less $100,000 accounts pay­
able) is required as a result of the change.

(2) Adjustment period. Section
481(c) and §§ 1.446–1T(e)(3)(i) and
1.481–4 provide that the adjustment re­
quired by § 481(a) may be taken into
account in determining taxable income
in the manner and subject to the condi­
tions agreed to by the Commissioner
and the taxpayer. Generally, in the ab­
sence of such an agreement, the
§ 481(a) adjustment is taken into ac­
count completely in the year of change,
subject to § 481(b) which limits the
amount of tax where the § 481(a) ad­
justment is substantial. However, under
the Commissioner’s authority in
§ 1.446–1(e)(3)(ii) to prescribe terms
and conditions for changes in method of
accounting, this revenue procedure pro­
vides specific adjustment periods that
are intended to achieve an appropriate
balance between the goals of mitigating
distortions of income that result from
accounting method changes and provid­
ing appropriate incentives for voluntary
compliance.
.06 Method change using a cut-off
method. The Commissioner may deter­
mine that certain changes in method of
accounting will be made without a
§ 481(a) adjustment, using a ‘‘cut-off
method.’’ Under a cut-off method, only
the items arising on or after the begin­
ning of the year of change (or other
operative date) are accounted for under
the new method of accounting. Any
items arising before the year of change
(or other operative date) continue to be
accounted for under the taxpayer’s
former method of accounting. See, for
example, § 263A (which generally ap­
plies to costs incurred after December
31, 1986, for noninventory property),
§ 461(h) (which generally applies to
amounts incurred on or after July 18,
1984), and § 1.446–3 (which applies to
notional principal contracts entered into
on or after December 13, 1993). Be­
cause no items are duplicated or omitted
from income when a cut-off method is
used to effect a change in accounting
method, no § 481(a) adjustment is nec­
essary.

12

.07 Consistency and clear reflection
of income. Methods of accounting
should clearly reflect income on a con­
tinuing basis, and the Service exercises
its discretion under §§ 446(e) and
481(c) in a manner that generally mini­
mizes distortions of income across tax­
able years and on an annual basis.
Accordingly, if a taxpayer requests to
change from a method of accounting
that clearly reflects income, the Service,
in determining whether to consent to the
taxpayer’s request, will weigh the need
for consistency against the taxpayer’s
reason for desiring to change its method
of accounting.
.08 Separate trades or businesses.
(1) Sections 1.446–1(d)(1) and (2)
provide that when a taxpayer has two or
more separate and distinct trades or
businesses, a different method of ac­
counting may be used for each trade or
business, provided the method of ac­
counting used for each trade or business
clearly reflects the overall income of the
taxpayer as well as that of each particu­
lar trade or business. No trade or busi­
ness is separate and distinct unless a
complete and separable set of books and
records is kept for that trade or business.
(2) Section 1.446–1(d)(3) provides
that if, by reason of maintaining differ­
ent methods of accounting, there is a
creation or shifting of profits or losses
between the trades or businesses of the
taxpayer (for example, through inven­
tory adjustments, sales, purchases, or
expenses) so that income of the taxpayer
is not clearly reflected, the trades or
businesses of the taxpayer are not sepa­
rate and distinct.
.09 Penalties. Any otherwise appli­
cable penalty for the failure of a tax­
payer to change its method of account­
ing (for example, the accuracy-related
penalty under § 6662 or the fraud pen­
alty under § 6663) may be imposed if
the taxpayer does not timely file a
request to change a method of account­
ing. See § 446(f). Additionally, the tax­
payer’s return preparer may also be
subject to the preparer penalty under
§ 6694. However, penalties will not be
imposed when a taxpayer changes from
an impermissible method of accounting
to a permissible one by complying with
all the appropriate provisions of this
revenue procedure.
.10 Change made as part of an ex­
amination. Section 446(b) and § 1.446–
1(b)(1) provide that if a taxpayer does
not regularly employ a method of ac­
counting that clearly reflects its income,
the computation of taxable income must

be made in a manner that, in the opinion
of the Commissioner, does clearly re­
flect income. If a taxpayer under exami­
nation is not eligible to change an
accounting method under this revenue
procedure, the change may be made by
the district director. A change resulting
in a positive § 481(a) adjustment will
ordinarily be made in the earliest tax­
able year under examination with a
one-year § 481(a) adjustment period.
SECTION 3. DEFINITIONS
.01 Taxpayer.
(1) In general. The term ‘‘tax­
payer’’ has the same meaning as the
term ‘‘person’’ defined in § 7701(a)(1)
(rather than the meaning of the term
‘‘taxpayer’’ defined in § 7701(a)(14)).
(2) Consolidated group. For pur­
poses of (a) sections 3.07(1), 3.08(1),
4.02(2) and 6.01 (taxpayer under exami­
nation), (b) sections 3.08(2), 4.02(3) and
6.02 (taxpayer before an appeals office),
or (c) sections 3.08(3), 4.02(4) and 6.03
(taxpayer before a federal court), the
term ‘‘taxpayer’’ includes a consolidated
group.
.02 Filed. Any form (including a
Form 3115), statement, or other docu­
ment required to be filed under this
revenue procedure is filed on the date it
is mailed to the proper address (or an
address similar enough to complete de­
livery). If the form, statement, or other
document is not mailed (or the date it is
mailed cannot be reasonably deter­
mined), it is filed on the date it is
delivered to the Service.
.03 Mailed. The date of mailing will
be determined under the rules of
§ 7502. For example, the date of mail­
ing is the date of the U.S. postmark or
the applicable date recorded or marked
by a designated delivery service. See
Notice 97–26, 1997–17 I.R.B. 6.
.04 Timely performance of acts. The
rules of § 7503 apply when the last day
for the taxpayer’s timely performance of
any act (for example, filing a Form
3115, submitting additional information,
returning a Consent Agreement (see sec­
tion 8.11 of this revenue procedure), or
holding a conference) falls on a Satur­
day, Sunday, or legal holiday. The per­
formance of any act is timely if the act
is performed on the next succeeding day
that is not a Saturday, Sunday, or a legal
holiday.
.05 Year of change. The year of
change is the taxable year for which a
change in method of accounting is ef­
fective, that is, the first taxable year the

