IRS Tax: IRS Revenue procedure raises immediate considerations for automatic method changes

The Internal Revenue Service on August 27 released Rev. Proc. 2009-39, which modifies a number of significant procedures for taxpayers seeking to obtain automatic consent for a change in method of accounting. These modifications have an immediate impact on taxpayers planning to file a Form 3115 under the automatic consent procedures, including taxpayers planning to file change requests with their 2008 corporate income tax return due September 15.

Note that if an automatic Form 3115 was filed with the IRS national office prior to August 27, 2009, Rev. Proc. 2008-52 still applies to that filed change request and the new filing restrictions do not apply. But see the discussion of transition rules below for an overview of the option to amend such an application to apply the provisions of Rev. Proc. 2009-39.


General

Rev. Proc. 2009-39, effective immediately, amplifies, clarifies, and modifies Rev. Proc. 2008-52, which provides procedures for taxpayers within its scope to obtain automatic consent for specified changes in method of accounting. The revenue procedure is generally effective for automatic consent change requests filed on or after August 27, 2009, for a year of change ending on or after December 31, 2008.


Section 481 adjustment

Section 2.05, addressing a method change with a section 481(a) adjustment, has been modified to provide that in computing the net section 481(a) adjustment, a taxpayer must take into account all relevant accounts. For example, the section 481(a) adjustment for a change in the proper time for deducting salary bonuses under section 461 should reflect any necessary adjustments for the amount of salary bonuses capitalized to inventory under section 263A. This modification clarifies that in all cases where a taxpayer is subject to the section 263A uniform capitalization (UNICAP) rules, the section 481(a) adjustments must reflect appropriate UNICAP adjustments.


Taxpayers under examination

Section 3.08(1)(a), defining when a taxpayer is considered under examination for purposes of the safe-harbor filing rules, has been modified to include taxpayers with a claim before the Joint Committee on Taxation (JCT) and clarify when certain foreign corporations and taxpayers participating in the Compliance Assurance Process (CAP) are under exam.

- JCT review – New section 3.08(1)(a)(5) provides that a taxpayer is considered under examination if it has a refund or credit claim under review by the JCT and continues to be under examination under this provision until JCT review procedures and any necessary follow-up are complete. Under the new rules introduced by Rev. Proc. 2009-39, a taxpayer under review by the JCT may not file a method change request with the IRS. Under modified section 6.03, a taxpayer under review by the JCT may not file under the 90-day window period, 120-day window period, or with consent of the director. In addition, Rev. Proc. 2009-39 modifies the manual consent procedures provided in Rev. Proc. 97-27 in a similar fashion. Therefore, under the new procedures, taxpayers under review by the JCT cannot file a method change, whether automatic or manual, on or after August 27, 2009.

- Foreign corporation not required to file a federal income tax return – New section 3.08(a)(a)(4) provides that a foreign corporation that is not required to file a federal income tax return is under examination if any of its controlling domestic shareholders is under examination for a taxable year(s) in which it was a U.S. shareholder of the foreign corporation. For purposes of Rev. Proc. 2009-39, a foreign corporation is no longer under examination when the controlling domestic shareholders are no longer under examination. In the case of a controlled foreign corporation (CFC) or noncontrolled section 902 corporation, a foreign corporation's method of accounting for an item is an issue under consideration if any of the corporation's controlling domestic shareholders receives notification that the treatment of (1) a distribution or (2) deemed distribution from the foreign corporation, or (3) the amount of its earnings and profits or (4) foreign taxes deemed paid is an issue under consideration. If an issue is under consideration, a taxpayer may not file a method change request under the 90-day or 120-day window periods.

- Taxpayers in CAP – Under new section 3.08(1)(a)(6), a taxpayer participating in the CAP is considered to be under examination as of the date the taxpayer executes the memorandum of understanding for the CAP.


Transition rules

Transition relief is provided for taxpayers who filed a manual consent request before August 27, 2009, for an item that may now be filed under the automatic consent procedures of Rev. Proc. 2009-39. If the manual Form 3115 is pending within the IRS national office on August 27, 2009, the taxpayer may choose to convert the Form 3115 to make the change under the automatic consent procedures. The taxpayer must notify the national office of its intent to convert the Form 3115 prior to the later of October 26, 2009, or the issuance of a letter ruling granting or denying consent for the change filed under Rev. Proc. 97-27. If the taxpayer timely notifies the national office that it will convert the Form 3115, the national office will return the Form 3115 to the taxpayer to make the necessary modifications to comply with the applicable provisions of the automatic consent procedures and will refund the user fee submitted with the Form 3115.

The Form 3115 must be resubmitted with the necessary modifications, along with a copy of the national office letter sent with the returned Form 3115, to the national office within 30 calendar days after the date of the Service's letter returning the Form 3115 to the taxpayer. For purposes of the timely duplicate filing requirement, the national office copy of the Form 3115 will be considered filed as of the date the taxpayer originally filed the Form 3115 under Rev. Proc. 97-27.

An option to amend an application properly filed before August 27, 2009, under Rev. Proc. 2008-52 for the first tax year ending on or after December 31, 2008, is also provided. To amend an application under this transition rule, within six months from the due date of the federal income tax return for the year of change (excluding any extension) a taxpayer must file an original or amended return using the new method of accounting pursuant to the new provisions of Rev. Proc. 2009-39 and conform to certain other administrative requirements.


Automatic change no longer permitted for excluding section 118(a) contributions to capital

While transition rules applicable for a year of change ending on or after December 31, 2008, and on or before July 31, 2009, generally permit a taxpayer to choose to apply the procedures of Rev. Proc. 2008-52 or the new procedures of Rev. Proc. 2009-39, this rule is not applicable to excluding from income a nonshareholder contribution to capital under section 118(a). Thus, automatic consent is no longer available for a taxpayer that wants to change its method of accounting from including certain payments received in gross income to excluding the payments from income as nontaxable contributions capital under section 118(a). An automatic change request for this item may no longer be filed as of August 27, 2009.


Additional provisions

Only the procedural provisions of Rev. Proc. 2009-39 that have the most immediate consequences for the broadest range of taxpayers are discussed here. Rev. Proc. 2009-39 also includes many other changes, including numerous modifications to the Appendix, introducing a number of new items for which automatic consent is now provided and revising a number of previously existing items.