Accounting Method Changes Current and Future State American Bar Association Section of Taxation Tax Accounting Committee January 21, 2011 George Blaine Associate Chief Counsel (Income Tax & Accounting) Internal Revenue Service Moderator: Jack Donovan National Tax Department Ernst & Young LLP Washington, DC Panelists: Eric Lucas Attorney Advisor Office of Tax Policy Department of the Treasury John Moriarty Chief, Branch 1 (Income Tax & Accounting) Internal Revenue Service James Liechty Director Washington National Tax Services PricewaterhouseCoopers LLP The information contained herein is of general nature and based on authorities that are subject to change. Applicability to specific situations is to be determined through consultation with your tax advisor. The government panelists did not participate in the preparation of this handout. 1
Rev. Proc. 2011-14 Updated procedures for change in method of accounting requests Section 446(e) and its accompanying regulations generally require taxpayers to secure the consent of the Commissioner before changing a method of accounting (generally via the filing of a Form 3115, Application for Change in Accounting Method). To obtain the consent of the Commissioner for non-automatic method changes, a taxpayer must follow the rules outlined in Rev. Proc. 97-27. Previously, for certain prescribed automatic accounting method changes, a taxpayer who complied with all the applicable provisions of Rev. Proc. 2008-52, as amplified, clarified and modified by Rev. Proc. 2009-39, automatically obtained the consent of the Commissioner to change its method of accounting. In amplifying, clarifying, modifying, and superseding Rev. Proc. 2008-52 and Rev. Proc. 2009-39, the Service recently issued Rev. Proc. 2011-14, which makes procedural and definition changes, consolidates additional automatic method changes published subsequent to Rev. Proc. 2008-52 and Rev. Proc. 2009-39, adds three new automatic method changes, and generally is effective for automatic Forms 3115 filed on or after Jan. 10, 2011, for a year of change ending on or after April 30, 2010. In the case of non-automatic Forms 3115, it is generally effective for Forms 3115 filed on or after Jan. 10, 2011, for a year of change ending on or after Jan. 10, 2011. While Rev. Proc. 2011-14 continues to employ many of the same definitions and principles as Rev. Proc. 2008-52, Rev. Proc. 2009-39, and Rev. Proc. 97-27, it modifies certain definitions and procedures, as noted above and discussed below. Significant Changes to General Provisions Definition of under examination : For purposes of determining when a taxpayer is considered to be under examination for purposes of both automatic and non-automatic method change requests, Rev. Proc. 2011-14 provides that a taxpayer will be considered to remain under exam as long as it has a refund or credit that continues to be under review by the Joint Committee on Taxation. In addition, the 120-day window period will end early if the IRS Office of Appeals refers a case to the examining agent(s) for reconsideration. Issue at appeals or in federal court: Taxpayers before an appeals office or federal court with respect to any income tax issue may now request a method change without audit protection if the method being changed is an issue under consideration by appeals or a federal court. Additional terms and conditions for a foreign division of a domestic corporation and foreign partnership: Sections 5.07 and 5.08 of Rev. Proc. 2011-14 provide additional terms and conditions for a foreign division of a domestic corporation and foreign partnership, generally consistent with those already applicable to foreign corporations filing method change requests. Automatic consent provisions: Rev. Proc. 2011-14 clarifies that in order to receive automatic consent for the method change request, the taxpayer must comply with the provisions of Rev. 2
Proc. 2011-14 and implement the change on its federal income tax return for the requested year of change to which the original Form 3115 is attached. Duplicate filing requirement: The duplicate copy for most depreciation method changes, including software development costs, is now required to be filed with the Ogden, UT Service Center, in lieu of the IRS National Office. Transition rules: As noted above, Rev. Proc. 2011-14 is generally effective for automatic consent Forms 3115 filed on or after Jan. 10, 2011 for a year of change ending on or after April 30, 2010, and for non-automatic Forms 3115 filed on or after Jan. 10, 2011 for a year of change ending on or after Jan. 10, 2011. The IRS will return automatic consent Forms 3115 filed with the National