new method is to be used, even if no
affected items are taken into account for
that year. The year of change is also the
first taxable year for complying with all
the terms and conditions set forth in the
Consent Agreement.
.06 Section 481(a) adjustment period.
The § 481(a) adjustment period is the
applicable number of taxable years for
taking into account the § 481(a) adjust­
ment required as a result of the change
in method of accounting. The year of
change is the first taxable year in the
adjustment period and the § 481(a) ad­
justment is taken into account ratably
over the number of taxable years in the
adjustment period. The applicable ad­
justment periods are set forth in sections
5.02(3) and 6.04 of this revenue proce­
dure.
.07 Under examination.
(1) In general.
(a) Except as provided in section
3.07(2) of this revenue procedure, an
examination of a taxpayer with respect
to a federal income tax return begins on
the date the taxpayer is contacted in any
manner by a representative of the Ser­
vice for the purpose of scheduling any
type of examination of the return. An
examination ends:
(i) in a case in which the
Service accepts the return as filed, on
the date of the ‘‘no change’’ letter sent
to the taxpayer;
(ii) in a fully agreed case, on
the earliest of the date the taxpayer
executes a waiver of restrictions on
assessment or acceptance of overassess­
ment (for example, Form 870, 4549, or
4605), the date the taxpayer makes a
payment of tax that equals or exceeds
the proposed deficiency, or the date of
the ‘‘closing’’ letter (for example, Letter
891 or 987) sent to the taxpayer; or
(iii) in an unagreed or a par­
tially agreed case, on the earliest of the
date the taxpayer (or its representative)
is notified by Appeals that the case has
been referred to Appeals from Examina­
tion, the date the taxpayer files a peti­
tion in the Tax Court, the date on which
the period for filing a petition with the
Tax Court expires, or the date of the
notice of claim disallowance.
(b) An examination does not end
as a result of the early referral of an
issue to Appeals under the provisions of
Rev. Proc. 96–9, 1996–1 C.B. 575.
(c) An examination resumes on
the date the taxpayer (or its representa­
tive) is notified by Appeals (or other­
wise) that the case has been referred to
Examination for reconsideration.

13

(2) Partnerships and S corpora­
tions subject to TEFRA. For an entity
(including a limited liability company),
treated as a partnership or an S corpora­
tion for federal income tax purposes,
that is subject to the TEFRA unified
audit and litigation provisions for part­
nerships and S corporations, an exami­
nation begins on the date of the notice
of the beginning of an administrative
proceeding sent to the Tax Matters
Partner/Tax Matters Person (TMP). An
examination ends:
(a) in a case in which the Ser­
vice accepts the partnership or S corpo­
ration return as filed, on the date of the
‘‘no adjustments’’ letter or the ‘‘no
change’’ notice of final administrative
adjustment sent to the TMP;
(b) in a fully agreed case, when
all the partners, members, or sharehold­
ers execute a Form 870–P, 870–L, or
870–S; or
(c) in an unagreed or a partially
agreed case, on the earliest of the date
the TMP (or its representative) is noti­
fied by Appeals that the case has been
referred to Appeals from Examination,
the date the TMP (or a partner, member,
or shareholder) requests judicial review,
or the date on which the period for
requesting judicial review expires.
But see section 4.02(6) of this rev­
enue procedure for certain rules that
preclude an entity from requesting a
change in accounting method. Also note
that S corporations are not subject to the
TEFRA unified audit and litigation pro­
visions for taxable years beginning after
December 31, 1996. See Small Business
Job Protection Act of 1996, Pub. L. No.
104–188, § 1317(a), 110 Stat. 1755,
1787 (1996).
.08 Issue under consideration.
(1) Under examination. A taxpay­
er’s method of accounting for an item is
an issue under consideration for the
taxable years under examination if the
taxpayer receives written notification
(for example, by examination plan, in­
formation document request (IDR), or
notification of proposed adjustments or
income tax examination changes) from
the examining agent(s) specifically cit­
ing the treatment of the item as an issue
under consideration. For example, a tax­
payer’s method of pooling under the
dollar-value, last-in first-out LIFO in­
ventory method is an issue under con­
sideration as a result of an examination
plan that identifies LIFO pooling as a
matter to be examined, but it is not an
issue under consideration as a result of
an examination plan that merely identi­

fies LIFO inventories as a matter to be
examined. Similarly, a taxpayer’s
method of determining inventoriable
costs under § 263A is an issue under
consideration as a result of an IDR that
requests documentation supporting the
costs included in inventoriable costs, but
it is not an issue under consideration as
a result of an IDR that requests docu­
mentation supporting the amount of cost
of goods sold reported on the return.
The question of whether a method of
accounting is an issue under consider­
ation may be referred to the national
office as a request for technical advice
under the provisions of Rev. Proc. 97–2,
1997–1 I.R.B. 64 (or any successor).
(2) Before an appeals office. A
taxpayer’s method of accounting for an
item is an issue under consideration for
the taxable years before an appeals
office if the treatment of the item is
included as an item of adjustment in the
examination report referred to Appeals
or is specifically identified in writing to
the taxpayer by Appeals.
(3) Before a federal court. A tax­
payer’s method of accounting for an
item is an issue under consideration for
the taxable years before a federal court
if the treatment of the item is included
in the statutory notice of deficiency, the
notice of claim disallowance, the notice
of final administrative adjustment, the
pleadings (for example, the petition,
complaint, or answer) or amendments
thereto, or is specifically identified in
writing to the taxpayer by the counsel
for the government.
.09 Change within the LIFO inven­
tory method. A change within the LIFO
inventory method is a change from one
LIFO inventory method or sub-method
to another LIFO inventory method or
sub-method. A change within the LIFO
inventory method does not include a
change in method of accounting that
could be made by a taxpayer that does
not use the LIFO inventory method (for
example, a method governed by § 471
or § 263A).
SECTION 4. SCOPE
.01 Applicability. Except as specifi­
cally provided in other published guid­
ance or in section 4.02 of this revenue
procedure, this revenue procedure ap­
plies to all taxpayers requesting the
Commissioner’s consent to change a
method of accounting for federal income
tax purposes.

