Rp 97--27

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Revenue Procedure 97-27
Rev. Proc. 97-27; 1997-1 C.B. 680; 1997 IRB LEXIS 168; 1997-21 I.R.B. 11
January 1997
[*1]
APPLICABLE SECTIONS:
26 CFR 601.204: Changes in accounting periods and in methods of accounting. (Also Part 1, §§ 446, 481; 1.446-1,
1.481-1, 1.481-4.)
TEXT:

TABLE OF CONTENTS
PAGE
SECTION 1. PURPOSE
.01 In general
.02 Voluntary compliance
.03 Significant changes
SECTION 2. BACKGROUND
.01 Change in method of accounting defined
.02 Securing permission to make a
method change
.03 Terms and conditions of a
method change
.04 No retroactive method change
.05 Method change with a § 481 (a)
adjustment
(1) Need for
adjustment
(2) Adjustment
period
.06 Method change using a cut- off
method
.07 Consistency and clear reflection of income
.08 Separate trades or businesses.
.09 Penalties
.10 Change made as part of an
examination
SECTION 3. DEFINITIONS
.01 Taxpayer
(1) In general
(2) Consolidated
group

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Rev. Proc. 97-27; 1997-1 C.B. 680;
1997 IRB LEXIS 168, *; 1997-21 I.R.B. 11

TABLE OF CONTENTS
PAGE
.02 Filed
.03 Mailed
.04 Timely performance of acts
.05f 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 UFO inventory method
SECTION 4. SCOPE
.01 Applicability
.02 Inapplicability
(1) Automatic
change
(2) Under examination
(3) Before an
appeals office
(4) Before a
federal court
(5) Consolidated
group member
(6) Partnerships
and S corporations
SECTION 5. PROCEDURES FOR TAXPAYERS
NOT UNDER EXAMINATION
.01 Submission of application
(1) In general
(2) Limited relief
for late application
.02 Terms and conditions of change
(1) In general
(2) Year of
change
(3) Section 481
(a) adjustment

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Rev. Proc. 97-27; 1997-1 C.B. 680;
1997 IRB LEXIS 168, *; 1997-21 I.R.B. 11

TABLE OF CONTENTS
PAGE
period
(4) NOL carryback limitation
for taxpayer
subject to criminal investigation
(5) Change
treated as initiated by the taxpayer
SECTION 6. PROCEDURES FOR TAXPAYERS
UNDER EXAMINATION, BEFORE AN APPEALS
OFFICE, OR BEFORE A FEDERAL COURT
.01 Taxpayer
685
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
SECTION 8. GENERAL APPLICATION PROCEDURES
.01 Application-Service discretion
.02 Terms and conditions-Service
.03 Compliance with provisions
.04 Facts and circumstances considered in processing applications
.05 Specific rules in connection
with prior applications
(1) Method

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Rev. Proc. 97-27; 1997-1 C.B. 680;
1997 IRB LEXIS 168, *; 1997-21 I.R.B. 11

TABLE OF CONTENTS
PAGE
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
(2) Separate
Forms 3115 not
required
.14 Applicability of Rev. Proc. 97-1
and Rev Proc. 97-4
.15 Effect on other offices of the
Service
SECTION 9. AUDIT PROTEC689
TION 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

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Rev. Proc. 97-27; 1997-1 C.B. 680;
1997 IRB LEXIS 168, *; 1997-21 I.R.B. 11

TABLE OF CONTENTS
PAGE
(4) Criminal
investigation
SECTION 10. EFFECT OF CONSENT
.01 In general
.02 Retroactive change or modification
SECTION 11. REVIEW BY DISTRICT DIRECTOR
.01 In general
.02 National office consideration
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)
SECTION 15. PAPERWORK REDUCTION ACT

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SECTION 1. PURPOSE
.01 In [*2] general. This revenue procedure 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 consent of the Commissioner of Internal Revenue to change a method of accounting for federal income tax purposes. This revenue procedure modifies and
supersedes Rev. Proc. 92-20, 1992-1 C.B. 685.
.02 Voluntary compliance.
(1) This revenue procedure provides incentives to encourage prompt voluntary compliance with proper tax accounting principles. Under this approach, 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 accounting method before the Internal Revenue Service contacts the taxpayer for examination. 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 recognizes
that this approach may not be appropriate [*3] 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 governing
statute or regulation, the Service may, in other published guidance, provide 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