Office after this deadline if they are "filed pursuant to the Code, regulations, or other guidance published in the IRB other than this revenue procedure and the change in method of accounting appears to be within the scope of this revenue procedure." Certain transition rules are provided for taxpayers with change requests filed with the IRS National Office before Jan. 10, 2011. Specifically, Section 13.02(1) of Rev. Proc. 2011-14 permits taxpayers to choose to convert a pending Form 3115 filed under Rev. Proc. 97-27 for a year of change ending on or after April 30, 2010 to an automatic method change if the taxpayer is otherwise eligible under Rev. Proc. 2011-14. To do so, the taxpayer must notify the IRS National Office before the later of (a) February 11, 2011 or (b) the issuance of either a letter ruling granting or denying consent for the change or a letter closing the case. If notification is timely received, the IRS National Office will refund the user fee previously submitted and return the Form 3115 to the taxpayer for modification to comply with Rev. Proc. 2011-14. The taxpayer should then file the converted Form 3115, along with a copy of the IRS letter sent with the returned Form 3115, with the IRS National Office (or Ogden, UT) by the earlier of (a) the 30th calendar day after the date of the IRS letter returning the Form 3115 to the taxpayer, or (b) the date the taxpayer is required to file the copy of the Form 3115 under Rev. Proc. 2011-14. Noteworthy Changes in Specific Automatic Accounting Method Changes In addition to automatic method changes included in previously issued guidance, the Appendix to Rev. Proc. 2011-14 includes the following automatic accounting method changes: Changes to deduct under section 179D amounts paid or incurred for installation of energy efficient commercial building property Changes for advance payments deferred under Rev. Proc. 2004-34 subsequent change in applicable financial statement Changes for California franchise taxes consistent with Rev. Rul. 2003-90 The following are other significant changes under Rev. Proc. 2011-14: Appendix Section 3.06(3), relating to changes to deduct repair and maintenance costs, modifies the date that the additional Ogden, UT copy of the Form 3115 must be filed Appendix Section 6.01, relating to changes from impermissible to permissible depreciation methods, clarifies that the amount of allowable depreciation takes into account all first year depreciation deduction provisions 3
Appendix Section 6.03(2)(b), relating to sale, lease, or financing transactions, is modified to explain when the IRS will consider advance consent method change request for existing sale, lease, or financing transactions Appendix Sections 6.24 and 6.25, related to changes for dispositions of structural components of a building and tangible depreciable assets, requires an additional statement be provided with the Form 3115 Numerous appendix sections are modified to permit taxpayers to file concurrent depreciation method changes on a single Form 3115 when a taxpayer makes a change for more than one asset for the same year of change, and also to provide rules for aggregating net section 481(a) adjustments Appendix Section 19.01(2), relating to changes involving the timing of incurring liabilities for bonuses, is amplified and modified to include bonuses received by employees more than 2½ months after the year in which the related services are provided that are not deferred compensation Appendix Section 22.01(7), relating to changes from the LIFO method to a non-lifo method, is clarified to require the calculation of a section 481(a) adjustment Appendix Section 29.01, relating to functional currency changes, requires an additional statement be provided with the Form 3115 Obsoleted sections and appendix sections have been removed Select Questions on Rev. Proc. 2011-14 1. Many of the depreciation method changes, and others, require the copy of Form 3115, Application for Change in Accounting Method, be filed with the IRS at Ogden, UT, in lieu of being filed with the IRS National Office. See Section 6.02(3)(ii)(B) of Rev. Proc. 2011-14. 1 What is the purpose for having some copies of Form 3115 filed with Ogden, as opposed to with National Office? Why is this requirement focused primarily on depreciation related changes? 2. Section 3.08(1)(c) address the examination status of a taxpayer when a case is referred from Appeals back to Exam. This section provides that a taxpayer will ordinarily be notified by Appeals, although such notification may be made otherwise. How is the notification made to the taxpayer? 