.02 Inapplicability. This revenue pro­
cedure does not apply in the following
situations:
(1) Automatic change. If the
change in method of accounting is re­
quired to be made pursuant to a pub­
lished automatic change procedure. Tax­
payers are encouraged to review the
automatic change procedures listed in
section 9.03 of Rev. Proc. 97–1, 1997–1
I.R.B. 11, 37 (or any successor), before
submitting a Form 3115 pursuant to this
revenue procedure;
(2) Under examination. If the tax­
payer is under examination, except as
provided in sections 6.01(2) (90-day
window), 6.01(3) (120-day window),
and 6.01(4) (district director consent) of
this revenue procedure;
(3) Before an appeals office. If the
taxpayer is before an appeals office with
respect to any income tax issue and the
accounting method to be changed is an
issue under consideration by the appeals
office;
(4) Before a federal court. If the
taxpayer is before a federal court with
respect to any income tax issue and the
accounting method to be changed is an
issue under consideration by the federal
court; or
(5) Consolidated group member. A
corporation that is (or was formerly) a
member of a consolidated group is un­
der examination, before an appeals of­
fice, or before a federal court (for
purposes of sections 4.02(2), (3), and (4)
of this revenue procedure) if the con­
solidated group is under examination,
before an appeals office, or before a
federal court for a taxable year(s) that
the corporation was a member of the
group.
(6) Partnerships and S corpora­
tions. For an entity (including a limited
liability company) treated as a partner­
ship or an S corporation for federal
income tax purposes, if the entity’s
accounting method to be changed is an
issue under consideration in an examina­
tion of a partner, member, or sharehold­
er’s federal income tax return or an
issue under consideration by an appeals
office or by a federal court with respect
to a partner, member, or shareholder’s
federal income tax return.
SECTION 5. PROCEDURES FOR
TAXPAYERS NOT UNDER
EXAMINATION
.01 Submission of application.
(1) In general.

14

(a) A Form 3115 must be filed
during the year of change, as provided
in § 1.446–1T(e)(3)(i). If the taxable
year is a short period, the Form 3115
must be filed no later than the last day
of the short taxable year.
(b) The Service recommends
that the Form 3115 be filed as early as
possible during the year of change to
provide the Service adequate time to
respond to the Form 3115 prior to the
original due date of the taxpayer’s re­
turn for the year of change.
(2) Limited relief for late applica­
tion. A taxpayer that fails to file a Form
3115 during the year of change as
provided in section 5.01(1) of this rev­
enue procedure will not be granted an
extension of time to file under
§ 301.9100 of the Procedure and Ad­
ministration Regulations, except in un­
usual and compelling circumstances. See
§ 301.9100–3T(c)(2)(i).
.02 Terms and conditions of change.
(1) In general. Except as specifi­
cally provided in other published guid­
ance, an accounting method change filed
under this revenue procedure, if granted,
must be made pursuant to the terms and
conditions provided in this revenue pro­
cedure (including sections 8.02 and
13.02 of this revenue procedure).
(2) Year of change. The year of
change is the taxable year with respect
to which the Form 3115 is timely filed
under section 5.01 of this revenue pro­
cedure. However, Rev. Proc. 93–48 (re­
garding notional principal contracts) is
an example of other published guidance
that provides for a different year of
change.
(3) Section 481(a) adjustment pe­
riod.
(a) In general. Except as pro­
vided in sections 5.02(3)(b) and 7.03 of
this revenue procedure, the § 481(a)
adjustment period for positive and nega­
tive § 481(a) adjustments is four taxable
years.
(b) Changes within the LIFO
method. Any change within the LIFO
inventory method must be made using a
cut-off method. However, Announce­
ment 91–173, 1991–47 I.R.B. 29 (re­
garding LIFO taxpayers changing their
method of accounting for certain bulk
bargain purchases of inventory to com­
ply with Hamilton Industries, Inc. v.
Commissioner, 97 T.C. 120 (1991)) is
an example of other published guidance
that requires a § 481(a) adjustment.
(4) NOL carryback limitation for
taxpayer subject to criminal investiga­
tion. Generally, 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 investi­
gation or proceeding concerning (a) di­
rectly or indirectly, any issue relating to
the taxpayer’s federal tax liability, or (b)
the possibility of false or fraudulent
statements made by the taxpayer with
respect to any issue relating to its
federal tax liability.
(5) Change treated as initiated by
the taxpayer. For purposes of § 481, an
accounting method change filed under
this revenue procedure, if granted, is a
change in method of accounting initiated
by the taxpayer.

separate statement signed by the tax­
payer certifying that, to the best of the
taxpayer’s knowledge, the same method
of accounting is not an issue under
consideration or an issue placed in sus­
pense by the examining agent(s).
(3) 120-day window period.
(a) A taxpayer may file a Form
3115 to request a change in accounting
method during the 120-day period fol­
lowing the date an examination ends
(‘‘120-day window’’) regardless of
whether a subsequent examination has
commenced. This 120-day window is
not available if the method of accounting the taxpayer is requesting to change
is an issue under consideration at the
time the Form 3115 is filed or is an
issue the examining agent(s) has placed
SECTION 6. PROCEDURES FOR
in suspense at the time the Form 3115 is
TAXPAYERS UNDER
filed.
EXAMINATION, BEFORE AN
(b) A taxpayer requesting a
APPEALS OFFICE, OR BEFORE A
change under this 120-day window must
provide a copy of the Form 3115 to the
FEDERAL COURT
examining agent(s) for any examination
.01 Taxpayer under examination.
that is in process at the same time it
(1) In general. A taxpayer that is files the original Form 3115 with the
under examination may not file a Form national office. The Form 3115 must
3115 to request a change in accounting contain the name(s) and telephone num­
method under this revenue procedure, ber(s) of the examining agent(s). The
except as provided in sections 6.01(2) taxpayer must attach to the Form 3115 a
(90-day window), 6.01(3) (120-day win­ separate statement signed by the tax­
dow), and 6.01(4) (district director con­ payer certifying that, to the best of the
sent) of this revenue procedure. A tax­ taxpayer’s knowledge, the same method
payer that files a Form 3115 beyond the of accounting is not an issue under
time periods provided in the 90-day and consideration or an issue placed in sus­
120-day windows will not be granted an pense by the examining agent(s).
extension of time to file under
(4) Consent of district director.
§ 301.9100, except in unusual and com­
(a) A taxpayer under examina­
pelling circumstances.
tion may request to change an account­
(2) 90-day window period.
ing method under this revenue proce­
(a) A taxpayer may file a Form dure if the district director consents to
3115 to request a change in accounting the filing of the request. The district
method during the first 90 days of any director will consent to the filing of the
taxable year (‘‘90-day window’’) if the Form 3115 unless, in the opinion of the
taxpayer has been under examination for district director, the method of account­
at least 12 consecutive months as of the ing to be changed would ordinarily be
first day of the taxable year. This 90-day included as an item of adjustment in the
window is not available if the method of year(s) for which the taxpayer is under
accounting the taxpayer is requesting to examination. For example, the district
change is an issue under consideration director will consent to the filing of a
at the time the Form 3115 is filed or is Form 3115 to change from a clearly
an issue the examining agent(s) has permissible method of accounting. The
placed in suspense at the time the Form district director will also consent to the
3115 is filed.
filing of a Form 3115 to change from an
(b) A taxpayer requesting a impermissible method of accounting
change under this 90-day window must where the impermissible method was
provide a copy of the Form 3115 to the adopted subsequent to the years under
examining agent(s) at the same time it examination. The question of whether
files the original Form 3115 with the the method of accounting from which
national office. The Form 3115 must the taxpayer is changing is permissible
contain the name(s) and telephone num­ or was adopted subsequent to the years
ber(s) of the examining agent(s). The under examination may be referred to
taxpayer must attach to the Form 3115 a the national office as a request for