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Rev. Proc. 97-27; 1997-1 C.B. 680;
1997 IRB LEXIS 168, *; 1997-21 I.R.B. 11
change. See, for example, Rev. Proc. 93-48, 1993-2 C.B. 580 (regarding 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, 1992-1 C.B. 685 have
been simplified or eliminated. For example, the Category A, Category B, Designated A, and Designated B classifications have been eliminated, the 90-day window at the beginning of an examination has been eliminated, the 30-day
window for taxpayers under continuous examination has been expanded to 90 days and the number of consecutive
months the taxpayer is required to be under examination has been [*4] 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 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 eliminated.
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 material 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 relevant question is
whether the practice permanently changes the amount of the taxpayer's lifetime income. If the practice does not permanently affect the taxpayer's lifetime income, but does or could change the taxable [*5] 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 accounting may exist under this definition without a pattern of consistent treatment of an
item, a method of accounting is not adopted in most instances without consistent treatment. The treatment of a material
item in the same way in determining the gross income or deductions in two or more consecutively filed tax returns
(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 consecutive 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 income tax return(s). See Rev. Rul. 90-38, 1990-1 C.B. 57.
(3) A change in the characterization of an item may also constitute a change in method of accounting if the change
has [*6] the effect of shifting income from one period to another. For example, a change from treating an item as
income to treating the item as a deposit is a change in method of accounting. See Rev. Proc. 91-31, 1991-1 C.B. 566.
(4) A change in method of accounting 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 otherwise
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) authorizes the Commissioner to prescribe
administrative procedures setting forth the limitations, terms, [*7] 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
Commissioner 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) adjustment period.
.04 No retroactive method change. Unless specifically authorized by the Commissioner, a taxpayer may not request, or otherwise make, a retroactive change in method of accounting, regardless of whether the change is from a
permissible or an impermissible method. See generally Rev. Rul. 90-38, 1990-1 C.B. 57.
.05 Method change with a § 481 (a) adjustment.

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Rev. Proc. 97-27; 1997-1 C.B. 680;
1997 IRB LEXIS 168, *; 1997-21 I.R.B. 11
(1) Need for adjustment. Section 481 (a) requires those adjustments necessary 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 [*8] 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 payable) 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 required
by § 481 (a) may be taken into account in determining taxable income in the manner and subject to the conditions
agreed to by the Commissioner and the taxpayer. Generally, in the absence of such an agreement, the § 481 (a) adjustment is taken into account completely in the year of change, subject to § 481 (b) which limits the amount of tax where
the § 481 (a) adjustment is substantial. However, under the Commissioner's [*9] authority in § 1.446-1 (e) (3) (ii) to
prescribe terms and conditions for changes in method of accounting, this revenue procedure provides 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 providing appropriate incentives for voluntary compliance.
.06 Method change using a cut-off method. The Commissioner may determine 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 beginning 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 applies 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). Because [*10] 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 necessary.
.07 Consistency and clear reflection of income. Methods of accounting should clearly reflect income on a continuing basis, and the Service exercises its discretion under §§ 446 (e) and 481 (c) in a manner that generally minimizes
distortions of income across taxable 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 accounting may be used for each trade or business, provided the method of accounting
used for each trade or business clearly reflects the overall income of the taxpayer as well as that of each particular trade
or business. No trade or business is separate and distinct unless a complete [*11] 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 different methods of accounting, there is a creation or shifting of profits or losses between the trades or businesses of the taxpayer (for example, through inventory
adjustments, sales, purchases, or expenses) so that income of the taxpayer is not clearly reflected, the trades or businesses of the taxpayer are not separate and distinct.
.09 Penalties. Any otherwise applicable penalty for the failure of a taxpayer to change its method of accounting (for
example, the accuracy-related penalty under § 6662 or the fraud penalty under § 6663) may be imposed if the taxpayer

