Rp 2002-19

26 CFR 601.204: Changes in accounting periods
and methods of accounting.
(Also Part I, §§ 446, 481; 1.446–1, 1.481–1, 1.481–
4.)

Rev. Proc. 2002–19
SECTION 1. PURPOSE
This revenue procedure modifies Rev.
Proc. 97–27 (1997–1 C.B. 680) which
provides procedures under which taxpayers may obtain the advance consent of the
Commissioner of Internal Revenue to
change a method of accounting. In addition, this revenue procedure modifies
Rev. Proc. 2002–9 (2002–3 I.R.B. 327)
which provides procedures for taxpayers
within the scope of that revenue procedure to obtain automatic consent to
change a method of accounting.
The changes to Rev. Proc. 97–27 and
Rev. Proc. 2002–9 include:
(1) allowing a taxpayer to change its
method of accounting prospectively, without audit protection, if the method to be
changed is an issue pending for a taxable
year under examination or an issue under
consideration by either an appeals office
or a federal court;
(2) providing that, in the case of
changes in method of accounting that
result in a negative (i.e., taxpayerfavorable) § 481(a) adjustment, the entire
amount of the adjustment will be taken
into account in the year of change; and
(3) certain other conforming and clarifying changes.
For a discussion of the policy reasons
for certain of the modifications provided
by this revenue procedure, see Announcement 2002–37 (2002–13 I.R.B. 703)
SECTION 2. CHANGES
.01 Changes to BACKGROUND Sections. Section 2.01(3) in each of Rev.
Proc. 97–27 and Rev. Proc. 2002–9 is
deleted.

.02 Changes to § 481(a) Spread
Period for Negative § 481(a) Adjustments.
(1) Section 5.02(3)(a) of Rev. Proc.
97–27 is modified to read as follows:
“(a) In general. Except as otherwise provided in sections 5.02(3)(b) and
7.03 of this revenue procedure, the
§ 481(a) adjustment period is four taxable
years for a net positive adjustment for an
accounting method change, and one taxable year for a net negative adjustment
for an accounting method change.”
(2) Section 5.04(1) of Rev. Proc.
2002–9 is modified to read as follows:
“(1) In general. Except as otherwise
provided in section 5.04(3) or the
APPENDIX of this revenue procedure,
the § 481(a) adjustment period is four
taxable years for a net positive adjustment
for an accounting method change, and
one taxable year for a net negative adjustment for an accounting method change.”
(3) The second sentence in both
Example 1 and Example 2 in section 7.02
of Rev. Proc. 97–27 and section 5.04(2)
of Rev. Proc. 2002–9 is modified to read
as follows:
“The net § 481(a) adjustment for this
method change is a positive adjustment of
$30,000 and the adjustment period is four
taxable years.”
(4) Section 7.03(1) of Rev. Proc.
97–27 and section 5.04(3)(a) of Rev.
Proc. 2002–9 are each modified to read as
follows:
“De minimis rule. A taxpayer may
elect to use a one-year adjustment period
in lieu of the § 481(a) adjustment period
otherwise provided by this revenue procedure for positive adjustments if the net
§ 481(a) adjustment for the change is less
than $25,000. The taxpayer must complete the appropriate line on the Form
3115 to elect this de minimis rule.”
(5) Section 4.01(3) of the APPENDIX of Rev. Proc. 2002–9 (relating to the
§ 481(a) adjustment for certain uniform
capitalization methods used by resellers

X’s 1997 Ending Inventory:
Beginning Inventory (With UNICAP costs)
1997 Increment
1997 § 481(a) Adjustment
Total 1997 Ending Inventory

2002-13 I.R.B.