15

technical advice under the provisions of
Rev. Proc. 97–2 (or any successor).
(b) A taxpayer requesting a
change with the consent of the district
director must attach to the Form 3115 a
statement from the district director con­
senting to the taxpayer filing the Form
3115. The taxpayer must provide a copy
of the Form 3115 to the district director
at the same time it files the original of
that form with the national office. The
Form 3115 must contain the name(s)
and telephone number(s) of the examin­
ing agent(s).
.02 Taxpayer before an appeals of­
fice. A taxpayer that is before an appeals
office with respect to any income tax
issue may request a change in account­
ing method if the accounting method to
be changed is not an issue under consid­
eration by the appeals office. The tax­
payer must attach to the Form 3115 a
separate statement signed by the tax­
payer certifying that, to the best of the
taxpayer’s knowledge, the same method
of accounting is not an issue under
consideration by the appeals office. The
taxpayer must provide a copy of the
Form 3115 to the appeals officer at the
same time it files the original Form
3115 with the national office. The Form
3115 must contain the name and tele­
phone number of the appeals officer.
.03 Taxpayer before a federal court.
A taxpayer that is before a federal court
with respect to any income tax issue
may request a change in accounting
method if the accounting method to be
changed is not an issue under consider­
ation by the federal court. The taxpayer
must attach to the Form 3115 a separate
statement signed by the taxpayer certify­
ing that, to the best of the taxpayer’s
knowledge, the same method of ac­
counting is not an issue under consider­
ation by the federal court. The taxpayer
must provide a copy of the Form 3115
to the counsel for the government at the
same time it files the original Form
3115 with the national office. The Form
3115 must contain the name and tele­
phone number of the counsel for the
government.
.04 Terms and conditions of change.
For a taxpayer under examination filing
a Form 3115 during the 90-day or
120-day window, or with the consent of
the district director, or for a taxpayer
before an appeals office or a federal
court, the terms and conditions are the
same as those provided in section 5.02
of this revenue procedure for taxpayers
not under examination.

SECTION 7. SECTION 481(a)
ADJUSTMENT PERIOD
.01 In general. The § 481(a) adjust­
ment periods are provided in sections
5.02(3) and 6.04 of this revenue proce­
dure.
.02 Short period as a separate tax­
able year. If the year of change, or any
taxable year during the § 481(a) adjust­
ment period, is a short taxable year, the
§ 481(a) adjustment must be included in
income as if that short taxable year were
a full 12-month taxable year. See Rev.
Rul. 78–165, 1978–1 C.B. 276.
Example 1. A calendar year taxpayer received
permission to change an accounting method begin­
ning with the 1997 calendar year. The § 481(a)
adjustment is $30,000 and the adjustment period is
four taxable years. The taxpayer subsequently
receives permission to change its annual account­
ing period to September 30, effective for the
taxable year ending September 30, 1998. The
taxpayer must include $7,500 of the § 481(a)
adjustment in gross income for the short period
from January 1, 1998, through September 30,
1998.
Example 2. Corporation X, a calendar year tax­
payer, received permission to change an account­
ing method beginning with the 1997 calendar year.
The § 481(a) adjustment is $30,000 and the
adjustment period is four taxable years. On July 1,
1999, 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 1997. Corporation X must include
$7,500 of the § 481(a) adjustment in gross income
for its short period income tax return for January
1, 1999, through June 30, 1999. In addition,
Corporation Z must include $7,500 of the
§ 481(a) adjustment in gross income in its income
tax return for calendar year 1999.

.03 Shortened or accelerated adjust­
ment periods. The four-year § 481(a)
adjustment period provided in sections
5.02(3) and 6.04 of this revenue proce­
dure will be shortened or accelerated in
the following situations.
(1) De minimis rule. A taxpayer
may elect to use a one-year adjustment
period in lieu of the § 481(a) adjust­
ment period otherwise provided by this
revenue procedure if the entire § 481(a)
adjustment is less than $25,000 (either
positive or negative). The taxpayer must
complete the appropriate line on the
Form 3115 to elect this de minimis rule.
(2) Cooperatives. A cooperative
within the meaning of § 1381(a) gener­
ally must take the entire amount of a
§ 481(a) adjustment into account in
computing taxable income for the year
of change. See Rev. Rul. 79–45, 1979–1
C.B. 284.
(3) Ceasing to engage in the trade
or business.
(a) In general. A taxpayer that
ceases to engage in a trade or business

or terminates its existence must take the
remaining balance of any § 481(a) ad­
justment relating to the trade or business
into account in computing taxable in­
come in the taxable year of the cessa­
tion or termination. Except as provided
in sections 7.03(3)(d) and (e) of this
revenue procedure, a taxpayer is treated
as ceasing to engage in a trade or
business if the operations of the trade or
business cease or substantially all the
assets of the trade or business are
transferred to another taxpayer. For this
purpose, ‘‘substantially all’’ has the
same meaning as in section 3.01 of Rev.
Proc. 77–37, 1977–2 C.B. 568.
(b) Examples of transactions
that are treated as the cessation of a
trade or business. The following is a
nonexclusive list of transactions that are
treated as the cessation of a trade or
business for purposes of accelerating the
§ 481(a) adjustment under this section
7.03(3):
(i) the trade or business to
which the § 481(a) adjustment relates is
incorporated;
(ii) the trade or business to
which the § 481(a) adjustment relates is
purchased by another taxpayer in a
transaction to which § 1060 applies;
(iii) the trade or business to
which the § 481(a) adjustment relates is
terminated or transferred pursuant to a
taxable liquidation;
(iv) a division of a corpora­
tion ceases to operate the trade or
business to which the § 481(a) adjust­
ment relates; or
(v) the assets of a trade or
business to which the § 481(a) adjust­
ment relates are contributed to a partner­
ship.
(c) Conversion to or from S cor­
poration status.
(i) In general. Except as pro­
vided in sections 7.03(3)(c)(ii) and (iii)
of this revenue procedure, no accelera­
tion of a § 481(a) adjustment is re­
quired under this section 7.03(3)(c)
when a C corporation elects to be
treated as an S corporation or an S
corporation terminates its S election and
is then treated as a C corporation.
(ii) 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, § 1363(d) requires an
increase in the taxpayer’s gross income
for the LIFO recapture amount (as de­
fined in § 1363(d)(3)) for the taxable
year preceding the year of change (the