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Rev. Proc. 97-27; 1997-1 C.B. 680;
1997 IRB LEXIS 168, *; 1997-21 I.R.B. 11
does not timely file a request to change a method of accounting. See § 446 (f). Additionally, the taxpayer'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 examination. Section 446 (b) and § 1.446-1 (b) (1) provide that if a taxpayer
[*12] does not regularly employ a method of accounting 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 reflect income. If a taxpayer
under examination 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 taxable year under examination with a one-year § 481 (a) adjustment period.
SECTION 3. DEFINITIONS
.01 Taxpayer.
(1) In general. The term "taxpayer" 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 purposes of (a) sections 3.07 (1). 3.08 (1), 4.02 (2) and 6.01 (taxpayer under examination), (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 document required to be filed under this revenue
procedure [*13] is filed on the date it is mailed to the proper address (or an address similar enough to complete delivery). If the form, statement, or other document is not mailed (or the date it is mailed cannot be reasonably determined), 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 mailing 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
section 8.11 of this revenue procedure), or holding a conference) falls on a Saturday, Sunday, or legal holiday. The performance 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 effective,
that is, the first taxable year the new method is to be used, even if no [*14] 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) adjustment 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) adjustment is taken into account ratably over
the number of taxable years in the adjustment period. The applicable adjustment periods are set forth in sections 5.02 (3)
and 6.04 of this revenue procedure.
.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 Service
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;

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Rev. Proc. 97-27; 1997-1 C.B. 680;
1997 IRB LEXIS 168, *; 1997-21 I.R.B. 11

(ii)

in a fully agreed [*15] case, on the earliest of the date the taxpayer executes a waiver of restrictions
on assessment or acceptance of overassessment (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 partially
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 Examination, the date the taxpayer files a petition 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 representative) is notified by Appeals (or otherwise)
that the case has been referred to Examination for reconsideration.
(2) Partnerships and S corporations subject to TEFRA. For an entity (including a limited liability company), treated
as a partnership or [*16] an S corporation for federal income tax purposes, that is subject to the TEFRA unified audit and litigation provisions for partnerships and S corporations, an examination 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 Service accepts the partnership or S corporation 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 shareholders 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 notified 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 revenue 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 [*17] unified audit and litigation
provisions 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 taxpayer'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, information
document request (IDR), or notification of proposed adjustments or income tax examination changes) from the examining agent(s) specifically citing the treatment of the item as an issue under consideration. For example, a taxpayer's
method of pooling under the dollar-value, last-in first-out (LIFO) inventory method is an issue under consideration 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 identifies 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 [*18] supporting the costs included in inventoriable costs, but it is not an issue
under consideration as a result of an IDR that requests documentation supporting the amount of cost of goods sold reported on the return. The question of whether a method of accounting is an issue under consideration 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).

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Rev. Proc. 97-27; 1997-1 C.B. 680;
1997 IRB LEXIS 168, *; 1997-21 I.R.B. 11
(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 taxpayer'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 [*19] in writing to the taxpayer by the counsel
for the government.
.09 Change within the LIFO inventory 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 specifically provided in other published guidance or in section 4.02 of this revenue
procedure, this revenue procedure applies to all taxpayers requesting the Commissioner's consent to change a method of
accounting for federal income tax purposes.
.02 Inapplicability. This revenue procedure does not apply in the following situations:

(1)

Automatic change. If the change in method of accounting is required to be made pursuant to a published
automatic change procedure. Taxpayers 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 [*20] examination. If the taxpayer 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;

(5)

Consolidated group member. A corporation that is (or was formerly) a member of a consolidated group
is under examination, before an appeals office, or before a federal court (for purposes of sections 4.02
(2), (3), and (4) of this revenue procedure) if the consolidated 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; or

(6)

Partnerships and S corporations. For an entity (including a limited liability company) treated as a partnership or an S corporation for federal income tax purposes, if [*21] the entity's accounting method
to be changed is an issue under consideration in an examination of a partner, member, or shareholder'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.