3. The first sentence of Section 3.09(2) provides when an issue is under consideration at Appeals (and the first sentence of Section 3.09(3) provides a similar rule for determining when an issue is under consideration by a Federal court). It appears that Sections 6.03, 6.04 and 6.05 allow a taxpayer to file a method change when an issue is under consideration at Appeals (or Federal court) without audit protection. Is the intent of the previously referenced portions of Rev. Proc. 2011-14 to allow a taxpayer with an issue under consideration at Appeals or before a Federal court to file a method change without audit protection just as a method change for an issue pending in an examination may be filed without audit protection? 1 All Section references in this portion of this document refer to Rev. Proc. 2011-14 unless otherwise noted. 4
4. The time for providing copies of a Form 3115 to revenue agents, Appeals Officers or government counsel has changed from at the same time to no later than the date the taxpayer files the copy with the IRS National Office or Ogden, UT. See Section 6.02(3)(a)(ii). Was this change meant to eliminate potential ambiguity with the use of the at the same time standard? 5. Section 16.01(6) describes changes to Section 6.01 that are intended to clarify that a taxpayer receives the consent of the Commissioner to make a change in method of accounting under the APPENDIX of this revenue procedure if the taxpayer complies with the provisions of this revenue procedure and implements the change on its federal income tax return for the requested year of change to which the original application is attached pursuant to section 6.02(3). What confusion or issues are these changes intended to clarify? 6. The current issue under consideration rule in Section 3.09(4) provides that all methods of a controlled foreign corporation (CFC) are an issue under consideration if an actual or deemed distribution from the CFC, the amount of the CFC's E&P or the CFC's deemed taxes paid, is an issue under consideration for a shareholder of the CFC. For a CFC under exam this broad definition coupled with common examination practices effectively makes all of the CFC's methods an issue under consideration that precludes the CFC from using the window periods to voluntarily comply with proper tax accounting principles. Precluding a CFC from using a window period appears to be inconsistent with the government's policy to provide incentives for voluntary compliance. Please comment on the rationale for not changing this rule from the rule provided in Rev. Proc. 2008-52. Are there any plans to narrow the issue under consideration rule for a CFC to an "item" similar to the general rule in Section 3.09(1) or another more specific rule? 7. Is there a gap in a taxpayer's examination status between the time that a taxpayer performs an act described in Section 3.08(1), (2), or (3) (relating to when an examination ends) and the date the taxpayer is contacted in any manner for additional information as a result of a Joint Committee on Taxation inquiry described in Section 3.08(4)? Language in Section 16.01(2) provides, "Section 3.08(4) of this revenue procedure is clarified to explain that a taxpayer under examination, for purposes of this revenue procedure, continues to be under examination while the taxpayer has a refund or credit under review by the Joint Committee on Taxation." This language appears to indicate that there isn't a gap in examination status. Please confirm. 8. Language in Section 3.08(4) indicates that an examination "begins on the date a taxpayer is contacted in any manner for additional information as a result of a Joint Committee on Taxation inquiry pursuant to section 6405." Is this language only intended to be applicable to a taxpayer that is not otherwise under exam and files a claim for refund subject to review by the Joint Committee on Taxation? 9. For a taxpayer not under continuous examination, what is the impact on the 12 consecutive month rule for the 90-day window under Section 6.03(2) of an examination resuming when the case is referred back to Exam from Appeals? Is it intended that the 12 month testing period restart? For example, assume a calendar-year taxpayer is under exam for 12 months as of 1/1/10. On 6/1/10 the taxpayer is notified that the case is referred to Appeals. On 12/1/10 the Taxpayer is notified that the case is referred from 5