16

taxpayer’s last taxable year as a C
corporation), and a corresponding ad­
justment 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 tax­
able year as a C corporation as provided
in § 1363(d)(2). Any corresponding ba­
sis adjustment is taken into account in
computing the § 481(a) adjustment (if
any) that results upon the discontinuance
of the LIFO method by the corporation.
(iii) 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, the
remaining balance of any positive
§ 481(a) adjustment must be included 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 taxpay­
er’s last taxable year as a C corporation
as provided in § 1363(d)(2), unless the
taxpayer is required to take the remain­
ing 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(3) of this rev­
enue procedure.
(d) Certain transfers to which
§ 381(a) applies. No acceleration of the
§ 481(a) adjustment is required under
this section 7.03(3) when a taxpayer
transfers substantially all the assets of
the trade or business that gave rise to
the § 481(a) adjustment to another tax­
payer in a transfer to which § 381(a)
applies and the accounting method (the
change to which gave rise to the
§ 481(a) adjustment) is a tax attribute
that is carried over and used by the
acquiring corporation immediately after
the transfer pursuant to § 381(c). 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.
(e) Certain transfers pursuant to
§ 351 within a consolidated group.
(i) In general. No acceleration
of the § 481(a) adjustment is required
under this section 7.03(3) when one
member of an affiliated group filing a
consolidated return transfers substan­
tially all the assets of the trade or

business that gave rise to the § 481(a)
adjustment to another member of the
same consolidated group in an exchange
qualifying under § 351 and the trans­
feree member adopts and uses the same
method of accounting (the change to
which gave rise to the § 481(a) adjust­
ment) used by the transferor member.
The transferor member must continue to
take the § 481(a) adjustment into ac­
count pursuant to the terms and condi­
tions set forth in its Consent Agreement
(as provided in section 8.11 of this
revenue procedure). The transferor
member must take into account activi­
ties of the transferee member (or any
successor) in determining whether accel­
eration of the § 481(a) adjustment is
required. For example, except as pro­
vided in the following sentence, the
transferor member must take any re­
maining § 481(a) adjustment into ac­
count 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) adjust­
ment relates. The § 481(a) adjustment is
not accelerated when the transferee
member engages in a transaction de­
scribed in section 7.03(3)(d) or section
7.03(3)(e)(i) of this revenue procedure.
(ii) Exception. The provisions
of section 7.03(3)(e)(i) of this revenue
procedure cease to apply and the
transferor member must take any re­
maining balance of the § 481(a) adjust­
ment into account in the taxable year
immediately preceding any of the fol­
lowing: (A) the taxable year the
transferor member ceases to be a mem­
ber of the group; (B) the taxable year
any transferee member owning substan­
tially all the assets of the trade or
business which gave rise to the § 481(a)
adjustment ceases to be a member of the
group; or (C) a separate return year of
the common parent of the group. In
applying the preceding sentence, the
rules of paragraphs (j)(2), (j)(5), and
(j)(6) of § 1.1502–13 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 af­
ter acquisition of such assets. For ex­
ample, the transferor member is not
required to accelerate the § 481(a) ad­
justment 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 cor­

poration (A) is a member of the same
group as the transferor member, and (B)
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.
SECTION 8. GENERAL
APPLICATION PROCEDURES
.01 Application—Service discretion.
The Service reserves the right to decline
to process any Form 3115 filed under
this revenue procedure in situations in
which it would not be in the best
interest of sound tax administration to
permit the requested change. In this
regard, the Service will consider
whether the change in method of accounting would clearly and directly frus­
trate compliance efforts of the Service
in administering the income tax laws.
.02 Terms and conditions—Service
discretion. Except as specifically provided in other published guidance, a
change in method of accounting filed
under this revenue procedure, if granted,
must be made pursuant to the terms and
conditions provided in this revenue procedure. Notwithstanding this general
rule, the Service may determine that,
based on the unique facts of a particular
case and in the interest of sound tax
administration, terms and conditions that
differ from those provided in this revenue procedure are more appropriate for
a change made under this revenue procedure.
.03 Compliance with provisions. If a
taxpayer changes its method of accounting without authorization or without
complying with all the provisions of this
revenue procedure, the taxpayer has initiated a change in method of accounting
without obtaining the consent of the
Commissioner required by § 446(e).
Upon examination, a taxpayer that has
initiated an unauthorized change in
method of accounting may be required
to effect the change in an earlier or later
taxable year and may be denied the
benefit of spreading the § 481(a) adjustment over the number of taxable years
otherwise prescribed by this revenue
procedure.
.04 Facts and circumstances considered in processing applications. In processing an application for a change in
method of accounting, the Service will
consider all the facts and circumstances,
including:

17

(1) if the method of accounting
requested is consistent with the Code,
regulations, revenue rulings, revenue
procedures, and decisions of the United
States Supreme Court;
(2) if the use of the method of
accounting requested will clearly reflect
income;
(3) if the present method of accounting clearly reflects income;
(4) the need for consistency in the
accounting area (see section 2.07 of this
revenue procedure);
(5) the taxpayer’s reason(s) for the
change;
(6) the tax effect of the § 481(a)
adjustment;
(7) if the taxpayer’s books and
records and financial statements will
conform to the proposed method of
accounting; and
(8) if the taxpayer previously re­
quested to change its method of ac­
counting for the same item but did not
make the change.
.05 Specific rules in connection with
prior applications.
(1) Method change made.
(a) In general. If the taxpayer
changed its method of accounting for
the same item within the four taxable
years preceding the year of change
(under either an automatic change procedure or a procedure requiring advance
consent), a copy of the application for
the previous change, the signed Consent
Agreement (see section 8.11 of this
revenue procedure) if applicable, and
any other correspondence from the Ser­
vice, must be attached to the Form 3115
filed for the subsequent taxable year. An
explanation must be furnished stating
why the taxpayer is again requesting to
change its method of accounting for the
same item. The Service will consider the
explanation in determining whether the
subsequent request for change in method
of accounting will be granted.
(b) LIFO inventory method
change. If a taxpayer previously received permission from the Commis­
sioner to change from the LIFO inven­
tory method, the Commissioner will not
consent to the taxpayer’s readoption of
the LIFO inventory method for five
taxable years (beginning with the taxable year the taxpayer changed from the
LIFO inventory method), in the absence
of a showing of unusual and compelling
circumstances.
(2) Method change not made. If a
prior Form 3115 (filed under either an
automatic change procedure or a proce­
dure requiring advance consent) was