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Rev. Proc. 97-27; 1997-1 C.B. 680;
1997 IRB LEXIS 168, *; 1997-21 I.R.B. 11
SECTION 5. PROCEDURES FOR TAXPAYERS NOT UNDER EXAMINATION
.01 Submission of application.
(1) In general.
(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 return for the year
of change.
(2) Limited relief for late application. A taxpayer that fails to file a Form 3115 during the year of change as provided in section 5.01 (1) of this revenue procedure will not be granted an extension of time to file under § 301.9100 of
the Procedure and Administration Regulations, except in unusual and compelling circumstances. [*22] See §
301.9100-3T (c) (2) (i).
.02 Terms and conditions of change.
(1) In general. Except as specifically provided in other published guidance, an accounting method change filed under this revenue procedure, if granted, must be made pursuant to the terms and conditions provided in this revenue procedure (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 procedure. However, Rev. Proc. 93-48 (regarding notional principal contracts) is an
example of other published guidance that provides for a different year of change.
(3) Section 481 (a) adjustment period.
(a) In general. Except as provided in sections 5.02 (3) (b) and 7.03 of this revenue procedure, the § 481 (a) adjustment period for positive and negative § 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, Announcement 91-173, 1991-47 I.R.B. 29 (regarding LIFO taxpayers changing their method of accounting for certain bulk bargain purchases of inventory to comply with Hamilton Industries, Inc. v. Commissioner, 97
T.C. 120 (1991)) [*23] is an example of other published guidance that requires a § 481 (a) adjustment.
(4) NOL carryback limitation for taxpayer subject to criminal investigation. 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 investigation or proceeding concerning (a) directly 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.
SECTION 6. PROCEDURES FOR TAXPAYERS UNDER EXAMINATION, BEFORE AN APPEALS OFFICE, OR
BEFORE A FEDERAL COURT
.01 Taxpayer under examination.
(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 [*24] (3)
(120-day window), and 6.01 (4) (district director consent) of this revenue procedure. 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.
(2) 90-day window period.
(a) A taxpayer may file a Form 3115 to request a change in accounting method during the first 90 days of any taxable year ("90-day window") if the taxpayer has been under examination for at least 12 consecutive months as of the first
day of the taxable year. This 90-day window is not available if the method of accounting the taxpayer is requesting to

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Rev. Proc. 97-27; 1997-1 C.B. 680;
1997 IRB LEXIS 168, *; 1997-21 I.R.B. 11
change is an issue under consideration at the time the Form 3115 is filed or is an issue the examining agent(s) has
placed in suspense at the time the Form 3115 is filed.
(b) A taxpayer requesting a change under this 90-day window 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). The taxpayer must attach to the Form 3115 a separate
statement [*25] signed by the taxpayer 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 suspense 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 following
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 in suspense at the time
the Form 3115 is filed.
(b) A taxpayer requesting a change under this 120-day window must provide a copy of the Form 3115 to the examining agent(s) for any examination that is in process 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). The taxpayer must
attach to the Form 3115 a separate statement signed by the taxpayer certifying that, to the best of the taxpayer's
knowledge, the same method [*26] of accounting is not an issue under consideration or an issue placed in suspense
by the examining agent(s).
(4) Consent of district director.
(a) A taxpayer under examination may request to change an accounting method under this revenue procedure if the
district director consents to the filing of the request. The district director will consent to the filing of the Form 3115 unless, in the opinion of the district director, the method of accounting to be changed would ordinarily be included as an
item of adjustment in the year(s) for which the taxpayer is under examination. For example, the district director will
consent to the filing of a Form 3115 to change from a clearly permissible method of accounting. The district director
will also consent to the filing of a Form 3115 to change from an impermissible method of accounting where the impermissible method was adopted subsequent to the years under examination. The question of whether the method of accounting from which the taxpayer is changing is permissible or was adopted subsequent to the years under examination
may be referred to the national office as a request for technical advice under the provisions of Rev. Proc. 97-2, 1997-1
C.B. 486 (or any [*27] 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 consenting 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 examining agent(s).
.02 Taxpayer before an appeals office. A taxpayer that is before an appeals office 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 consideration by the appeals office. The taxpayer must attach to the Form 3115 a separate statement signed by the taxpayer
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 telephone number of
the appeals officer.
.03 Taxpayer before a federal court. [*28] 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 consideration by the federal court. The taxpayer must attach to the Form 3115 a separate statement signed by the taxpayer
certifying that, to the best of the taxpayer's knowledge, the same method of accounting is not an issue under consideration 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 telephone
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,

Page 13
Rev. Proc. 97-27; 1997-1 C.B. 680;
1997 IRB LEXIS 168, *; 1997-21 I.R.B. 11
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) adjustment periods are provided in sections 5.02 (3) and 6.04
procedure.