Appeals back to Exam and the examination ultimately ends on 4/15/12. Does the taxpayer's next 90-day window begin on 1/1/11 or 1/1/12? 10. Will there be regular updates to the mass automatic revenue procedure in the future? If so, what is the proposed schedule? 11. Are method change applications filed with the IRS in Ogden, UT, tracked in a particular way? 12. Rev. Proc. 2011-14 includes three additional automatic method changes that were not included in Rev. Proc. 2008-52. How does the IRS determine when to add additional method changes to the mass automatic method change procedure? 13. Please clarify or confirm the rule in Section 6.02(10) that allows a taxpayer to file a single application for an identical change in method of accounting in certain situations. For example, does this rule allow an identical change for members of a consolidated group to be included on the same application as CFCs wholly owned by members of the group or require two separate applications? If two applications are required, what is the rationale for requiring two applications? 14. For depreciation changes that may be made concurrently for more than one asset on the same application, Rev. Proc. 2011-14 provides additional information on the computation of the IRC Section 481(a) adjustment. See, for example, Section 6.01(7) of the Appendix. This additional information appears to allow a taxpayer the choice of (1) aggregating the IRC Section 481 adjustment for all assets included on the application and taking the adjustment into account in one year or over four years depending on whether the netted number is negative or positive, or, alternatively, (2) aggregating all negative IRC Section 481 adjustments into one net number that will be taken into account in one year and aggregating all positive IRC Section 481 adjustments into one net number that will be taken four years. Please confirm if this reading is correct. 15. For a functional currency change requested under Section 29.01 of the Appendix, a taxpayer must make representations that were not previously required under Rev. Proc. 2008-52. These representations include: that the taxpayer has made the adjustments set forth in Treas. Reg. Section 1.985-5 or Treas. Reg. Section 1.985-8(c), providing the amount of any unrealized exchange gain or loss required to be taken into account, the date on which the taxpayer took such amount into account, and providing a detailed and complete description of any other adjustments required pursuant to Treas. Reg. Section 1.985-5 or Treas. Reg. Section 1.985-8(c). Are these now-required representations intended to address particular concerns relating to functional currency changes? 16. It appears that Section 30.01 of the Appendix was removed from Rev. Proc. 2011-14. In Rev. Proc. 2008-52 this section related to a change in the method of determining the basis of certain securities sold or transferred under IRC Section 1012. However, the removal of this method change is not referenced in Section 16, Significant Changes. Has this change been removed, and if so, why? 17. A taxpayer was not permitted to request a change in method of accounting for accrued bonuses if the liability was fixed at year end, but the amount was paid more than 2.5 months after the end of the year under Rev. Proc. 2008-52. The modifications to Rev. Proc. 2011-14 now allow this change to be made automatically. It appears, however, 6
that a scope limitation similar to that found with accrued bonuses under Rev. Proc. 2008-52 continues to exist in Rev. Proc. 2011-14 with respect to vacation pay. See Section 19.01(3) of the Appendix. Was this limitation for vacation pay intended? 18. Section 15.11(2) of the Appendix requires that a taxpayer attach a statement its return due to a change in method of accounting under Rev. Proc. 2004-34 as a result of a change in financial statement revenue reporting. Does a notation on Schedule M-3 indicating that there has been a change in financial statement reporting, along with an explanation including the information required under Section 15.11(2) of the Appendix meet the statement requirement? 19. Section 3.08(1)(c) provides rules to determine a taxpayer's examination when a case is referred from Appeals back to Exam. Can you confirm that the last sentence of Section 3.08(1)(c) (which reads: "The 120-day window period in section 6.03(3) will be available to the taxpayer in its entirety when the resumed examination ends.") means that if after 100 days of the 120-day window period the taxpayer is notified that the case has been referred back to Exam and the case is later sent to Appeals again, that on the date that the examination ends the taxpayer has 120 days (the full 120 day window period) within which to file an accounting method change request without consent of the revenue agent, assuming all other provisions of Rev. Proc. 2011-14 are satisfied? 20. Are there plans in place to update Rev. Proc. 97-27? If so, what are they? 7