withdrawn, not perfected, or denied, or
if a Consent Agreement (see section
8.11 of this revenue procedure) was sent
to the taxpayer but was not signed and
returned to the Service, or if the change
was not made, and the taxpayer files
another application to change the same
item for a year of change within four
taxable years of the prior application, a
copy of the earlier application (that is,
the first Form 3115), together with any
correspondence from the Service, must
be attached to the Form 3115 filed for
the subsequent taxable year. An explana­
tion must be furnished stating why the
earlier application was withdrawn or not
perfected, or why the change was not
made. The Service will consider the
explanation in determining whether the
subsequent request for change in method
of accounting will be granted.
.06 Where to file. A taxpayer, other
than an exempt organization, applying
for a change in accounting method pur­
suant to this revenue procedure must
complete and file a current Form 3115,
together with the appropriate user fee,
with the Commissioner of Internal Rev­
enue, Attention: CC:DOM:CORP:T, P.O.
Box 7604, Benjamin Franklin Station,
Washington, DC 20044. An exempt or­
ganization must complete and file a
current Form 3115, together with the
appropriate user fee, with the Assistant
Commissioner (Employee Plans and Ex­
empt Organizations), Attention: E:EO,
P.O. Box 120, Benjamin Franklin Sta­
tion, Washington, DC 20044.
.07 User fee. Taxpayers are required
to pay user fees for requests for changes
in accounting method made under this
revenue procedure. Rev. Proc. 97–1 (or
any successor) contains the schedule of
user fees and provides guidance for
administering the user fee requirements.
.08 Signature requirements. The Form
3115 must be signed by, or on behalf of,
the taxpayer requesting the change by
an individual with authority to bind the
taxpayer in such matters. For example,
an officer must sign on behalf of a
corporation, a general partner on behalf
of a state law partnership, a membermanager on behalf of a limited liability
company, a trustee on behalf of a trust,
or an individual taxpayer on behalf of a
sole proprietorship. If the taxpayer is a
member of a consolidated group, a Form
3115 submitted on behalf of the tax­
payer must be signed by a duly autho­
rized officer of the common parent. See
the signature requirements set forth in
the General Instructions attached to a
current Form 3115 regarding those who

are to sign. If an agent is authorized to
represent the taxpayer before the Ser­
vice, receive the original or a copy of
the correspondence concerning the re­
quest, or perform any other act(s) re­
garding the Form 3115 filed on behalf
of the taxpayer, a power of attorney
reflecting such authorization(s) must be
attached to the Form 3115. A taxpayer’s
representative without a power of attor­
ney to represent the taxpayer as indi­
cated in this section will not be given
any information regarding the Form
3115.
.09 Incomplete Form 3115—21 day
rule. If the Service receives a Form
3115 that is not properly completed in
accordance with the instructions on the
Form 3115 and the provisions of this
revenue procedure, or if supplemental
information is needed, the Service will
notify the taxpayer. The notification will
specify the information that needs to be
provided, and the taxpayer will be per­
mitted 21 days from the date of the
notification to furnish the necessary in­
formation. The Service reserves the right
to impose shorter reply periods if subse­
quent requests for additional information
are made. If the required information is
not submitted to the Service within the
reply period, the Form 3115 will not be
processed. An additional period, not to
exceed 15 days, to furnish information
may be granted to a taxpayer. The
request for an extension of time must be
made in writing and submitted within
the 21-day period. If the extension re­
quest is denied, there is no right of
appeal.
.10 Conference in the national office.
The taxpayer must complete the appro­
priate line on the Form 3115 to request
a conference of right if an adverse
response is contemplated by the Service.
If the taxpayer does not complete the
appropriate line on the Form 3115 or
request a conference in a later written
communication, the Service will pre­
sume that the taxpayer does not desire a
conference. If requested, a conference
will be arranged in the national office
prior to the Service’s formal reply to the
taxpayer’s Form 3115. For taxpayers
other than exempt organizations, see
section 11 of Rev. Proc. 97–1 (or any
successor). For exempt organizations,
see section 12 of Rev. Proc. 97–4,
1997–1 I.R.B. 96 (or any successor).
.11 Consent Agreement.
(1) In general. Unless otherwise
specifically provided, the Commissioner’s permission to change a taxpayer’s
method of accounting for a specific

18

taxable year will be set forth in a ruling
letter (original and one copy) from the
national office that identifies the item or
items being changed, the § 481(a) ad­
justment (if any), and the terms and
conditions under which the change is to
be effected for the taxable year specified
in the ruling letter. See §§ 1.446–1(e)(3)
and 1.481–4. If the taxpayer agrees to
the terms and conditions contained in
the ruling letter, the taxpayer must sign
and date the agreement copy of the
ruling letter in the appropriate space.
The signed copy of the ruling letter will
constitute an agreement (Consent Agree­
ment) within the meaning of § 481(c)
and as required by § 1.481–4(b). The
Consent Agreement must be returned to
the address provided in the Consent
Agreement within 45 days of the date of
its issuance. In addition, a copy of the
Consent Agreement must be attached to
the taxpayer’s income tax return for the
year of change. If a taxpayer signs and
returns the Consent Agreement, the tax­
payer must implement the change in
accounting method in accordance with
the terms and conditions provided in the
Consent Agreement and this revenue
procedure. See § 1.481–4(b).
(2) Signature requirements. The
Consent Agreement must be signed by,
or on behalf of, the taxpayer making the
request. The individual signing the Con­
sent Agreement must have the authority
to bind the taxpayer in such matters (in
general, it may not be signed by the
taxpayer’s representative).
(3) 45-day requirement. If the tax­
payer does not return the signed Con­
sent Agreement within 45 days of the
date of its issuance, the ruling letter
granting permission for the change will
be null and void.
(4) Change in method of account­
ing not made by the taxpayer.
(a) If the taxpayer decides not to
effect the change in accordance with the
terms and conditions of the ruling letter,
the taxpayer must so indicate by return­
ing the ruling letter and the unsigned
Consent Agreement to the national of­
fice addressed as follows: Commissioner
of Internal Revenue, Attention: [Indi­
vidual whose name and symbols appear
at the top of the Consent Agreement],
P.O. Box 14095, Benjamin Franklin Sta­
tion, Washington, DC 20044, with an
explanation of why the accounting
method change will not be effected.
(b) If the taxpayer disagrees
with the terms and conditions of the
ruling letter, the taxpayer must express
the disagreement together with an expla­