[*29] of this revenue

.02 Short period as a separate taxable year. If the year of change, or any taxable year during the § 481 (a) adjustment 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 beginning 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 accounting 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 accounting
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 [*30] 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 adjustment periods. The four-year § 481 (a) adjustment period provided in sections
5.02 (3) and 6.04 of this revenue procedure 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) adjustment
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) generally 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

[*31] 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) adjustment relating to the trade or business into account in computing taxable income
in the taxable year of the cessation 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;

Page 14
Rev. Proc. 97-27; 1997-1 C.B. 680;
1997 IRB LEXIS 168, *; 1997-21 I.R.B. 11
(ii)

the trade or business to which the § 481 (a) adjustment relates is purchased by another taxpayer in a
transaction to which [*32] § 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 corporation ceases to operate the trade or business to which the § 481 (a) adjustment relates; or

(v)

the assets of a trade or business to which the § 481 (a) adjustment relates are contributed to a partnership.

(c) Conversion to or from S corporation status.
(i) In general. Except as provided in sections 7.03 (3) (c) (ii) and (iii) of this revenue procedure, no acceleration of
a § 481 (a) adjustment is required 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 defined in § 1363 (d) (3)) for the taxable year preceding the
year of change (the taxpayer's last taxable year as a C corporation), and a corresponding adjustment [*33] 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 taxable year as a C corporation as provided in § 1363 (d) (2). Any corresponding basis 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 taxpayer's last taxable year as a C corporation as provided in § 1363
(d) (2), unless the taxpayer is required to take the remaining balance of the § 481 (a) adjustment [*34] into account
in the last taxable year as a C corporation under another acceleration provision in section 7.03 (3) of this revenue 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 taxpayer 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 substantially all the assets of the trade or business that gave
rise to the § 481 (a) adjustment to another [*35] member of the same consolidated group in an exchange qualifying
under § 351 and the transferee member adopts and uses the same method of accounting (the change to which gave rise
to the § 481 (a) adjustment) used by the transferor member. The transferor member must continue to take the § 481 (a)
adjustment into account pursuant to the terms and conditions set forth in its Consent Agreement (as provided in section
8.11 of this revenue procedure). The transferor member must take into account activities of the transferee member (or
any successor) in determining whether acceleration of the § 481 (a) adjustment is required. For example, except as provided in the following sentence, the transferor member must take any remaining § 481 (a) adjustment into account in
computing taxable income in the taxable year in which the transferee member ceases to engage in the trade or business

Page 15
Rev. Proc. 97-27; 1997-1 C.B. 680;
1997 IRB LEXIS 168, *; 1997-21 I.R.B. 11
to which the § 481 (a) adjustment relates. The § 481 (a) adjustment is not accelerated when the transferee member engages in a transaction described 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 [*36] apply and the
transferor member must take any remaining balance of the § 481 (a) adjustment into account in the taxable year immediately preceding any of the following: (A) the taxable year the transferor member ceases to be a member of the group;
(B) the taxable year any transferee member owning substantially 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 after acquisition of such assets. For example, the transferor member is not
required to accelerate the § 481 (a) adjustment 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 corporation (A) is a member of the same group as
the [*37] 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 frustrate 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 [*38] 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:

(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

(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;

[*39] the present method of accounting clearly reflects income;

Page 16
Rev. Proc. 97-27; 1997-1 C.B. 680;
1997 IRB LEXIS 168, *; 1997-21 I.R.B. 11

(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 requested to change its method of accounting 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 Service, 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 [*40] 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 Commissioner to change
from the LIFO inventory 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 procedure 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 [*41] year. An explanation 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 pursuant to this revenue procedure must complete and file a current Form 3115, together with the appropriate user fee, with
the Commissioner of Internal Revenue, Attention: CC:DOM:CORP:T, P.O. Box 7604, Benjamin Franklin Station,
Washington, DC 20044. An exempt organization must complete and file a current Form 3115, together with the appropriate user fee, with the Assistant Commissioner (Employee Plans and Exempt Organizations), Attention: E:EO, P.O.
Box 120, Benjamin Franklin Station, 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, 1997-1 C.B. 433 (or any successor) contains the schedule of user fees and provides guidance for administering the user fee requirements.
.08 Signature requirements. The [*42] 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 member-manager 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 taxpayer must be signed by a duly
authorized 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 Service, receive the original or a copy of the correspondence concerning the request, or perform any other act(s) regarding
the Form 3115 filed on behalf of the taxpayer, a power of attorney reflecting such authorization(s) must be attached to