and reseller-producers) is modified to
read as follows:
“(3) Section 481(a) adjustment. Beginning with the year of change, a taxpayer
changing its method of accounting for
costs pursuant to sections 4.01(a)(1)(i),
4.01(1)(a)(iii), or 4.01(1)(a)(iv) of this
APPENDIX generally must take any
applicable net positive § 481(a) adjustment for such change into account ratably
over the same number of taxable years,
not to exceed four, that the taxpayer used
its former method of accounting. A taxpayer changing its method of accounting
for costs pursuant to sections
4.01(1)(a)(ii), 4.01(1)(a)(v), or
4.01(1)(a)(vi) of this APPENDIX generally must take any applicable net positive
§ adjustment for such change into account
ratably over four taxable years. See section 5.04(3) of this revenue procedure for
exceptions to this general rule.”
(6) Section 4.01(5) of the APPENDIX of Rev. Proc. 2002–9, which provides an example illustrating the change
to and from a UNICAP method of
accounting for small resellers and formerly small resellers is modified to read
as follows:
“(5) Example.
***
Because X satisfies the small reseller
exception for 1997, X may change voluntarily from the UNICAP method to a permissible non-UNICAP inventory capitalization method under section 4.01 of this
APPENDIX. To reflect the removal of the
additional § 263A costs from the cost of
its 1997 beginning inventory, X must
compute a corresponding § 481(a) adjustment, which is a negative $100,000
($1,200,000 - $1,300,000). The entire
amount of this negative § 481(a) adjustment is included in the computation of
X’s taxable income for 1997. In addition,
X must include $20,000 of the unamortized 1995 § 481(a) adjustment in 1997
taxable income.

$1,300,000
100,000
<100,000>
$1,300,000

696

April 1, 2002

X’s Unamortized 1995 § 481(a) Adjustment:
Unamortized 1995 § 481(a) Adjustment—12/31/96
Amount Included in 1997 Taxable Income
Unamortized 1995 § 481(a) Adjustment—12/31/97

$40,000
<20,000>
$20,000

X’s Unamortized 1997 § 481(a) Adjustment:
1997 § 481(a) Adjustment
Amount Included in 1997 Taxable Income
Unamortized 1997 § 481(a) Adjustment—12/31/97

$<100,000>
100,000
$
0

X also satisfies the small reseller exception for 1998 and, therefore, is not required to return to the UNICAP method for 1998.
X, however, must include $20,000 of the unamortized 1995 positive § 481(a) adjustment in its 1998 taxable income.
X’s 1998 Ending Inventory:
Beginning Inventory (Without UNICAP costs)
1998 Increment
Total 1998 Ending Inventory

$1,300,000
100,000
$1,400,000

X’s Unamortized 1995 § 481(a) Adjustment:
Unamortized 1995 § 481(a) Adjustment—12/31/97
Amount Included in 1998 Taxable Income
Unamortized 1995 § 481(a) Adjustment—12/31/98

$20,000
<20,000>
$
0

In 1999, X fails to satisfy the small reseller exception and, therefore, must return to the UNICAP method as provided under
section 4.01 of this APPENDIX. X changes to the simplified resale method without a historic absorption ratio election under
§ 1.263A–3(d)(3). Assume that X must capitalize $120,000 of additional § 263A costs to the cost of its 1999 beginning inventory
because of this change in inventory method. Because X used a non-UNICAP for two taxable years prior to 1999, the § 481 spread
period for the positive § 481(a) adjustment is two years. Therefore, X must include one-half of the § 481(a) adjustment ($60,000)
when computing taxable income for 1999 and 2000. Assume that X must add $10,000 of additional § 263A costs to the cost of its
1999 ending inventory because of the $100,000 increment for 1999.
X’s 1999 Ending Inventory:
Beginning Inventory (Without UNICAP costs)
1999 Increment

$1,400,000
100,000

Additional § 263A costs in Beginning Inventory
Additional § 263A costs in 1999 Increment
Total 1999 Ending Inventory

120,000
10,000
$1,630,000

X’s Unamortized 1999 § 481(a) adjustment:
1999 § 481(a) Adjustment
Amount Included in 1999 Taxable Income
Unamortized 1999 § 481(a) Adjustment—12/31/99

April 1, 2002

697

$120,000
<60,000>
$60,000

2002-13 I.R.B.