nation of the reason(s) within the 45-day
period set forth above. The Service will
consider the reason(s) for disagreement
and notify the taxpayer whether the
original ruling letter will be modified. If
the ruling letter is not modified, the
taxpayer will be notified and given 15
days from the date of the notification
either to accept the original ruling letter
by signing and returning the Consent
Agreement, or to reject the change by
returning the ruling letter and the un­
signed Consent Agreement to the ad­
dress in section 8.11(4)(a) of this rev­
enue procedure.
.12 Two or more trades or busi­
nesses.
(1) In general. Sections 1.446–
1(d)(1) and (2) permit different methods
of accounting to be used for each trade
or business of a taxpayer. However, in
considering whether to grant an account­
ing method change for one of the trades
or businesses of a taxpayer, the Service
will consider whether the change will
result in the creation or shifting of
profits or losses between the trades or
businesses, and whether the proposed
method will clearly reflect the taxpay­
er’s income as required under § 446
and the regulations thereunder.
(2) Information required. A tax­
payer requesting a change in method of
accounting for one of its trades or
businesses must identify all other trades
or businesses by name and the method
of accounting used by each trade or
business for the particular item that is
the subject of the requested change in
method of accounting.
(3) Separate Forms 3115 required.
If a taxpayer operates two or more
separate and distinct trades or businesses
and has kept separable books and
records (and employed different meth­
ods of accounting for the businesses), a
Form 3115 and separate user fee is
required for each separate trade or busi­
ness should the taxpayer desire to
change the methods of accounting of the
separate trades or businesses.
.13 Consolidated groups.
(1) In general. Section 1.1502–
17(a) permits separate methods of ac­
counting to be used by each member of
a consolidated group, subject to the
provisions of § 446 and the regulations
thereunder. However, in considering
whether to grant accounting method
changes to group members, the Service
will consider the effects of the changes
on the income of the group. A common
parent requesting a change in method of
accounting on behalf of a member of

the consolidated group must submit any
information necessary to permit the Ser­
vice to evaluate the effect of the re­
quested change on the income of the
consolidated group. Except as provided
in section 8.13(2) of this revenue proce­
dure, a Form 3115 and separate user fee
must be submitted for each member of
the group for which a change in ac­
counting method is requested pursuant
to this revenue procedure.
(2) Separate Forms 3115 not re­
quired. A common parent may request
an identical accounting method change
on a single Form 3115 on behalf of
more than one member of a consoli­
dated group at a reduced user fee. To
qualify, the taxpayers in the consolidated
group must be members of the same
affiliated group under § 1504(a) that
join in the filing of a consolidated tax
return, and they must be requesting to
change from the identical present
method of accounting to the identical
proposed method of accounting. All as­
pects of the requested accounting
method change, including the present
and proposed methods, the underlying
facts, and the authority for the request,
must be identical, except for the
§ 481(a) adjustment. See section
15.07(1) and (3) of Rev. Proc. 97–1 at
48–49 (or any successor) for the infor­
mation required to be submitted with the
Form 3115.
.14 Applicability of Rev. Proc. 97–1
and Rev Proc. 97–4. Rev. Proc. 97–1
and Rev. Proc. 97–4 (or any successors),
respectively, are applicable to a Form
3115 filed under this revenue procedure,
unless specifically excluded or overrid­
den by other published guidance (in­
cluding the special procedures in this
document).
.15 Effect on other offices of the
Service. The provisions of this revenue
procedure are not intended to preclude
an appropriate representative of the Ser­
vice (for example, an appeals official
with delegated settlement authority)
from settling a particular taxpayer’s case
involving an accounting method issue
by agreeing to terms and conditions that
differ from those provided in this rev­
enue procedure when it is in the best
interest of the government to do so.
SECTION 9. AUDIT PROTECTION
FOR TAXABLE YEARS PRIOR TO
YEAR OF CHANGE
.01 In general. Except as provided in
section 9.02 of this revenue procedure,
when a taxpayer timely files a Form

19

3115 pursuant to this revenue procedure,
the Service will not require the taxpayer
to change its method of accounting for
the same item for a taxable year prior to
the year of change.
.02 Exceptions.
(1) Change not made or made im­
properly. The Service may change a
taxpayer’s method of accounting for
prior taxable years if (a) the taxpayer
withdraws or does not perfect its re­
quest, (b) the national office denies the
request, (c) the taxpayer declines to
implement the change in method of
accounting pursuant to the terms and
conditions of the Consent Agreement
and this revenue procedure, (d) the
taxpayer implements the change but
does not comply with the terms and
conditions contained in the Consent
Agreement and this revenue procedure,
or (e) the national office modifies or
revokes the ruling retroactively because
there has been a misstatement or an
omission of material facts. See section
10.02(2) of this revenue procedure.
(2) Change in sub-method. The
Service may change a taxpayer’s meth­
od of accounting for prior taxable years
if the taxpayer is changing a sub-method
of accounting within the method. For
example, an examining agent may pro­
pose to terminate the taxpayer’s use of
the LIFO inventory method during a
prior taxable year even though the tax­
payer changes its method of valuing
increments in the current year.
(3) Prior year Service-initiated
change. The Service may make adjust­
ments to the taxpayer’s returns for the
same item for taxable years prior to the
requested year of change to reflect a
prior year Service-initiated change.
(4) Criminal investigation. The
Service may change a taxpayer’s
method of accounting for the same item
for taxable years prior to the requested
year of change if there is any pending
or future criminal investigation or pro­
ceeding concerning (a) directly or indi­
rectly, any issue relating to the taxpay­
er’s federal tax liability for any taxable
year prior to the year of change, or (b)
the possibility of false or fraudulent
statements made by the taxpayer with
respect to any issue relating to its
federal tax liability for any taxable year
prior to the year of change.
SECTION 10. EFFECT OF CONSENT
.01 In general. A taxpayer that
changes to a method of accounting
pursuant to this revenue procedure may