Page 17
Rev. Proc. 97-27; 1997-1 C.B. 680;
1997 IRB LEXIS 168, *; 1997-21 I.R.B. 11
the Form 3115. A taxpayer's representative without a power of attorney to represent the taxpayer as indicated in this
section will not be given any information regarding [*43] 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 permitted 21 days from the date of the notification to furnish the necessary information. The Service reserves the right to impose shorter reply periods if subsequent 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 request is
denied, there is no right of appeal.
.10 Conference in the national office. The taxpayer must complete the appropriate line on the Form 3115 to request
a conference of right if an adverse response is contemplated by the Service. If the taxpayer [*44] does not complete
the appropriate line on the Form 3115 or request a conference in a later written communication, the Service will presume 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, 1997-1 C.B. 433 (or any successor). For exempt organizations, see section 12 of Rev. Proc.
97-4, 1997-1 C.B. 519, 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 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) adjustment (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. [*45] The signed copy of the ruling letter will
constitute an agreement (Consent Agreement) 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 taxpayer 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 Consent 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 taxpayer does not return the signed Consent 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 accounting not made by the taxpayer.
(a) [*46] 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 returning the ruling letter and the unsigned Consent Agreement to the national office addressed as follows: Commissioner of Internal Revenue, Attention: [Individual whose name and symbols
appear at the top of the Consent Agreement]. P.O. Box 14095, Benjamin Franklin Station, 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 explanation 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 unsigned Consent Agreement to the address in section 8.11 (4) (a) [*47] of this revenue procedure.
.12 Two or more trades or businesses.

Page 18
Rev. Proc. 97-27; 1997-1 C.B. 680;
1997 IRB LEXIS 168, *; 1997-21 I.R.B. 11
(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 accounting 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 taxpayer's income as
required under § 446 and the regulations thereunder.
(2) Information required. A taxpayer 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 methods of accounting for the businesses), a Form 3115
and separate user fee is required for each separate trade [*48] or business 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 accounting 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 Service to evaluate the effect of the requested change on the
income of the consolidated group. Except as provided in section 8.13 (2) of this revenue procedure, a Form 3115 and
separate user fee must be submitted for each member of the group for which a change in accounting method is requested
pursuant to this revenue procedure.
(2) Separate Forms 3115 not required. A common parent may request an identical accounting method change on a
single Form 3115 on behalf of more than one member of a consolidated group at a reduced user fee. To qualify, [*49]
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 aspects 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, 1997-1 C.B. 433 at 48-49 (or any successor)
for the information required to be submitted with the Form 3115.
.14 Applicability of Rev. Proc. 97-1, 1997-1 C.B. 433 and Rev Proc. 97-4, 1997-1 C.B. 519. Rev. Proc. 97-1,
1997-1 C.B. 433 and Rev. Proc. 97-4, 1997-1 C.B. 519 (or any successors), respectively, are applicable to a Form 3115
filed under this revenue procedure, unless specifically excluded or overridden by other published guidance (including
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 Service (for example, an appeals official with delegated settlement authority) from
settling [*50] a particular taxpayer's case involving an accounting method issue by agreeing to terms and conditions
that differ from those provided in this revenue 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
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 improperly. The Service may change a taxpayer's method of accounting for prior
taxable years if (a) the taxpayer withdraws or does not perfect its request, (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 [*51] retroactively because there has been a misstatement or an omission of material facts. See
section 10.02 (2) of this revenue procedure.