Because X fails to satisfy the small reseller exception for 2000, X must continue using the UNICAP method for its inventory
costs. Furthermore, X is required to include $60,000 of the unamortized 1999 positive § 481(a) adjustment in 2000 taxable income.
Assume that X is required to add $10,000 of additional § 263A costs to the cost of its 2000 ending inventory because of the
$100,000 increment for 2000.
X’s 2000 Ending Inventory:
Beginning Inventory (With UNICAP costs)
2000 Increment

$1,630,000
100,000

Additional § 263A Costs in 2000 Increment
Total 2000 Ending Inventory

10,000
$1,740,000

X’s Unamortized 1999 § 481(a) Adjustment:
Unamortized 1999 § 481(a) Adjustment—12/31/99

$60,000

Amount Included in 2000 Taxable Income
Unamortized 1999 § 481(a) Adjustment—12/31/00

<60,000>
$
0

.03 Changes to Scope Restrictions for
Taxpayers Under Examination, or Before
an Area Appeals Office or a Federal
Court.
(1) Taxpayers under examination.
(a) Section 4.02(2) of Rev. Proc.
97–27 (relating to the situations in which
Rev. Proc. 97–27 does not apply) is modified to read as follows:
“(2) Under examination. If the taxpayer is under examination, except as
provided in sections 6.01(2) (90-day window), 6.01(3) (120-day window), 6.01(4)
(director consent), and 6.01(5) (issue
pending) of this revenue procedure.”
(b) Section 6.01 of Rev. Proc.
97–27 (relating to procedures for taxpayers under examination) is modified as follows:
“(1) In general. A taxpayer that is
under examination may not file a Form
3115 to request a change in accounting
method under this revenue procedure
except as provided in sections 6.01(2)
(90-day window), 6.01(3) (120-day window), 6.01(4) (director consent), and
6.01(5) (issue pending). A taxpayer that
files a Form 3115 beyond the time periods provided in the 90-day and 120-day
windows will not be granted an extension
of time to file under § 301.9100, except
in unusual and compelling circumstances.”
***
“(5) Issue Pending. (a) A taxpayer
that is under examination with respect to
any income tax issue may request to

2002-13 I.R.B.

change a method of accounting if the
method of accounting to be changed is an
issue pending for any taxable year under
examination. However, the audit protection provisions of section 9.01 of this revenue procedure do not apply to a taxpayer
changing its method of accounting under
this section 6.01(5). For this purpose, an
issue is pending for taxable years under
examination if the Service has given the
taxpayer written notification indicating an
adjustment is being made or will be proposed with respect to the taxpayer’s
method of accounting. This notification
normally will occur after the Service has
gathered information sufficient to determine that an adjustment is appropriate
and justified, although the exact amount
of the adjustment may not yet be determined.
(b) A taxpayer that requests to
change a method of accounting under this
section 6.01(5) must provide a copy of
the Form 3115 to the examining agent(s)
at the same time it files the original Form
3115 with the national office. The Form
3115 must contain the name(s) and telephone number(s) of the examining
agent(s). In order to assist in processing
an application under this section 6.01(5),
the taxpayer should type or legibly write
“Issue pending” on the Form 3115.”
(c) Section 4.02(1) of Rev. Proc.
2002–9 (relating to situations in which
Rev. Proc. 2002–9 does not apply) is
modified to read as follows:

698

“(1) Under examination. If, on the
date the taxpayer would otherwise file a
copy of the application with the national
office, the taxpayer is under examination
(as provided in section 3.08 of this revenue procedure), except as provided in
sections 6.03(2) (90-day window),
6.03(3) (120-day window), 6.03(4) (director consent), 6.03(5) (changes lacking
audit protection), and 6.03(6) (issue pending) of this revenue procedure.”
(d) Section 6.03 of Rev. Proc.
2002–9 (relating to procedures for taxpayers under examination) is modified as
follows:
“(1) In general. Except as otherwise
provided in the APPENDIX of this revenue procedure (see, for example, section
1.01 of the APPENDIX of this revenue
procedure), a taxpayer that is under
examination may file an application to
change a method of accounting under section 6 of this revenue procedure only if
the taxpayer is within the provisions of
section 6.03(2) (90-day window), 6.03(3)
(120-day window), 6.03(4) (director consent), 6.03(5) (changes lacking audit protection), or 6.03(6) (issue pending) of this
revenue procedure. A taxpayer that files
an application beyond the time periods
provided in the 90-day and 120-day windows is not eligible for the automatic
extension of time and will not be granted
an extension of time to file under
§ 301.9100, except in unusual and compelling circumstances.”
***

April 1, 2002

“(6) Issue Pending. (a) A taxpayer
that is under examination with respect to
any income tax issue may request to
change a method of accounting if the
method of accounting to be changed is an
issue pending for any taxable year under
examination. However, the audit protection provisions of section 7.01 of this revenue procedure do not apply to a taxpayer
changing its method of accounting under
this section 6.03(6). For this purpose, an
issue is pending for taxable years under
examination if the Service has given the
taxpayer written notification indicating an
adjustment is being made or will be proposed with respect to the taxpayer’s
method of accounting. This notification
normally will occur after the Service has
gathered information sufficient to determine that an adjustment is appropriate
and justified, although the exact amount
of the adjustment may not yet be determined.
(b) A taxpayer that requests to
change a method of accounting under this
section 6.03(6) must provide a copy of
the Form 3115 to the examining agent(s)
at the same time it files the original Form
3115 with the national office. The Form
3115 must contain the name(s) and telephone number(s) of the examining
agent(s). In order to assist in processing
an application under this section 6.03(6),
the taxpayer should type or legibly write
“Issue pending” on the Form 3115.”
(2) Taxpayers before an appeals
office.
(a) Section 4.02(3) of Rev. Proc.
97–27 (relating to the situations in which
Rev. Proc. 97–27 does not apply) is
deleted.
(b) Section 6.02 of Rev. Proc.
97–27 (relating to procedures for taxpayers before an appeals office) is modified
as follows:
“.02 Taxpayer before an appeals
office. A taxpayer otherwise within the
scope of this revenue procedure that is
before an appeals office with respect to
any income tax issue may request a
change in accounting method. However,
the audit protection provisions of section
9.01 of this revenue procedure do not
apply if the accounting method to be
changed is an issue under consideration
by the appeals office. A taxpayer that
requests to change a method of accounting under this section 6.02 must provide a

April 1, 2002

copy of the Form 3115 to the appeals
officer at the time it files the original
Form 3115 with the national office. The
Form 3115 must contain the name(s) and
telephone number(s) of the appeals officer(s). In order to assist in processing an
application under this section 6.02, the
taxpayer should type or legibly write
“Issue under consideration” on the Form
3115.”
(c) Section 4.02(2) of Rev. Proc.
2002–9 (relating to situations to which
Rev. Proc. 2002–9 does not apply) is
deleted.
(d) Section 6.04 of Rev. Proc.
2002–9 (relating to procedures for taxpayers before an appeals office) is modified to read as follows:
“.04 Taxpayer before an appeals
office. A taxpayer otherwise within the
scope of this revenue procedure that is
before an appeals office with respect to
any income tax issue may request a
change in accounting method. However,
the audit protection provisions of section
7.01 of this revenue procedure do not
apply if the accounting method to be
changed is an issue under consideration
by the appeals office. A taxpayer that
requests to change a method of accounting under this section 6.04 must provide a
copy of the Form 3115 to the appeals
officer at the time it files the original
Form 3115 with the national office. The
Form 3115 must contain the name(s) and
telephone number(s) of the appeals officer(s). In order to assist in processing an
application under this section 6.04, the
taxpayer should type or legibly write
“Issue under consideration” on the Form
3115.”
(3) Taxpayers before a federal court.
(a) Section 4.02(4) of Rev. Proc.
97–27 (relating to the situations in which
Rev. Proc. 97–27 does not apply) is
deleted.
(b) Section 6.03 of Rev. Proc.
97–27 (relating to procedures for taxpayers before a federal court) is modified to
read as follows:
“.03 Taxpayer before a federal court.
A taxpayer otherwise within the scope of
this revenue procedure that is before a
federal court with respect to any income
tax issue may request a change in
accounting method. However, the audit
protection provisions of section 9.01 of
this revenue procedure do not apply if the