be required to change or modify that
method of accounting for the following
reasons:
(1) the enactment of legislation;
(2) a decision of the United States
Supreme Court;
(3) the issuance of temporary or
final regulations;
(4) the issuance of a revenue rul­
ing, revenue procedure, notice, or other
statement published in the Internal Rev­
enue Bulletin;
(5) the issuance of written notice
to the taxpayer that the change in
method of accounting was granted in
error or is not in accord with the current
views of the Service; or
(6) a change in the material facts
on which the consent was based.
.02 Retroactive change or modifica­
tion. Except in rare or unusual circum­
stances, if a taxpayer that changes its
method of accounting under this revenue
procedure is subsequently required un­
der this section 10 to change or modify
that method of accounting, the required
change or modification will not be ap­
plied retroactively provided that:
(1) the taxpayer complied with all
the applicable provisions of the Consent
Agreement and this revenue procedure;
(2) there has been no misstatement
or omission of material facts;
(3) there has been no change in the
material facts on which the consent was
based;
(4) there has been no change in the
applicable law; and
(5) the taxpayer to whom consent
was granted acted in good faith in
relying on the consent, and applying the
change or modification retroactively
would be to the taxpayer’s detriment.
SECTION 11. REVIEW BY DISTRICT
DIRECTOR
.01 In general. The district director
must apply a ruling obtained under this
revenue procedure in determining the
taxpayer’s liability unless the district
director recommends that the ruling
should be modified or revoked. The
district director will ascertain if:
(1) the representations on which
the ruling was based reflect an accurate
statement of the material facts;
(2) the amount of the § 481(a)
adjustment was properly determined;
(3) the change in method of ac­
counting was implemented as proposed
in accordance with the terms and condi­
tions of the Consent Agreement and this
revenue procedure;

(4) there has been any change in
the material facts on which the ruling
was based during the period the method
of accounting was used; and
(5) there has been any change in
the applicable law during the period the
method of accounting was used.
.02 National office consideration. If
the district director recommends that the
ruling (other than the amount of the
§ 481(a) adjustment) should be modi­
fied or revoked, the district director will
forward the matter to the national office
for consideration before any further ac­
tion is taken. Such a referral to the
national office will be treated as a
request for technical advice, and the
provisions of Rev. Proc. 97–2 (or any
successor) will be followed.

year of change) in Rev. Proc. 92–20,
and (b) the applicable § 481(a) adjust­
ment period and the authority therefor.
(3) Open window periods under
Rev. Proc. 92–20. If, on May 15, 1997,
a taxpayer is within a window period
provided in Rev. Proc. 92–20, the tax­
payer may file a Form 3115 under this
revenue procedure during the remainder
of that window period and apply the
terms and conditions in Rev. Proc.
92–20 for the applicable window period.
The taxpayer must affirmatively state in
an attachment to the Form 3115 (a) that
it agrees to apply the terms and condi­
tions of the applicable window period in
Rev. Proc. 92–20, and (b) the applicable
§ 481(a) adjustment period and the au­
thority therefor.

SECTION 12. INQUIRIES

SECTION 14. EFFECT ON OTHER
DOCUMENTS

Inquiries regarding this revenue pro­
cedure may be addressed to the Com­
missioner of Internal Revenue, Atten­
tion: CC:DOM:IT&A, 1111 Constitution
Avenue, NW, Washington, DC 20224.
SECTION 13. EFFECTIVE DATE
.01 In general. Except as provided in
section 13.02(1) of this revenue proce­
dure, this revenue procedure is effective
for Forms 3115 filed on or after May
15, 1997.
.02 Transition rules.
(1) Currently pending Forms 3115.
If a taxpayer filed a Form 3115 under
Rev. Proc. 92–20 for a taxable year
ending on or after May 15, 1997, and
the Form 3115 is pending with the
national office on May 15, 1997, the
taxpayer may apply the terms and con­
ditions (exclusive of the year of change)
in this revenue procedure. However, the
national office will apply the terms and
conditions in Rev. Proc. 92–20, unless,
prior to the later of June 15, 1997, or
the issuance of the letter ruling granting
or denying consent to the change, the
taxpayer notifies the national office that
it requests to apply the terms and condi­
tions (exclusive of the year of change)
in this revenue procedure.
(2) New Forms 3115. Except as
provided in section 13.02(3) of this
revenue procedure, a taxpayer that files
a Form 3115 under this revenue proce­
dure on or before December 31, 1997,
may apply the terms and conditions
(exclusive of the year of change) in Rev.
Proc. 92–20. The taxpayer must affirma­
tively state in an attachment to the Form
3115 (a) that it requests to apply the
terms and conditions (exclusive of the

20

.01 Rev. Proc. 92–20. Except as pro­
vided in section 14.02 of this revenue
procedure, Rev. Proc. 92–20 is modified
and, as modified, is superseded.
.02 Rev. Proc. 93–48 (notional prin­
cipal contracts). The Designated A
method provisions of Rev. Proc. 92–20
continue to apply to changes in method
of accounting for notional principal con­
tracts made pursuant to the requirements
of § 1.446–3 and Rev. Proc. 93–48.
.03 Notice 89–15 (long-term con­
tracts). Q&A 13 of Notice 89–15,
1989–1 C.B. 634, 637, regarding
changes in method of accounting for longterm contracts under § 460, is mod­
ified and, as modified, is superseded.
SECTION 15. PAPERWORK
REDUCTION ACT
The collections of information con­
tained in this revenue procedure have
been reviewed and approved by the
Office of Management and Budget in
accordance with the Paperwork Reduc­
tion Act (44 U.S.C. 3507) under control
number 1545–1541.
An agency may not conduct or spon­
sor, and a person is not required to
respond to, a collection of information
unless the collection of information dis­
plays a valid OMB control number.
The collections of information in this
revenue procedure are in sections 6, 8,
and 13. This information is required to
determine whether the taxpayer’s pro­
posed method of accounting is permis­
sible. This information will be used by
the Service to determine whether to
consent to a change in accounting
method and the appropriate terms and

conditions for the change. The collec­
tions of information are required to
obtain consent to the accounting method
change. The likely respondents are the
following: individuals, farms, business
or other for-profit organizations, non­
profit institutions, and small businesses
or organizations.
The estimated total annual reporting
burden is 9,633 hours.
The estimated annual burden per re­
spondent varies from 1/4 of an hour to 5

hours, depending on individual circum­
stances, with an estimated average of
31/4 hours. The estimated number of
respondents is 3,000.
The estimated annual frequency of
responses is occasional.
Books or records relating to a collec­
tion of information must be retained as
long as their contents may become ma­
terial in the administration of any inter­
nal revenue law. Generally tax returns
and tax return information are confiden­

21

tial, as required by 26 U.S.C. 6103.
DRAFTING INFORMATION
The author of this revenue procedure
is Robert A. Testoff of the Office of
Assistant Chief Counsel (Income Tax
and Accounting). For further information
regarding this revenue procedure, con­
tact Mr. Testoff on (202) 622–4990 (not
a toll-free call).