Page 19
Rev. Proc. 97-27; 1997-1 C.B. 680;
1997 IRB LEXIS 168, *; 1997-21 I.R.B. 11
(2) Change in sub-method. The Service may change a taxpayer's method 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 propose to
terminate the taxpayer's use of the LIFO inventory method during a prior taxable year even though the taxpayer changes
its method of valuing increments in the current year.
(3) Prior year Service-initiated change. The Service may make adjustments 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 proceeding
concerning (a) directly or indirectly, any issue relating to the taxpayer'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 [*52] 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 ruling, revenue procedure, notice, or other statement published in the Internal
Revenue 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 modification. Except in rare or unusual circumstances, if a taxpayer that changes its
method of accounting under this revenue procedure is subsequently required under this section 10 to change or modify
that method of accounting, the required change or modification will not be applied retroactively provided that:

(1)

the taxpayer complied
revenue procedure;

[*53] with all the applicable provisions of the Consent Agreement and this

(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

Page 20
Rev. Proc. 97-27; 1997-1 C.B. 680;
1997 IRB LEXIS 168, *; 1997-21 I.R.B. 11

(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 accounting was implemented as proposed in accordance with the terms and conditions 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.

[*54]

.02 National office consideration. If the district director recommends that the ruling (other than the amount of the §
481 (a) adjustment) should be modified or revoked, the district director will forward the matter to the national office for
consideration before any further action 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, 1997-1 C.B. 486 (or any successor) will be followed.
SECTION 12. INQUIRIES
Inquiries regarding this revenue procedure may be addressed to the Commissioner of Internal Revenue, Attention:
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 procedure, 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, 1992-1 C.B. 685 for a
taxable year ending on or after May 15, 1997, and the Form 3115 is pending with the national office on [*55] May
15, 1997, the taxpayer may apply the terms and conditions (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, 1992-1 C.B. 685, 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 conditions (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 procedure on or before December 31, 1997, may apply the terms and conditions (exclusive of
the year of change) in Rev. Proc. 92-20, 1992-1 C.B. 685. The taxpayer must affirmatively state in an attachment to the
Form 3115 (a) that it requests to apply the terms and conditions (exclusive of the year of change) in Rev. Proc. 92-20,
1992-1 C.B. 685, and (b) the applicable § 481 (a) adjustment period and the authority therefor.

Page 21
Rev. Proc. 97-27; 1997-1 C.B. 680;
1997 IRB LEXIS 168, *; 1997-21 I.R.B. 11
(3) Open window periods under Rev. Proc. 92-20, 1992-1 C.B. 685. If, on May 15, 1997, a taxpayer is within a
window period provided in Rev. Proc. 92-20, 1992-1 C.B. 685, the taxpayer may file a Form 3115 under this revenue
[*56] procedure during the remainder of that window period and apply the terms and conditions in Rev. Proc. 92-20,
1992-1 C.B. 685 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 conditions of the applicable window period in Rev. Proc. 92-20, 1992-1
C.B. 685, and (b) the applicable § 481 (a) adjustment period and the authority therefor.
SECTION 14. EFFECT ON OTHER DOCUMENTS
.01 Rev. Proc. 92-20, 1992-1 C.B. 685. Except as provided in section 14.02 of this revenue procedure, Rev. Proc.
92-20, 1992-1 C.B. 685 is modified and, as modified, is superseded.
.02 Rev. Proc. 93-48 (notional principal contracts). The Designated A method provisions of Rev. Proc. 92-20,
1992-1 C.B. 685 continue to apply to changes in method of accounting for notional principal contracts made pursuant to
the requirements of § 1.446-3 and Rev. Proc. 93-48.
.03 Notice 89-15, 1989-1 C.B. 634, 637 (long term contracts). Q&A 13 of Notice 89-15, 1989-1 C.B. 634, 637, regarding changes in method of accounting for long term contracts under § 460, is modified and, as modified, is superseded.
SECTION 15. PAPERWORK REDUCTION ACT
The collections of information contained in this revenue procedure have been reviewed and approved by the Office
of Management [*57] and Budget in accordance with the Paperwork Reduction Act (44 U.S.C. 3507) under control
number 1545-1541.
An agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless the collection of information displays 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 proposed method of accounting is permissible. 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 collections 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, nonprofit institutions, and
small businesses or organizations.
The estimated total annual reporting burden is 9,633 hours.
The estimated annual burden per respondent varies from 1/4 of an hour to 5 hours, depending on individual circumstances, with an estimated average of 31/4 hours. The estimated number of respondents is 3,000.
The estimated annual

[*58] frequency of responses is occasional.

Books or records relating to a collection of information must be retained as long as their contents may become material in the administration of any internal revenue law. Generally tax returns and tax return information are confidential,
as required by 26 U.S.C. 6103.