699

accounting method to be changed is an
issue under consideration by the federal
court. A taxpayer that requests to change
a method of accounting under this section
6.03 must provide a copy of the Form
3115 to the counsel(s) for the government
at the time it files the original Form 3115
with the national office. The Form 3115
must contain the name(s) and telephone
number(s) of the counsel(s) for the government. In order to assist in processing
an application under this section 6.03, the
taxpayer should type or legibly write
“Issue under consideration” on the Form
3115.”
(c) Section 4.02(3) of Rev. Proc.
2002–9 (relating to situations to which
Rev. Proc. 2002–9 does not apply) is
deleted.
(d) Section 6.05 of Rev. Proc.
2002–9 (relating to procedures for taxpayers before a federal court) is modified
to read as follows:
.05 Taxpayer before a federal court. A
taxpayer otherwise within the scope of
this revenue procedure that is before a
federal court with respect to any income
tax issue may request a change in
accounting method. However, the audit
protection provisions of section 7.01 of
this revenue procedure do not apply if the
accounting method to be changed is an
issue under consideration by the federal
court. A taxpayer that requests to change
a method of accounting under this section
6.05 must provide a copy of the Form
3115 to the counsel(s) for the government
at the time it files the original Form 3115
with the national office. The Form 3115
must contain the name(s) and telephone
number(s) of the counsel(s) for the government. In order to assist in processing
an application under this section 6.05, the
taxpayer should type or legibly write
“Issue under consideration” on the Form
3115.”
.04 Notional Principal Contracts. Section 14.02 of Rev. Proc. 97–27 (relating
to Designated A treatment for changes in
method of accounting for notional principal contracts) is deleted.
SECTION 3. EFFECT ON OTHER
DOCUMENTS
Rev. Proc. 97–27 and Rev. Proc.
2002–9 are modified and amplified.

2002-13 I.R.B.

SECTION 4. EFFECTIVE DATE
.01 In General. Except as otherwise
provided in sections 4.02 and 4.03 of this
revenue procedure, this revenue procedure is effective for taxable years ending
on or after December 31, 2001.
.02 Changes to Scope Restrictions of
Rev. Proc. 97–27. Notwithstanding section 4.01 of this revenue procedure, the
changes to the scope restrictions of Rev.
Proc. 97–27 provided in section
2.03(1)(a) and (b), 2.03(2)(a) and (b), and
2.03(3)(a) and (b) of this revenue procedure are effective for taxable years ending
on or after March 14, 2002.
.03 Notional Principal Contracts. Notwithstanding section 4.01 of this revenue
procedure, the deletion of section 14.02
of Rev. Proc. 97–27 is effective for Forms
3115 pending with the national office on
March 14, 2002.
.04 Transition Rules.
(1) Applications Under Rev. Proc.
2002–9.
(a) If a taxpayer has filed its federal income tax return on or before April
15, 2002, for a taxable year ending on or
after December 31, 2001, and wants to
change a method of accounting for such
taxable year under Rev. Proc. 2002–9 for
an issue pending at examination, or an
issue under consideration by an area
office or by a federal court, without audit
protection, as permitted under this revenue procedure, then the taxpayer must
comply with the requirements of this section 4.04(1)(a). The taxpayer must complete and file a Form 3115 in duplicate.
The original must be attached to the taxpayer’s amended federal income tax
return for the year of change. The
amended return must be filed no later
than September 10, 2002. A copy of the
Form 3115 must be filed with the national
office (see section 6.02(6) of Rev. Proc.
2002–9 for the address) no later than
when the taxpayer’s amended return is
filed.
(b) If a taxpayer has applied to
change a method of accounting under
Rev. Proc. 2002–9 for a taxable year ending on or after December 31, 2001, by
filing an application with its federal

2002-13 I.R.B.

income tax return on or before April 15,
2002, such change in method of accounting results in a net negative § 481(a)
adjustment, and the taxpayer wants to
apply the one-year § 481(a) adjustment
period of this revenue procedure to the
change, then the taxpayer must comply
with the requirements of this section
4.04(1)(b). The taxpayer must complete
and file a revised Form 3115 in duplicate,
reflecting the one-year § 481(a) adjustment period. The original must be
attached to the taxpayer’s amended federal income tax return for the year of
change. The amended return must be filed
no later than September 10, 2002. A copy
of the revised Form 3115 must be filed
with the national office (see section
6.02(6) of Rev. Proc. 2002–9 for the
address) no later than when the taxpayer’s
amended return is filed. Both the original
and the copy of the application filed with
the national office should be labeled
“Substitute Application under Rev. Proc.
2002–19.”
(c) If a taxpayer has filed a copy
of an application to change a method of
accounting under Rev. Proc. 2002–9 for a
taxable year ending on or after December
31, 2001, with the national office on or
before April 15, 2002, but has not filed its
federal income tax return with the original application attached by April 15,
2002, such change in method of accounting results in a net negative § 481(a)
adjustment, and the taxpayer wants to
apply the one-year § 481(a) adjustment
period of this revenue procedure to the
change, then the taxpayer must comply
with the requirements of this section
4.04(1)(c). The taxpayer must complete
and file a revised Form 3115 in duplicate,
reflecting the one-year § 481(a) adjustment period. The revised original Form
3115 must be attached to the taxpayer’s
timely filed federal income tax return for
the year of change. The revised copy of
the Form 3115 must be filed with the
national office (see section 6.02(6) of
Rev. Proc. 2002–9 for the address) no
later than when the taxpayer’s original
federal income tax return is filed. The
copy of the application filed with the

700

national office should be labeled “Substitute Application under Rev. Proc. 2002–
19.”
(d) If a taxpayer has filed an original application and/or a copy of an application to change a method of accounting
under Rev. Proc. 2002–9 for a taxable
year ending on or after December 31,
2001, with the national office on or
before April 15, 2002, such change in
method of accounting results in a net
negative § 481(a) adjustment, and the taxpayer does not file revised applications
under either section 4.04(1)(b) or (c) of
this revenue procedure (whichever
applies), then the four-year § 481(a)
adjustment period of Rev. Proc. 2002–9
(prior to its modification by this revenue
procedure) will apply to the change.
(2) Applications Under Rev. Proc.
97–27. In the case of an application to
change a method of accounting for a taxable year ending on or after December
31, 2001, filed under Rev. Proc. 97–27,
and pending with the national office on
March 14, 2002, the § 481(a) adjustment
period for a net negative § 481(a) adjustment for the change will be one taxable
year. In such a case, the national office
will require the taxpayer to make appropriate modifications to the application or
ruling request to comply with the applicable provisions of this revenue procedure. However, if such a taxpayer does
not want a one-year § 481(a) adjustment
period to apply, the taxpayer must notify
the national office prior to the later of
April 30, 2002, or the issuance of the letter ruling granting or denying consent to
the change. In such a case, the § 481(a)
adjustment period rules of Rev. Proc.
97–27, prior to its modification by this
revenue procedure, will apply.
DRAFTING INFORMATION
The principal author of this revenue
procedure is Grant D. Anderson of the
Office of Associate Chief Counsel
(Income Tax and Accounting). For further
information concerning this revenue procedure, please contact Mr. Anderson at
(202) 622–4970 (not a toll-free call).

April 1, 2002